Connaughton: N.C. economy shows strong growth in 2006; expansion expected through 2007

The North Carolina economy is expected to grow by 3.5 percent during 2006, UNC Charlotte economist John Connaughton reported today in his TIAA-CREF/UNC Charlotte Economic Forecast for North Carolina. The growth forecast for 2006 is slightly lower than the growth rate of 4.1 percent experienced during 2005 but considerably higher than the 1.5 percent rate projected in Connaughton’s September report.

The forecast, funded by TIAA-CREF and published quarterly by the University of North Carolina at Charlotte, provides both a review of North Carolina’s recent economic performance and a barometer of the state’s future growth. Connaughton, who directs the forecast, is the TIAA-CREF professor of economics at UNC Charlotte’s Belk College of Business.

“As an integral part of Charlotte’s thriving financial business community, we are pleased to sponsor this economic forecast by John Connaughton,” said Kevin Brown, TIAA-CREF vice president, client services. “We at TIAA-CREF benefit from this important report and want to make this barometer for state growth available to the people of North Carolina.”

Connaughton attributes the higher than expected 2006 growth rate to significant revisions in U.S. government data for the second half of 2005 and the first two quarters of 2006. The largest revision was made in the finance, real estate, and insurance sector (FIRE), and this single revision was largely responsible for the dramatic increase in North Carolina’s first quarter Gross State Product (GSP).

During the first quarter of 2006, GSP increased by an annualized real growth rate of 9.2 percent. During the second quarter, GSP growth slowed to an annualized real growth rate of 1.2 percent. In the third quarter*, GSP growth is expected to pick up and reach an annualized real rate of 3.6 percent. In the fourth quarter of 2006, the GSP is expected to continue growing, but at a slower pace of 1.9 percent.

“This economic expansion is likely to continue into 2007 as a result of the decline in energy prices that began in September of 2006,” Connaughton said. “This decline will result in an increase in consumer discretionary income, which is likely to propel the economy through next year. In fact, North Carolina’s economy is expected to grow by 2.0 percent during 2007.”

Seven of the state’s eleven economic sectors are forecast to experience growth during 2006. The sectors with the strongest expected growth forecasts are Mining with a projected real growth rate of 11.1 percent; Finance, Insurance, and Real Estate (FIRE) with a projected real growth rate of 8.2 percent; Construction with a projected real growth rate of 6.9 percent; Wholesale Trade with a projected real growth rate of 5.0 percent; and Services with a projected real growth rate of 4.6 percent.

Four other sectors are expected to experience growth during 2006 but at rates less than the overall state growth rate of 3.5 percent. These sectors are Transportation, Warehousing, Utilities, and Information (TWUI) with a projected real growth rate of 2.5 percent; Government with a projected real growth rate of 1.4 percent; Nondurable Goods Manufacturing with a projected growth rate of 0.9 percent; and Retail Trade with a projected growth of 0.6 percent.

The North Carolina economy is expected to add 70,400 net jobs by December 2006, an increase of 1.8 percent over the state employment level in December 2005. Seven of the state’s 10 nonagricultural sectors of the economy should experience positive employment growth during 2006. The sectors expected to display the strongest employment growth rates in 2006 are Construction at 4.2 percent, FIRE at 3.9 percent, and Services at 2.8 percent.

The North Carolina unemployment rate for October 2006 was 4.7 percent, the same as the national rate. The state’s seasonally-adjusted unemployment rate is expected to be stable during the rest of the year and is forecast to close 2006 at 4.9 percent.
For 2007, the North Carolina economy is expected to continue its sixth year of economic expansion. Real (inflation adjusted) GSP is expected to increase by 2.0 percent over the 2006 level.

Overall growth during the four quarters of 2007 is expected to be quite stable. For 2007, first quarter GSP is expected to increase by an annualized real growth rate of 1.6 percent. During the second quarter, GSP is expected to increase by an annualized real rate of 2.0 percent. In the third quarter, GSP growth should continue and record an annualized real growth rate of 1.9 percent. In the fourth quarter of 2007, GSP growth is expected to reach an annualized real rate of 2.1 percent.

“Since World War II there have been 10 periods of economic expansion, and the average length of these 10 expansions has been 57 months,” Connaughton explained. “By the end of 2006, we will have been in this expansion for 62 months. The forecast for 2007 would extend the length of this expansion to 74 months and make it the fourth-longest expansion since 1945. With the recent fall in energy prices, it is very likely that GSP growth will continue during 2007 and produce the sixth year of this expansion.”

Eight of the state’s eleven economic sectors are forecast to experience growth during 2007. The sectors with the strongest expected growth forecasts are Agriculture with a projected real growth rate of 14.1 percent; Finance, Insurance, and Real Estate (FIRE) with a projected real growth rate of 4.6 percent; Transportation, Warehousing, Utilities, and Information (TWUI) with a projected real growth rate of 3.6 percent; Wholesale Trade with a projected real growth rate of 3.2 percent; Mining with a projected real growth rate of 3.0 percent; and Construction with a projected real growth rate of 2.5 percent.

Three other sectors are expected to experience growth during 2007, but at rates less than the overall state growth rate of 2.0 percent. These sectors are Services with a projected real growth rate of 1.8 percent, Government with a projected real growth rate of 1.1 percent, and Retail Trade with a projected real growth rate of 0.1 percent.

For 2007, Connaughton projects that state employers will add 57,100 net jobs, an increase of 1.4 percent over the 2006 level. Eight of the state’s ten nonagricultural sectors are expected to experience positive employment growth during 2007. The sectors that are expected to display the strongest employment growth rates in 2007 are Construction at 3.6 percent, FIRE at 2.6 percent, and Services at 2.5 percent.