QUARTERLY OUTLOOK

The U.S. and South Carolina economies continued to expand through the late spring and summer of 2006, although there are signs that economic growth may be slowing. Real Gross Domestic Product (GDP) for the U.S. in the second quarter grew at less than half the pace from the first quarter. The housing

These signs of a cooling economy, in part, prompted the Federal Reserve to keep short-term interest rates unchanged at its most recent Federal Open Market Committee (FOMC) meeting in early August. Despite signs of slower growth, the current economic expansion is not expected to be derailed anytime soon. The U.S. economy continues to display resiliency in the face of higher energy prices and rising interest rates in recent quarters.

The first estimate of real Gross Domestic Product (GDP) for the second quarter of 2006 indicates that real GDP grew at an annual pace of 2.5 percent for the quarter. During the first quarter, real GDP had grown 5.6 percent. Over the last few years, the U.S. economy has been growing at an average pace of roughly 3.5 percent. While the most recent reading is below this average, it does not necessarily signal that the economy is on the verge of a substantial slowdown. Overall, real GDP is expected to continue growing about 3 percent over the next few quarters.

Each of the four major components of real GDP - consumption, investment, government spending, and net exports - worked to boost economic growth in the second quarter. The largest positive contribution came from personal consumption expenditures, adding 1.74 percentage points to total real GDP growth. This was largely in the form of spending on services, which increased at an annual rate of 3.5 percent for the quarter. Meanwhile, spending on durable goods declined 0.5 percent from the first quarter.

The other main components contributed to economic growth only slightly. Investment added 0.28 percentage points to total real GDP growth as nonresidential investment grew slightly while residential investment declined for the third consecutive quarter. Government spending grew and added another 0.11 percentage points to real GDP growth. Finally, both exports and imports increased, though net exports overall increased enough to add 0.33 percentage points to real GDP growth. Overall, the slower growth in the second quarter was due to slower growth in consumption, investment, and government spending.

Turning to the labor market, the U.S. economy generated an average of 112,000 net new jobs monthly from April to July. This is down from a monthly average of 165,000 during 2005. Total employment in July was about 1.3 percent ahead of where it was during July 2005. This year-over-year rate of job growth has been slowing slightly in recent months, further supporting the view that the U.S. is experiencing a moderate slowdown. The national unemployment rate edged up from 4.6 percent in May and June to stand at 4.8 percent in July. Yet, this continues to be a historically low jobless rate. Outside of a period during the late 1990s and 2000, this unemployment rate is the lowest it has been since the 1970s.

Inflation has been steadily increasing. The level of the Consumer Price Index in July 2006 was about 4.2 percent higher than July 2005. During all of 2005, consumer prices rose about 3.4 percent. Much of this gain is due to higher energy prices. Over the last 12 months, energy prices are up about 20.5 percent.

At its latest meeting on Aug. 8, 2006, the FOMC decided to keep its target for the federal funds rate at 5.25 percent. This decision came after 17 consecutive increases in the target for the fed funds rate. At the previous FOMC meeting in late June, the committee remarked: "Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Because the information that came in during July and early August pointed to some slowing of economic growth, the Fed decided to keep rates unchanged. In their Aug. 8 statement, the FOMC noted that "economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

Turning to South Carolina specifically, it appears that the state's economy is enjoying a healthy expansion. During the first half of 2006, almost every major indicator was positive for the state, including job and income growth, spending, tax collections, and construction. However, the state's jobless rate remained relatively high. The most recent reading on the state's labor markets shows that the state continued to see job growth in July and also posted a drop in the unemployment rate.

In terms of job growth, between June 2006 and July 2006, the state posted a net increase of 2,500 jobs. Between July 2005 and July 2006, total employment increased by 46,800 jobs, a gain of about 2.5 percent. South Carolina is currently creating jobs at the fastest pace since the late 1990s. The troubling sign had been the high jobless rate. Part of the explanation behind the high jobless rate had been the rapid growth in the state's labor force. The size of the labor force had been growing at roughly the same pace as total employment, leading to a generally unchanging unemployment rate. In July, the state posted a decline in the size of the labor force coupled with a gain in employment; this led to a decline in the unemployment rate from 6.7 percent in June to 6.2 percent in July. As long as the state continues to generate new jobs and labor force growth trends slower, the state's jobless rate can finally begin to decline steadily toward the national average.

Overall, despite pressures from high energy prices, the national and state economies are expected to continue to expand into 2007. For South Carolina, 2006 should turn out to be a strong year for economic growth, with job growth averaging between 2 and 2.5 percent and a falling unemployment rate in the final months of the year.