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National, State and Regional Economy
The headline Gross Domestic Product number increased by 5.7 percent in the 4th quarter, compared to an increase of 2.2 percent in the 3rd quarter.
The increase was the largest since 2003. However, consumption expenditures rose only 2.0 percent during the quarter, slowing from a 2.8 percent increase during the 3rd quarter. In a recent speech, Atlanta Federal Reserve President Dennis Lockhart stated that he saw “two competing narratives about how this recovery will play out….in the first narrative – that of a traditional sharp bounce-back following a deep recession – growth exceeds the underlying long-term potential of the economy and unemployment declines at an accelerating pace…the alternative narrative entails some fundamental changes in business practices and consumer habits…Consumers, in this narrative, have assumed a quite different mind-set compared to the pre-crisis, prerecession 'normal.' Chastened by the recession and high unemployment, - consumers are simply more frugal and more inclined to save. And even if consumers wanted to resume pre-recession spending habits, the consumer finance industry, in this narrative, will not accommodate previous levels of consumption…In this narrative, growth continues, but at a very modest pace, and unemployment is very slow to recede…My team of Atlanta Fed economists and I are forecasting the second narrative.” The City’s revenue projections for FY 2011, which were presented in the City Manager’s Proposed budget on February 16, are predicated on the second narrative.
On the inflation front, the increase in the Washington-Baltimore Metro area’s consumer price index (CPI) has converged with the national consumer price index. The CPI rose by 2.6 percent year-over-year in each, in large part due to increases in energy costs. Motor fuels, which make up around 4.5 percent of the index, increased by over 50 percent year-over-year. The consumer price index excluding food and energy rose at a more modest 1.6 percent. Housing, which makes up over 40 percent of the CPI-U, dipped by 0.5 percent.
Alexandria’s economy was affected by the snowstorm in December. The three-month moving average of sales tax revenues compared to the previous year went negative in December for the first time since September 2009, even while the national year-over-year numbers went positive for the first time since September 2008.
In order to keep hotel rooms filled, Alexandria hotels have been deeply discounting rooms. While the number of occupied hotel rooms increased during the period from October through December compared to 2008, the average room rate decreased to a level only slightly above that of December 2006, despite the opening of several new high end hotels in the City since then.
The City of Alexandria Calendar Year 2010 (CY 2010) assessments were issued on February 16. Overall, unequalized assessments (before administrative or board review) decreased by 7.45 percent compared to CY 2009 assessments. That’s a decrease of 5.46 percent in residential assessments and 10.64 percent in commercial property assessments. Equalized residential assessments (after administrative or board review) decreased by 5.17 percent, while commercial assessments decreased by 9.60 percent. Total equalized assessments, including non-locally assessed property, decreased by 6.83 percent compared to last year.
The condo market was especially hard hit, where the average assessment has decreased by over 25 percent since 2006, from $364,286 to $269,695. The average single family home has fared relatively better and has decreased only by around 8 percent since 2006, from $669,299 to $612,749.
The housing market in Alexandria has shown some recent strength. The number of dwellings sold increased by over 30 percent during the last three months of 2009 compared to 2008.
However, over the next several months, some of the supports for the housing market may begin to wind down. The Federal Reserve has completed some 95 percent of its purchases of mortgage backed securities which have reduced interest rates on mortgages. Estimates from various sources are that after the Fed ends its purchases of mortgage backed securities at the end of March, mortgage rates could rise between 0.25 percent to 1.0 percent above current rates. An improving economy and large federal budget deficits could also put upward pressure on rates. In addition, unless extended, the homebuyer tax credit program is scheduled to end by the end of April. To take advantage of the credit, buyers must purchase homes by the end of April and settle by the end of June. Finally, the federal government’s program to prevent foreclosures appears to have served only to delay foreclosures rather than prevent them, as to date, relatively few borrowers have achieved permanently modified loans. The City has had relatively few foreclosures compared to other jurisdictions, but foreclosures may increase in the months to come. The question in the housing market is how much of the recent strength is due to massive support from the federal government and whether the strength is sustainable when and if the support comes to an end.
Commercial assessments decreased by the largest amount since the early 1990’s. The categories experiencing the worst rate of decline were office buildings (-12.11 percent), and hotels (-12.85 percent). New construction was minimal and is not expected to increase over the next several years. Budget memo #3 contains detailed information regarding the City’s commercial assessments and projections.
Governor McDonnell has formally issued a letter to legislators outlining new revenue projections and additional cuts to balance the biennium budget. The updated revenue projections have changed little from Governor Kaine’s final projections, but they’re not worsening. Governor McDonnell has proposed a continuation of funding for the car tax reimbursement which Governor Kaine had discontinued in his budget proposal. However, Governor McDonnell has offered some additional reductions that will affect Alexandria. The across-the-board cut to localities that had been eliminated in Kaine’s budget has been restored by McDonnell, which will reduce the City’s revenue estimates from intergovernmental transfers by $1.1 million. In addition, McDonnell proposed additional reductions to education and many social services. Staff will keep Council informed as additional information becomes available.