Quarterly outlook

The summer of 2000 brings with it rising mercury and a hot economy. While the drought continues in South Carolina, the Federal Reserve is doing a rain-dance of its own, hoping to douse, or at least contain, the blazing economy. Despite largely mixed signals on the inflation front, the Fed remains

Real gross domestic product (GDP) in the U.S. grew at an annual rate of 5.4 percent (advance estimate) during the first quarter of 2000 following a revised figure of 7.3 percent for the fourth quarter of 1999. As usual, the largest contributor to first-quarter growth was consumption. Personal consumption expenditures rose by 8.3 percent, driven by 25.9 percent increases in spending on both motor vehicles and furniture and appliances. These strong gains were due, in part, to consumers' desires to lock-in financing terms on these durable goods before interest rates climb any higher. Meanwhile, a generally strengthening dollar contributed to a slight decline in exports, working to dampen real GDP growth.

The latest U.S. employment figures complement the strong real GDP data. Nonfarm payroll employment increased by 340,000 in April on the heels of a 458,000 increase in March. Though a significant portion of these jobs represent temporary hires by the government for Census 2000, the gains are remarkable. This job growth helped push the U.S. unemployment rate to 3.9 percent, the first mark below 4.0 percent since January 1970.

These output and employment reports have been accompanied by some mixed inflation signals. The GDP deflator, a price index tied to all domestically produced goods and services, increased at an annual rate of 2.7 percent during the first quarter, the fastest advance since the first quarter of 1997. However, more recent reports suggest prices remain tame. The producer price index (PPI) for finished goods fell 0.3 percent April. Meanwhile, the consumer price index (CPI) was unchanged between March and April. Even if falling energy prices are excluded, both the PPI and CPI showed only modest advances of 0.1 and 0.2 percent in April, respectively.

The current national forecast centers around a familiar story. The Federal Reserve will continue to pursue tight monetary policy, consumer spending will eventually cool leading to a slowdown in real GDP growth, and inflation will remain under control. More specifically, real GDP is expected to post another 5.4 percent gain during the second quarter, but will then slow to 4.0 percent in the third quarter and 2.8 percent by the end of the year. Unemployment will hover around 4.0 percent throughout the foreseeable future. Inflation, as measured by the CPI, should fall slightly through the year. The annual rate of inflation of 3.2 percent during the first quarter is expected to drop to 2.1 percent by the end of the year.

The South Carolina economy remains exceptionally strong. Further, the `imbalances' that pose an inflationary threat at the national level (high demand coupled with near-capacity supply) are much weaker in South Carolina. While the Palmetto State enjoys continued low unemployment, the rates of job and income growth have sufficiently cooled to sustainable levels, while showing no signs of dropping to recession conditions. Total nonfarm payroll employment grew at an annual rate of 2.5 percent during the first three months of the year. Further, recent revisions to the state's employment numbers show the state's rate of job creation is slightly ahead of previous estimates. Meanwhile, unemployment has continued to hover around 4.0 percent, dipping to just 3.7 percent in March.

South Carolina job gains were distributed evenly in the first quarter. The service, wholesale and retail trade, construction, and finance, insurance and real estate sectors turned in their customary strong growth, including a 4.2 percent advance in services and 5.6 percent in construction. However, the first quarter brought new life into the state's lagging manufacturing sectors. Total manufacturing employment fell by just 1.1 percent, following job erosion of nearly 5 percent during 1999. Yes, manufacturing employment still fell, but at a significantly slower pace than it has in recent quarters. Durable goods manufacturing employment posted an advance of 0.8 percent, the first positive growth since the second quarter of 1999. Further, the nondurable goods sectors recorded job declines of just 2.6 percent in the first quarter, following declines of nearly 9.0 percent during 1999.

The current South Carolina forecast maintains the status quo. Real personal income, which grew by 3.1 percent during the fourth quarter of 1999 (latest available data), is expected to advance at an annual rate of 3.7 percent during the remainder of 2000. Employment gains are expected to remain steady, with the state adding jobs at an annual rate of roughly 2.5 percent through the end of 2000. This amounts to the net creation of approximately 45,000 jobs on an annual basis. A majority of these new jobs will continue to be in the service and trade sectors. The recent good news on the manufacturing front will continue to partially alleviate the manufacturing job losses, as these sectors are expected to see employment decline at a slower 1.0 percent pace in the coming quarters. Meanwhile, the unemployment rate will be largely unchanged during the rest of the year, remaining around 4.0 percent.

As the summer heat continues, so does the record economic expansion. Successful Federal Reserve policy, coupled with strong consumer sentiment and productivity gains by firms, is expected to keep the U.S. and South Carolina economies on track through the coming quarters. 0