November 6, 2009

FOURTH QUARTER 2009 ECONOMIC FORECAST AND ANALYSIS FOR

 THE HAMPTON ROADS MSA

The Hampton Roads MSA (formally the Virginia Beach-Norfolk-Newport News MSA) includes Currituck County, Gloucester County, Isle of Wight County, James City County, Mathews County, York County, Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Surry County, Suffolk, Virginia Beach and Williamsburg.

Although serious financial and structural problems within the national and global economies have spread to Hampton Roads and have negatively affected the region's economic performance in 2009, the decline in the region's economic growth rate through the first two quarters of 2009 has been tempered by the large military presence in Hampton Roads and increased funding of U.S. Department of Defense (DOD) procurement and military operations. The third quarter turnaround in the nation's economic performance and its continued growth are expected to have a positive affect the region's economy in the fourth quarter.   In particular, we expect the return of positive growth in the nation's economy to help in dramatically slowing the region's recent decline in employment, retail sales and tourism and create a turnaround in port cargo and new home building.

Employment (Non-Agricultural Civilian Employment -0.3%)

Unemployment Rate (Civilian Labor Force 6.8%)

DOD spending not withstanding, the economic downturn in the national economy as well as the lagged effect of the Ford plant closing and implementation of the BRAC directive has led to continuously declining employment in Hampton Roads throughout 2008.  Like their national counterparts, Hampton Roads employers struggled with declining demand for services and products, rising inventory and a significant tightening of credit availability.  

Employment losses in the region's economy have continued into 2009 although the rate of decline in those losses has tapered off.  The overall level of job losses is expected to fall in 2009 as the economy begins to claw its way out of recession and  as the performance of the national economy, global trade and the economic stimulus package begin to have a positive affect on Hampton Roads output.

Latest data obtained from the Bureau of Labor Statistics shows that Hampton Roads' economy so far has done relatively better than the Commonwealth. Year-to-date September 2009 data compared with the same period in 2008 indicate that the Commonwealth lost about 2.6 percent of civilian jobs compared to a loss of only 0.9 percent in Hampton Roads.  The combination of job losses as well as the job search difficulties faced by new entrants into the region's labor force is reflected in a rising Hampton Roads unemployment rate.

Retail Sales (Taxable Sales -0.95%)

Hampton Roads retailers continue to face a difficult business environment. We estimate that Hampton Roads household income rose by about three percent in 2008 and is expected to remain relatively stable in 2009. However, Hampton Roads retail sales declined by approximately 6.3 percent during January through September 2009 compared to the same period in 2008.   Much of the decline in retail sales was due to declining household wealth, a significant tightening of credit availability, and increased household savings.

Tourism (Hotel Room Revenue -2.1%)

Regional tourism has not escaped the national and local economic downturn.  Hampton Roads hotel revenue declined by an estimated 5.6 percent during January through September 2009 compared to the same period in 2008. As grim as these data seem, regional tourism fared much better than that of the nation where, hotel revenue dropped by an estimated 15.5 percent over the same period.  

Although Hampton Roads in general appears to have done much better than the nation in garnering hotel revenue during the recent economic downturn, the same can not be said for some Hampton Roads sub-markets where changes in the growth rate of hotel revenue were spread unevenly.  In particular, hotel revenue in Williamsburg market declined by 15.6 percent during first nine months of 2009 compared to the same time period in 2008.

 Port (General Cargo Tonnage +2.4%)

Throughout 2008 the port of Hampton Roads experienced a modest increase of 0.6 percent in its general cargo tonnage.  However, this number obscures the fact that cargo tonnage fell dramatically from October to December of 2008 as international trade throughout the world turned seriously negative and this trend has continued in 2009. Cargo tonnage declined by 20.8 percent during January through September 2009 compared to the same period in 2008.  A growing world economy, depreciating US dollar and a slow recovery in the national economy are expected to account for a modest increase in the volume of both exports and imports going through the port in the fourth quarter. 

Housing (Value of Single-Family Housing Permits +0.5%)

The Hampton Roads' housing market in 2009 is in the process of a wrenching adjustment that has featured falling prices, past overbuilding, and excessive housing inventory. Hampton Roads' existing residential home inventory as of September 2009 has more than quadrupled since September 2003 while the inventory of new homes has tripled over the same period.   Even though home prices have fallen, the price decline has not been enough to reduce inventory significantly. However, the price decline has played an important role in reversing the inventory increase that had gained momentum between 2004 and 2008.   Latest data on residential sales and on the active listings of unsold homes indicate that at the current pace of residential sales, it will take approximately 9 to 10 months to exhaust the active residential listings of real estate agents.

The region's large housing inventory has influenced the behavior of local home builders. Home builders have reacted to the relatively large increase in 2006's new home inventory with a reduction in construction and continue to do so.  Since 2006, the year-over-year reduction in new home construction has continued through 2009 at a pace of more than 1,200 less new homes per year.   

Additional symptoms of disequilibrium include declining sales and an extended market time for sales.  Year-to-date September  2009 existing home sales have declined by 4.8 percent while days on the market has risen by 8.6 percent to 88 days over the same period in 2008.   The continued excess supply and subsequent disequilibrium in the region's housing market means that house prices are very likely to continue to decline through the fourth quarter of 2009. 

On a more positive note, the federal $8,000 tax credit for new home buyers has led to an increase  in  residential home sales.  A comparison of year over year monthly sales shows that sales of existing homes began their decline in June 2006 and this trend continued through May 2009. It was only in June 2009 that we observed an increase in sales volume of existing homes compared to sales in June 2008. From June through August 2009, sales of existing homes increased only by 4.4 percent compared to the same period in 2008. However, sales of these homes increased by 22.7, and 27.8 percent in September and October respectively compared to same periods in 2008. Extension of the existing home buyers' credit and provisions of a new tax credit for existing home owners should provide some stability in