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N.C. Bankers Association 2015 Economic Outlook: Metrics Clearly Signaling Economic Growth in 2015

*Release from N.C. Bankers Association

Dec. 15, 2014. Dr. Harry M. Davis, Economist with the North Carolina Bankers Association (NCBA) and professor of banking at Appalachian State University, has released the NCBA’s 2015 economic outlook. It provides a detailed analysis of the future of the state’s economy. According to the outlook, the economic metrics are clearly signaling economic growth for the remainder of 2014 and into 2015.

GDP growth declined 2.1 percent in the first quarter of 2014, but rebounded sharply to increase 4.6 percent and 3.9 percent for the second and third quarters. Considering several reasons for the improving economy, 2014 has been the best year for GDP growth since before the “Great Recession.”

The ISM Index, which is a measure of manufacturing activity, has been above 50 for the last 18 months. It is currently 58.7, which is the highest level since 2011. A reading above 50 says the manufacturing sector is expanding in terms of output. Lower and falling energy prices lead directly to lower operating costs for the sector.

Depending on the average or index, the stock market is (as of the beginning of December 2014) up more than 10 percent this year and is at historic highs. Similarly, corporate earnings growth continues to be strong. U.S. corporations are sitting on record levels of cash even as they become more efficient and productive. With low interest rates, many companies are borrowing money to buy back their own stock, further boosting returns to stockholders.

Davis
Davis

The U.S. has created more than 200,000 jobs each month this year since February. The average monthly job creation number for the third quarter was 234,000. In November 2014, the country created 321,000 jobs, which is the highest number of jobs created in a single month for more than two years. At 5.8 percent, the unemployment rate is at a six-year low and falling. Unfortunately, the labor participation rate (LPR) remains at a 35-year low. One reason for the lack of improvement in the LPR is more and more employers are complaining they cannot find qualified workers for many trade type jobs.

Thus far, the increase in new jobs has not led to significant increases in personal income. Wages and salaries for 2014 through October were up by 2 percent, which is just ahead of the inflation rate. Real median household income is still lower than the average in 2008. Part-time workers make up a larger percentage of the workforce now than before the “Great Recession,” and the average duration of unemployment is much higher now than at any time in the last decade.

The FED ended its tapering strategy in October 2014. As the FED decreased its security purchases, most observers expected interest rates would start slowing rising. The rise, however, did not occur in part because the European Central Bank was increasing its security purchases and pushing European interest rates below U.S. rates. The value of the Euro has fallen relative to the dollar, leading European investors to buy U.S. securities as the FED has withdrawn. The U.S. can expect the FED to increase interest rates in 2015, when the rate of inflation exceeds 2 percent.

North Carolina’s employment rate fell .3 percent in October to 6.3 percent. This figure is 1.2 percent lower than it was in October 2013. More importantly, the state has created nearly 85,000 new jobs in the last 12 months, which is a significant increase above the figures for each of the last five years.

Banks are beginning to experience robust revenue growth. Net income increased 7.3 percent in the third quarter compared to the same quarter in 2013. Net interest income (NII) increased 2.3 percent in the third quarter with 71 percent of institutions reporting year-over-year increases. Fortunately, loan growth has picked up and is driving the increase in NII. Net interest margins (NIMs) declined in the third quarter of 2014 compared to the third quarter of 2013. Intense competition for loans and the flat yield curve make it very difficult to increase NIMs from present levels. Fortunately, most of the decline in NIMs was concentrated in a small minority of banks.

In 2015, the state can expect bank profitability to continue to improve. Additionally, the economy will grow faster, leading to stronger loan growth. This change will drive NII even higher for the sector. Loan loss provision, which increased in the third quarter for the first time in five years, will continue to increase along with the greater loan demand. Banks will continue to reduce the total number of offices throughout the state, as the sector must reduce operating costs even more to achieve higher profitability.

GDP growth will slow slightly in the fourth quarter, but will still remain around 2.5 percent for 2014, marking the best year for growth since before the “Great Recession.” GDP growth will improve further to about 3 percent for 2015. Lower energy prices will allow a more efficient allocation of spending by consumers, which will increase general business activity. With Europe heading for a recession, Japan already experiencing one, and the Chinese and Indian economies slowing, the U.S. will be an even stronger economic force in the world.

Corporate profits will grow at single digit rates in 2015, but will still remain strong. Additionally, lower energy prices will help consumers and the manufacturing sector grow. Housing sales and starts will improve slightly from present levels. The unemployment rate will drop to about 5.5 percent nationwide and 5.8 percent for North Carolina. The state should add about 95,000 – 110,000 jobs in 2015, a very strong increase for North Carolina.

The North Carolina Bankers Association brings together all categories of banking institutions that best represent the interests of our rapidly changing state. The state’s banks have provided support to their communities since 1864. For more information, visit www.ncba.com.