Washington Area Economy Expands Further in May

The Washington Coincident Index, which represents the current state of the metropolitan area economy, moved marginally higher in May, following its sharp gain in April, increasing to 106.6 for a 0.13 percent gain from its revised April value of 106.5. This month-to-month increase in the Index pushed it higher than its May 2009 level, registering its third consecutive monthly over-the-year increase following 29 months of decline. In May, two of the Index’s four components contributed to its gain.

Domestic passenger volume at Reagan National and Dulles Airports increased for the third consecutive month; and,
Wage and salary employment increased on a month-to-month basis for the third month; while,
Consumer confidence (in the present) declined slightly following it sharp gain in April; and,
Nondurable goods retail sales decreased for a second month.

The Washington Leading Index, which is designed to forecast the performance of the metropolitan area economy six to eight months in advance, increased in May to 108.5 up from 108.3 in April for a gain of 0.22 percent. This was the Index’s fifth month-to-month increase in six months. On a monthly over-the-year basis, the Index registered its ninth consecutive monthly gain increasing 1.51 percent in May and extending its positive trend to a thirteenth month. In May, improvement in two of the Index’s five components contributed to its increase from April.

Consumer expectations (consumer confidence six months hence) increased in May for a third month; and,
Initial claims for unemployment insurance decreased (improved) for the fourth time in five months; while,
The Help Wanted Index was unchanged from April; and,
Durable goods retail sales decreased for the two time in three months; and,
Total residential building permits declined for a second month in a row.

The momentum the Washington area economy gained in April was extending in May although the pace of gain moderated. The Leading Index provides strong evidence of the economy’s recovery having turned positive thirteen months ago with the Coincident Index beginning to follow having now grown on a monthly over-the-year basis for three months. With the growth of payroll employment following the early stage of recovery, gaining jobs in each of the last three months, it would appear that the recovery has moved into a new stage. These trends are largely consistent with those seen at the national level and suggest that the recovery will continue in the coming months.

Current Conditions

The national economy grew more slowly in the first quarter than initially estimated with GDP growth being revised down for a second time to a final estimate of 2.8 percent. This slower growth rate still extends the recovery to a third consecutive quarter with estimated for the just completed 2^nd quarter showing stronger gains than for the 1^st quarter. The economy had been adding new jobs for three consecutive months, but with the release of the June data, only the private sector experienced slight gains while the public sector lost jobs (many of these were temporary Census workers) with the net effect being that the total job base contracted in June. The moderate level of job growth so far this year remains well below levels required to have a major impact on reducing unemployment levels in the near term.

Most of the national economic indicators in May and June showed the recovery to have slowed or stopped altogether following a strong performance in April. This pause in the recovery has resulted in further weakening of consumer confidence with resultant weakness in retail sales in both May and June. One positive sign has been the recent decline in initial claims for unemployment insurance following a several month period during which they had leveled off (stopped improving). Still, in spite of slower and even negative month-to-month performances as measured by various indicators, the national economy continues to grow but its growth rate has clearly slowed in May and June with projections for the third quarter GDP being lower than for the second. This slower growth during the year’s second half has resulted in the annual GDP growth being revised low from 3.4% to 3.2%.

The Washington area economy is experiencing the same pattern of recovery that is being reflected in national trends although, as it was not as vulnerable to the impacts of recession, the Washington area economy is performing better than its metropolitan peers and its labor market indicators appear poised for sustained growth. Locally, unemployment was 6.0% in May, by far the lowest among major metropolitan areas in the U.S. On a monthly over-the-year basis, the Washington area has added jobs for three months in a row after experiencing losses for 17 months (the nation lost jobs for 28 months).

Month-to-month job growth in the Washington area has been impressive. In the three months (March, April, May) the Washington area has added 79,300 net new jobs accounting for approximately 10% of the nation’s job growth over this period. Job growth is now occurring in all major sectors (federal jobs were up by 23,300 between May 2009 and May 2010 while state and local government jobs were down by 9,400 for a net government job change of 13,900) with five sectors reporting gains exceeding their same month levels in 2009.

Consumers and their spending, both individuals and businesses, remain a critical and still uncertain part of the recovery and there are signs that consumers have cut back on their spending in May and June after having slowly increasing their spending levels earlier in the year. Consumers continue to save at an above-average rate and have continued to pay down credit card debt and with personal income holding almost flat, except of increases in transfer payments, consumer spending has been constrained. And, with consumer confidence pulling back following an upward trend during the spring months, the outlook for increased consumer spending over the summer has weakened. The positive contribution of strong retail spending since January is seen in the growth of retail jobs with May retail employment up 8,700 compared to May 2009 reversing a downward employment trends that had extended for almost two years. With consumer confidence weakening and the outlook for continued job growth (increased personal earnings) uncertain over the summer months, it is likely that a slowdown in consumer spending will result.

The housing market is another key to the economy’s re-acceleration, as it is with the national economy. With an increase in new housing construction, not only will construction workers be put back to work (this was already evident since March) but the manufacturing and retail sectors will also benefit. Local employment gains in the construction sector in May (up 4,800 jobs from April) reflect this sector’s emerging recovery. The resale housing market has stabilized across most of the region although price gains have been large confined to Northern Virginia with prices up by approximately 6 percent from a year ago with these gains being sustained for eight months. While some of this strength was owed to the First Time Home Buyers Tax Credit, there are other signs of recovery that will drive the market forward during the year’s second half. Residential building permits are slowly trending higher although the trend has been uneven. With interest rates at historic lows and with prices moving higher, homebuyers should be increasingly motivated to enter the market.

Near-Term Outlook

The Washington Area Leading Index has been higher than its last year’s monthly values in eleven of the last thirteen months through May and is providing a clear signal that the local economy is in its expansion phase following its worst economic performance since 1991. Key indicators to watch include: residential building permits (down in May), initial claims for unemployment insurance (improving), consumer expectations (trending higher through May), and durable goods retail sales (uneven performance). Job growth is the ultimate indicator as it measures increases in demand for goods and services as well as increased consumer spending potential that result from new and growing personal earnings.

The housing market and especially new housing construction were positive forces in the economy’s performance in April but both pulled back in May with the expiration of the Tax Credit. The housing sector will need to accelerate in coming months if the economy is to achieve its projected growth levels for this year and beyond. Due to the expiration of the federal tax credits of first-time homebuyers, the housing market is expected to grow more slowly over the summer months while it is stabilizing and establishing its own pace. Continuing low interest rates and growing incomes should propel the housing market’s renewed expansion by the fall.

Even though labor market indicators lag the recovery, the recovery is now far enough along where job growth and unemployment are showing signs of improvement going forward. Job growth should continue to strengthen over the coming months and as it does unemployment should slowly decline. Still, it will take several more years to reach per-recession rates. The one-month decline of unemployment from 6.7% to 5.9% in May followed by a 0.1 point increase to 6.0% in May suggest that the recovery of the labor market will be slow and uneven.

Consumers will continue becoming more optimistic over the second half of the year and this confidence will build with favorable reports on job growth and stability in the financial markets and, as consumer confidence increases, retail sales and especially “big ticket” items as captured in the durable goods retail sales data will experience increased growth. With the recent uncertainty in the financial markets and the volatility of the stock indices and slow decline of the unemployment rate, consumers remain anxious as seen in the most recent consumer confidence measures reflecting June and July surveys. It may take several more months until consumers’ expectations are reconciled with the reality of a slow and long recovery. Once job growth trends are clarified in the fall, after the temporary hiring by the Census Bureau are no longer part of the work force, increased hiring in the private sector should gain momentum and convey more confidence to the general consumers.

Still, the economy remains vulnerable as it moves through its transition from contraction to sustained expansion, as was demonstrated by the recent reaction of the financial markets to the European debt crisis. During this period of transition, the economy is expected to reflect a more moderate growth trend in the third and fourth quarters with further acceleration occurring in 2011 as the construction sector recovers.