National, State and Regional Economy
There was good economic news from the National Bureau of Economic Research, which officially declared that the national recession ended in June 2009. Unfortunately, to many Americans, it looks and feels as if the recession that ended fifteen months ago has not gone away. The economy is healing itself, but the process is a gradual one and we are unlikely to see robust economic growth soon. In its statement on September 21, the Federal Reserve’s Open Market Committee declared that, “the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” The Committee also declared that inflation is likely to remain subdued, and as a result, the Federal Reserve is unlikely to raise interest rates anytime soon. Inflation slowed from an annual rate of increase of 1.2 percent in July to 1.1 percent in August.
Vincent and Carmen Reinhart of the American Enterprise Institute completed a research paper on the consequences of economic crises, which they described in the August 31 edition of the Financial Times. “Our research found real per capita gross domestic product growth tends to be much lower during the decade following crises. Unemployment rates are higher, with the most extreme increases in the most advanced economies that experienced a crisis. In 10 of the 15 episodes we studied, unemployment never fell back to its pre-crisis level, not in the following decade, nor right up to the end of 2009.”
The graph below shows that the unemployment rate has reached a plateau at a very high level. In the most recent unemployment release, the rate ticked up at the national, state, and local levels, and is in each case roughly comparable to the rate one year ago.
The graph below illustrates one reason why the economy remains stuck in low gear. Consumption expenditures make up around 70 percent of the economy, but the savings rate has increased to well above its 20-year average rate. Americans are gradually reducing their debt loads, but they’re not spending, which reduces growth.
Regionally, the picture is much brighter. In its September 17 edition, the Wall Street Journal published an analysis of stimulus funds and determined that more than $3.7 billion of stimulus contracts, grants, and loans went to recipients in Washington, DC and the two adjacent congressional districts, including Virginia’s 8th district. That amounted to almost $2,000 for every resident, nearly three times the national average. That has helped push down the Metro area’s unemployment rate to 6.3 percent, the lowest of any major metropolitan area in July. The George Mason Center for Regional Analysis computed that the number of the area’s jobs increased by 15,000 between June 2009 and June 2010. Except for the Dallas/Fort Worth area, that was the largest increase of any of the 15 largest metro job markets. The employer with the strongest gains was the federal government, without which the area would have lost jobs.
As measured by tax collections, Alexandria’s economy presents a picture of a gradually improving economy. The graph below shows the annual change in meals tax revenue, which turned strongly positive in May, based on a three-month trailing average of receipts from March through May. Last month’s year-over-year comparison was only slightly positive in part because it included the February snowstorms, which sharply reduced meals tax collections.
The trend seen in transient lodging tax receipts over the last several months continued in July as the 6.5 percent lodging tax, a measure of hotel room rates, increased much more quickly than the $1 per room tax, a measure of occupancy. The average room rate increased from $129 in July 2009 to over $148 in July 2010. The seasonally adjusted average room rate was the highest since the inauguration.
On the negative side, a three-month trailing average of sales tax collections are well below last year’s collections.
The data continue to show a mixed picture in the residential real estate market. With the expiration of the homebuyers’ tax credit, the three-month trailing average of sales volume decreased 7.5 percent in August 2010 compared to August 2009. The average sales price for the three-month period decreased by less than a percent compared to last year. However, on a calendar year-to-date basis, both the volume and the average sales price have increased compared to last year, by 2.8 percent, and 2.9 percent, respectively. In the FY 2011 approved budget, the City’s assessments assumed a flat residential real estate market in 2011 (with a projected decline of 4.5 percent overall, mostly from commercial real estate).
The graph of residential property sales below shows the two volume spikes from the homebuyers’ tax credit, the first from the perceived end of the homebuyers’ tax credit last November, and a smaller spike in June when the credit actually ended. The City’s residential real estate market is currently in the economic equivalent of a hangover from the expiration of the tax credit.
A good measure of housing market strength is the months’ worth of inventory. Fewer months’ inventory is a sellers’ market; more months’ inventory is a buyers’ market. According to MRIS, the number of months’ worth of inventory rose to its highest August level since at least 2002 for both houses (4.9 months) and condos (6.4 months), an indication that since the credit ended, the market has shifted from sellers to buyers. It will not be possible to get a good fix on the real strength of the housing market until later this year, when the tax credit is firmly in the rear view mirror.
The commercial real estate market remains in the doldrums. However, according to Jones Lang Lasalle in their National Capital Markets and Economic Review Q3 2010, there are some preliminary signs that national capitalization rates may have peaked, a positive sign for real estate values. However, another major national index of commercial real estate prices, Moody’s/REAL All Property Type Aggregate Index, declined by 7 percent combined in June and July and is now just 0.9 percent above its October 2009 low. The number of commercial sales continues to be depressed, though there has been some recent activity in the apartment sector. According to Code Enforcement, through the end of August, there had been no new commercial building project permits issued in the City for six months.