The Outlook for the Washington Area Economy Continues to Improve While Its Current Performance Lags

The Washington Coincident Index, which represents the current state of the metropolitan area economy, continued its decline in December decreasing to 102.7 down 1.39 percent from November. This is the fourth month-to-month decline in five months. The Index also fell below its same-month value on a monthly over-the-year basis for a twenty-seventh month losing 2.92 percent from its December 2008 level. This decrease was slightly greater than experienced in October and November. In December, three of the Index’s four components contributed to its decline.

Domestic passenger volume at Reagan National and Dulles Airports decreased in December for the fourth time in five months;
Nondurable goods retail sales decreased for the third consecutive month; and,
Wage and salary employment declined on a month-to-month basis after registering gains in both October and November; while,
Consumer confidence (in the present) rebounded from a sharp decline in November registering the second monthly increase in three months.

The Washington Leading Index, which is designed to forecast the performance of the metropolitan area economy six to eight months in advance, increased in December to 106.9 up from 106.1 in November for a gain of 0.77 percent. This was the Index’s third month-to-month increase in five months. On a monthly over-the-year basis, the Index registered its stronger increase in 45 months (March 2006) gaining 1.89 percent and extending its positive trend to an eighth month. In December, increases in four of the Index’s five components contributed to its increase from November.

Durable goods retail sales increased in December following two monthly declines;
Total residential building permits registered a strong gain for the second time in three months;
The Help Wanted Index increased for the first time in a year; and,
Consumer expectations (consumer confidence six months hence) increased in December for the fourth time in five months; while,
Initial claims for unemployment insurance increased (worsened) after trending lower for five months.

The Leading Index extended and accelerated its upward trend in December gaining for an eighth month. This trend provides a clear signal that the Washington area economy should experience broad-based gains this year. However, this growth pattern seen in the Leading Index is still not evident in the Coincident Index that continued to lag in December declining on a month-to-month basis in four of the year’s final five months. The Leading Index’s upward trend is consistent with improvements seen at the national level. The National leading Index has increased for eight months while the Coincident Index has yet to move higher. With the strong gains in residential building permits in December (both locally and nationally) and the slowing of job losses, there are positive signs that the recovery will spread to the broader economy by the year’s second quarter.

Current Conditions

The national recession was most likely over in June, at least in a technical sense. The third quarter’s 2.2% GDP growth (revised two times initially down from 3.5%) was the first quarterly increase in a year and with an increase of 5.7 percent (preliminary estimate) for the fourth quarter, the recovery appears to be well underway. Current forecasts have GDP growing 2.6 percent in 2010 offsetting last year’s 2.4 percent decline. However, this rate of growth will not be sufficient to achieve large enough numbers of new jobs (net job growth is expected by March) to bring unemployment down below its current levels. In fact, unemployment is likely to go up again before it begins its sustained downward trend later in the year.

The Washington area economy has been losing jobs since December 2008 with the number of losses peaking at mid-year. Since then, the rate of job loss has declined but has yet to turn positive (in December net employment was down by 15,700 on an annual basis). For the year, on average, losses totaled approximately 25,000 with losses in construction and retail trade accounting for more than one-half of these. In December, the Area’s unemployment rate increased a tenth to 6.2%, still the lowest among major metropolitan areas. As measured by an index of on-line job advertising, the Washington area had 1.15 unemployed workers for each job ad, the lowest rate in the U.S.; the national average was 4.2 unemployed workers per online job ad.

The housing market continues to be the key to the economy’s re-acceleration, as it is with the national economy. With an increase in new homes construction, not only will construction workers be put back to work (in December construction employment in the Washington area was down 8.6% compared to December 2008), manufacturing and retail sectors will also benefit. While December housing data (both re-sales and new home sales) fell below trend, this one-month pattern was shaped by buyers buying forward (buying earlier in the year than usual) to take advantage of the expected expiration of the first-time homebuyers tax credit.

By year’s end, the Washington area’s housing inventory was close to equilibrium levels with the number of sales increasing in all jurisdictions compared to a year ago, the inventory of unsold houses dropping to or below normal levels in most jurisdictions, and with average sales prices rising in all by a few suburban jurisdictions. Average housing sales prices were higher in both November and December for the full Washington metropolitan area and up for four months in Northern Virginia. Prices in suburban Maryland had not fully corrected by year’s end but their rates of monthly decline have lessened each month since February. Within the new homes market, contract cancelation rates stabilized at normal levels in March and have held steady at roughly 11 percent throughout the remainder of the year; December’s rate of 10.2%.

With the housing market tightening up, prices rising, home mortgage interest rates holding at near historically low levels, and the federal income tax credit provisions for first-time home buyers (also to include buyers who have lived in their homes for five or more years) extended to contracts signed by April 30^th and closed by June 30^th, the housing industry is well positioned to drive the recovery over the first six months of the year. After that, it is on its own. The first sign of a longer-term recovery in the housing sector was the sharp increase in residential building permits first in October when they increased 29.6. And, then, in December, they rose 34.2%. Nationally, residential building permits were up 48% in December. This increase in building permits points to the re-acceleration of residential building in the spring and, with increased homebuilding, the benefits of the recovery will spread more broadly across the economy as the year progresses.

Job growth and unemployment remain the lagging indicators of the recovery. At the national level, jobs losses since the beginning of the recession in December 2007 through January 2010 (26 months) total 8.4 million. Job losses in the Washington area started in December 2008, a year after job losses began nationally, and now of extending through at least December 2009 (13 months) totaling approximately 25,000 (employment for 2009 under go a major revision with job’s data released in March).

Unemployment has increased by 43,900 workers over the past 12 months reflecting the reality that the jobs being added in the economy (25,000 between December 2008 and December 2009) were largely filled by new entrants to the labor force, such as local college graduates or workers moving into the area who were qualified to fill these jobs, and not by unemployed workers as so many of these do not have the job skills and educational levels required to compete for the new jobs. As a consequence, as net job growth resumes in the next several months unemployment will not decline as quickly and is likely to persist for at least three years at levels much higher than prior to the beginning of the downturn. While the Washington area is expected to replace the jobs it lost in 2009 during 2010, at least numerically, replacing the 8.4 million jobs lost nationally is expected to require at least four years.

Consumer spending, both individuals and businesses, also remains important to the recovery. There are signs that consumers are slowly increasing their spending levels, although still not as fast as their savings rates. Consumer confidence remains at historically low levels but confidence did increase in both December and January. Still, consumers remain anxious and weary and they are not expected to return to their old ways of excessive consumption spending. As a result, as consumer spending returns to sustainable levels, it will not have the same stimulative impact on the economy as before the recession thereby supporting more moderate economic growth in the years following the recovery.

Near-Term Outlook

The Washington Area Leading Index has been higher than its last year’s monthly values in seven of the last eight months through December and December’s gain was the largest in 45 months. The Leading Index turned higher in May 2009 and is providing a clear signal that the local economy is moving into its expansion stage following its worst economic performance since 1991.

As the Leading Index continues to trend higher, the expansion will spread out across the breadth of the economy generating new jobs and income. In the coming months, residential building permits should continue to move higher at fast exceeding same-month levels in 2009 and then in 2008. Consumer spending, as measured by retail sales, will increase first on a month-to-month basis and then on a monthly over-the-year basis. Net job growth will be achieved early in 2010 as job losses in the sectors experiencing contraction in 2009 begin to add jobs and the sectors that grew during 2009 accelerate their expansion. Unemployment that stood at 6.2 percent at the end of the year should drop below 6 percent before the end of 2010.

The Washington metropolitan area economy was still struggling to gain traction at the end of 2009. That year started with growing weakness spanning the first and second quarters. By May, the local economy began to show early signs of life however job losses continued to mount and unemployment slowly moved higher (these are lagging indicators). The year ended showing great promise for 2010 based on a strong upward trend in the economy’s leading indicators and improvement in several coincident indicators. By mid-year, the early signs of recovery will be more visible across the remaining indicators. Job growth will provide a clear sign of the economy’s acceleration followed by slowly declining unemployment. Home building should accelerate in the second quarter and consumer confidence could turn optimistic by mid-year. These are the metrics to follow in the coming months.