Economists Predict Slower but Steady Economic Growth for the State
By Wayne Sheets, Contributing Business Writer
POSTED: November 20, 2007
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“The reason the economy is slowing down is because the Federal Reserve told it to with 17 consecutive rate hikes. For the past three years, we’ve seen a growth rate of 3 percent per year. Now the economy has slowed to 2 percent and most of that reduction is due to the housing slump, which has taken 1 percent off the growth rate. The economy is doing very well in all other segments and if it weren’t for the housing situation, we’d still be seeing the 3 percent growth rate,” Wyss said.
“What happened to the housing industry? Quite simply, housing became too affordable with low interest and adjustable rate mortgages. The price of a home to the average American is relative to the monthly payment. Everything was going along fine until the rate hikes began to take place with the ARMs. Many people bought homes with a 2-28 mortgage, (or something similar) meaning that the first two years of the mortgage carried a fixed rate and the remainder of the mortgage, normally 30 years, would be subjected to interest rate adjustments. Those rate hikes are now beginning to come into play. When the interest rates began to go up at the end of the low ‘teaser’ rate period, people could not afford the higher payments. Adding to these problems is the fact that the ratio of home price to income hit record highs and could not be maintained with the higher interest rates. In fact, that ratio went to 340 percent of income in the second quarter of last year, which was not sustainable. Housing values continued to rise, interest was relatively low and people became complacent. Borrowers began borrowing too much money and lenders were all too willing to lend too much money,” Wyss said.
“Eventually everyone was reminded that risk is a four-letter word. When problems began to surface, lenders tightened up the money supply to all but those with solid credit credentials. However, with interest rate adjustments and a gain in personal income growth over the next two or three years, the price of housing should drop back to its historical average of about 260 percent of income,” he said.
“While things may look a bit bleak, they could be worse. We are expecting a 2.2 percent growth this year and expect about the same next year. This is a slow down but it is a fairly moderate slowdown. Obviously, there’s a risk that things could get worse. When you have something like the housing crisis hitting the economy, it can ride over that, but it doesn’t leave room for much else to go wrong. There are many candidates out there of things that can go wrong starting with oil prices that hit $95 per barrel. With the price of oil going up because there is only so much of it and the demand growing as it is ... we’re going to use up what’s left of it fast. With our current growth rate, our oil consumption will increase by 50 percent over the next 10 years. The demand for what oil is available is becoming more competitive worldwide, and I don’t know where (more of) it is going to come from. There is no shortage of energy; there is a shortage of oil,” Wyss said.
“Another threat to the U.S. economy is entitlements. Up until a few years ago, 15 people supported each person on Social Security; today there are about five workers for each Social Security recipient. By 2020, there will be only three workers supporting each recipient. That, and health care costs, are the major threats to our economy. The retirement age must be raised. When Social Security was initiated, benefits began at age 65 and life expectancy was 63. Today, on average, we spend 15 years in retirement. There must also be some dramatic changes in our health care system. Twenty-five percent of our health care costs are eaten up by administrative costs. This must be reduced. In addition, does it make sense that doctors in this country make, on average, four times the average household income in this country? That’s more than anywhere else in the world,” he said.
Wyss pointed out, however, that world growth is strong which will help soften the slowdown of the American economy. “The slowdown in United States, and other parts of the world, will be softened by stronger growth in Asia and Latin America. Growth in the U.S., Canada, the Eurozone and Japan is forecast to remain fairly steady at about 3 percent of real GDP, while Asia and Latin American show signs of expansion of around 8 percent and between 4 and 5 percent respectively through 2009. China’s economy alone, for example, is accounting for 30 percent of the world’s growth while the U.S. economy accounts for 12 percent.
“Global warming is a real issue, too,” Wyss continued. “We can argue the extent to which we are contributing to the problem, but it is out there. Nor do we have an energy policy. During the oil embargo in 1973, Congress set about establishing an energy policy — but none has been established in the 34 years since. This shows a lack of courage in Washington.”
Wyss also pointed out another problem that is plaguing the U.S. — a shortage of water as evidenced in the southeastern part of the country. “We must do more to conserve and recycle our water supply and find better and more effective purification processes.”
Closer to home, the West Virginia economy, according to Dr. George W. Hammond, professor of economics at WVU’s College of Business and Economics, is hitting record highs in terms of employment and per-capita personal income. West Virginia’s per capita personal income hit $27,897 in 2006, while the national average was $36,276. However, the outlook for the next couple of years looks a little cloudier than it has for the past couple of years. The risks to West Virginia’s growth are a bit higher than they have been. West Virginia fell into recession in 2001 at about the same time the nation showed the same signs of slowing down. Job growth began to pick up in 2004 and 2005 and mirrored that of the national growth rate. But in 2006, the job growth rate began to decelerate somewhat faster than the national average. Since the middle of 2003, about 32,000 new jobs have been added. This translates into a growth rate of 1.1 percent, which is slower than the national 1.5 percent growth rate. West Virginia has added about 4,700 jobs over the last four quarters, which translates into a growth rate of about 0.6 percent — well below the national rate of growth.
According to Hammond’s statistics, the big decline in job growth has been in the manufacturing and construction sector of the economy. Manufacturing has lost about 1,600 jobs during the last four quarters alone, and construction went from about 3,500 new jobs in 2005-2006 to essentially no jobs in 2007. Natural resources and mining also took a dramatic reduction in jobs. In 2006, this segment of the economy saw about 2,200 new jobs then dropped in 2007 to around 500. Even with a decline of some 800 jobs, the state’s major job growth has come in the trade, transportation and utilities sector, which dropped from about 2,800 new jobs in 2005 to about 2,000 in 2006 and 2007.
“The state’s coal production,” Hammond said, “has stabilized in 2007 relative to 2006. It is slightly higher than the levels produced in 2003, 2004 and 2005. Coal production has slipped a little in the southern coalfields and risen slightly in the northern section of the state. The story we’re hearing from coal operators is one of increasingly challenging geologic mining conditions, rising costs and softness in spot prices. We’re hearing a lot about regulatory uncertainty regarding clean water, especially in the southern part of the state. And, while coal is the “big dog” in the state’s mining industry, we are seeing a rise in the production of oil and gas.”
Statistics from the Office of Federal Housing Enterprise Oversight that Hammond used in his presentation show that house price appreciation has taken a significant decline in all areas of the state. In 2006, home values were rising at a rate of from about 11 percent to 17 percent across the state. Most areas have experienced a decline into the single-digit area, hovering around 4 percent on average. “What we are seeing,” Hammond said, “is that the housing correction that’s going on nationally is also taking effect in West Virginia as well.”
The forecast, according to Hammond, is not all gloom and doom. Job growth is forecast to stabilize during the period from 2007 through 2012. Nearly each segment of the economy is predicted to experience growth from 0.5 percent to 2.5 percent. Natural resources and mining is forecast to experience a growth rate of about 3 percent. The only areas predicted to experience negative growth is in the manufacturing and information sectors with a decline from about .75 percent and 1.0 percent, respectively.
According to statistics provided at the conference, the outlook for the state economy calls for sustained modest growth during the next five years, assuming the national economy avoids recession, and slows in response to the housing correction. The forecast calls for the state to add only 2,600 jobs (on an annual average basis) through the end of 2007. This is dangerously close to no growth and suggests that the state may still flirt with recession during the next year. Over the next five-year period, however, the state is forecast to average 5,000 new jobs per year, which translates into an average annual growth rate of 0.7 percent per year. This is slightly above the average growth rate of the previous five-year period. While this is a small acceleration, the 2001-2006 period included an extended jobs recession. Further, the job growth rate expected for the state is well below the growth expected for the nation (at 1.1 percent per year).
