Q&A about the local economy

Andy Bauer, a regional economist at the Federal Reserve Bank of Richmond, Baltimore Branch, answers questions submitted by baltimoresun.com readers

June 19, 2008

Rhonda, Timonium: Along with everyone else, I am interested in when the housing market will start turning around for the seller. What is the latest you're hearing?

I would like to say that a turnaround is imminent but there is nothing in the data or in conversations with industry contacts that would suggest a turnaround. I have heard that in the most sought-after zip codes there have been signs of price stabilization and sales have improved. In addition, there has been some activity this spring. However, it is still too early to say if that activity will be sustained -- we experienced a similar pickup in activity in 2007.

There is still a significant imbalance in terms of supply and demand in the market, and it will take some time to work through these imbalances. Inventory levels of homes for sale remain very high, delinquencies and foreclosures continue to rise, and prices are declining in many areas. To underscore the inventory situation, in the Baltimore-Towson metropolitan area it would take 13 months at the current sales pace to sell a single family home. This figure is up dramatically from 2 months during the years before the housing boom. The question for 2008 is how much further will prices need to adjust in order to clear the excess inventory on the market.

Laurie, Ithaca, N.Y.: With gas prices continually rising, how is that affecting tourism and downtown attractions? Are there more local "staycations"?

Rising energy prices act like a tax on consumers and lower real personal disposable income. Consequently, consumers have less to spend, and the expenditures most likely to be cut are the non-essentials such as leisure and recreation activities. Consumers adjust their spending habits by taking less expensive vacations -- often by staying local and/or taking smaller weekend or day trips. At the same time, rising energy prices are a tax on businesses as well, increasing costs and reducing margins. Together, the impact will negatively impact the tourism industry, though to what degree is tough to say. Those tourist destinations and attractions that are oriented toward local markets, however, will benefit from the increased demand for local vacation spots.

Mike, Canton: Have you seen any indications that the recent tax increases in Maryland have had a negative effect on the local economy or [contributed to] job losses in the public sector?

As of yet, no. However, it would be difficult to disentangle any impact from higher taxes and moderation in the state economy as a result of the housing correction. Obviously, among businesses, there is a great deal of concern regarding increasing taxes on business services. I conduct a survey of Maryland businesses, and early in the year many of the survey participants indicated that the proposed tax increases would very negatively impact their industry.

Carla, Falling Waters, W.Va.: What defines a recession? Are we really in one?

A recession is a broad decline in economic activity that takes place over several months or quarters. Often, a recession is defined as two quarters of declining real GDP (Gross Domestic Product). However, in practice, the National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee, which officially marks the months when recessions begin and end. They define a recession as: "A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough."

Are we currently in a recession? Looking at the data series the NBER considers to determine recessions, one would likely conclude that the economy is not currently in a recession but rather is expanding at a very weak rate. Real GDP growth, which is the most focused indicator by the NBER, has been positive (albeit very weak) over the past two quarters. The economy grew 0.6% and 0.9% in the fourth quarter of 2007 and the first quarter of this year, respectively. In addition, growth in real income and wholesale retail sales has continued to grow over the past two quarters.

However, payroll employment and industrial production have both declined so far in 2008, underscoring the weak growth rate of the economy as well as the concerns many have regarding a possible recession.

Lynn, Baltimore: What is the most important economic indicator/statistic that consumers should be aware of?

Well, that depends on what you are most concerned about. If you are concerned about economic growth and want to keep tabs on the economy, you would obviously want to follow the quarterly real GDP figures. You would also want to gauge the health of the labor market. The employment report is released the first Friday of each month by the Department of Labor and will indicate if businesses are expanding or cutting payrolls and whether more people are becoming unemployed. Of course, the ongoing correction in the housing market will be key in 2008, so following new and existing home sales as well as housing prices will also be important. And finally, consumer spending is the largest component of real GDP (roughly 70 percent), so the monthly report on retail sales is an important indicator of economic growth.

If you are concerned about inflation, there are two indicators of consumer inflation that are closely followed: the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) Price Index. When looking at these series, we focus on both the overall inflation measure as well as the core measure -- which strips out volatile food and energy prices. These indicators are closely followed by the Federal Reserve and factor prominently in our policy decisions.

Reed, Mount Washington: What makes up the price of a gallon of gas?

The price of a gallon of gas reflects the price of crude oil, taxes, refining costs and profits, and distribution and marketing costs. According to the Energy Information Agency, the price of crude oil accounted for 58% of the national average retail price of a gallon of regular gasoline in 2007. Federal, state and local government taxes accounted for 15% of the price of a gallon, refining costs and profits were another 17%, and distribution, marketing and retail dealer costs and profits were 10% of the price. The attached graphic shows the breakdown for 2007 versus the average price from 2000 to 2007.