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					                             The Economic Forecast




V
        irginia, like the nation,           ecommunications infrastruc-              Virginia’s economy often
        has been experiencing               ture and the expansion of back       mirrors the nation’s, because
        unprecedented eco-                  office and call center opera-        factors that impact U.S. trends
nomic expansion. Virginia’s                 tions. The improved federal          also have an influence in the
high-tech sector has been a                 fiscal picture and expected in-      Commonwealth. If Virginia’s
solid driver of economic                    crease in defense spending al-       economy continues to decline,
growth. This sector has expe-               so bode well for Virginia.           it will be due to national eco-
rienced explosive employment                                                     nomic events such as interest
                                                Several factors are now
growth over the last four                                                        rate increases, the decline in
                                            contributing to a slowing of
years, increasing by an average                                                  equity markets, and surging
                                            economic growth in Virginia.
of close to 20 percent per year.                                                 fuel costs. Here is a look at
                                            The consolidation in the tech-
                                                                                 U.S. economic trends:
    In addition, information                nology industry that started
technology professionals earn               this year and the major shake-
substantially higher than aver-             out that is expected next year       1990s expansion
age wages, a significant part of            as technology companies run          is the longest
which is spent in the state.                out of initial startup money         in U.S. history
This has contributed to growth              should slow high-tech growth


                                                                                 I
in the trade and finance sec-               toward more moderate rates.              n February 2000, the cur-
tors.                                       Also, manufacturing industries           rent economic expansion
                                            such as tobacco, coal mining,            became the longest in U.S.
    Other positive trends for
                                            textiles, and apparel may con-       history. Furthermore, econom-
the Commonwealth are the
                                            tinue to shrink.                     ic growth posted its largest
development of the state’s tel-
                                                                                 gain for this expansion in fiscal
                                                                                 year 2000.

             U.S. economy expected to grow                                       Growth in U.S. Gross
                   at a moderate pace                                            Domestic Product posted
                                                                                 its strongest gain
                                  ACTUAL                      FORECAST               The value of all goods and
                                1999       2000              2001       2002     services produced within the
                                                                                 U.S., adjusted for inflation,
 Real GDP                       4.0%       5.2%               4.4%       3.4%
                                                                                 grew at 5.2 percent in fiscal
 Total employment*              2.4%       2.3%               1.7%       1.4%    year 2000. Growth in total
 Unemployment rate              4.4%       4.1%               4.2%       4.3%    personal income was 5.9 per-
                                                                                 cent, while growth in wages
 Inflation -- CPI               1.7%       2.9%               3.0%       2.3%
                                                                                 and salaries increased by 6.7
 *Total nonagricultural employment. Figures represent percent change over pre-   percent.
 vious year, except unemployment rate, which is a percentage. Data based on
 October WEFA standard forecast. Source: Department of Taxation



                                                                                      ECONOMIC FORECAST A-17
Productivity growth surged         than the forecast of a 2.5 per-        Productivity will demon-
     Productivity is the key de-   cent increase.                          strate its procyclical na-
terminant of real incomes and                                              ture. When GDP growth is
consumer spending. Produc-         The Fed stepped on                      accelerating, as it does ear-
tivity growth in the second        the monetary brakes                     ly in economic expansions,
quarter of calendar year 2000          From June 1999 to May               productivity growth in-
was the largest gain since 1983.   2000, the Federal Reserve               creases. Similarly, when
Over the last three years, labor   Board increased the federal             GDP growth is decelerat-
productivity has risen an aver-    funds rate on six separate oc-          ing as it is currently, prod-
age of 3.1 percent per year,       casions, raising short-term in-         uctivity gains diminish.
more than double the average       terest rates by 175 basis points        Thus, quarter-to-quarter
of the 1980s.                      as economic growth, particu-            changes in productivity
                                   larly in the third and fourth           growth are closely related
Consumer spending                  calendar year quarters, in-             to changes in the econo-
was robust                         creased at rates the Fed                my’s overall rate of
                                   deemed unsustainable.                   growth. Should the econ-
    Consumer spending expe-
                                                                           omy maintain its more
rienced another year of excep-
                                                                           modest pace of expansion,
tional growth in fiscal year       U.S. economic                           further drops in productiv-
2000, increasing by 5.6 percent.
Solid consumer fundamentals,
                                   growth is moderating                    ity growth can be ex-
                                                                           pected.


                                   T
such as strong job and income
                                          he Fed’s aggressive in-
growth, continuing wealth
                                          terest rate hikes over the      Inflation should show a
gains, and high levels of con-                                             temporary increase and
                                          past year and the explo-
sumer confidence, formed the                                               then fall. Sharp increases
                                   sive increase in oil prices have
basis for this robust consumer                                             in productivity have been
                                   and will continue to slow eco-
spending.                                                                  offsetting strong economic
                                   nomic growth. Economic pre-
                                   dictions for the next two years         growth and wage pressure
Job gains exceeded                 include:                                to alleviate any inflation
the forecast                                                               threat. The impact of
    Total nonagricultural em-         Real Gross Domestic                 higher oil prices is ex-
ployment in the U.S. increased         Product (GDP) growth is             pected to have only a tem-
by 2.3 percent during fiscal           expected to grow by 4.4             porary effect on inflation,
year 2000, well ahead of the           percent in fiscal year 2001,        particularly in fiscal year
forecast of 1.5 percent. Growth        and then by 3.4 percent in          2001 when the CPI is ex-
in construction, services, and         fiscal year 2002.                   pected to increase 3.0 per-
transportation, communica-                                                 cent before falling to 2.3
tion, and public utilities
                                      Job growth will moderate            percent in fiscal year 2002.
                                       over the forecast horizon,
(TCPU) employment also sub-
stantially exceeded their re-
                                       with growth rates of 1.7           With the economy noticea-
                                       percent and 1.4 percent in          bly slowing, the Fed is ex-
spective forecasts.
                                       fiscal years 2001 and 2002,         pected to maintain steady
                                       respectively.                       interest rates for an ex-
Inflation was slightly higher
                                                                           tended period.
than expected                         Lower employment
    The surge in energy prices         growth, higher energy
drove the consumer price in-           costs, and a slowing hous-
dex (CPI) slightly ahead of            ing market should contri-
forecast. The actual increase in       bute to reduced consump-
the CPI was 2.9 percent, higher        tion growth in the future.


A-18 ECONOMIC FORECAST
Virginia's economy                            official forecast of 3.3 percent.        ley. It is the number one re-
                                                                                       gion in the U.S. for software
in fiscal year 2000                               Here is a look at regional
                                                                                       development and also leads
experienced                                   employment in Virginia dur-
                                                                                       the nation in Internet services.
                                              ing fiscal year 2000:
solid growth                                                                               The building boom in



T
       he flourishing high-tech               Northern Virginia                        Northern Virginia continued
       industry continued to be                                                        unabated in fiscal year 2000,
                                                  Northern Virginia, home
       the principal driver of                                                         with construction employment
                                              to most of Virginia’s high-tech
Virginia’s thriving economy in                                                         growing by a strong 7.7 per-
                                              industries, experienced the
fiscal year 2000. Employment                                                           cent.
                                              best job growth among the ma-
growth was broad-based, with                  jor metropolitan areas during
almost all industry sectors                                                            Richmond/Petersburg
                                              fiscal year 2000. The region's
adding jobs.                                  employment growth of 4.2                     Job growth in the Rich-
    Virginia's nonagricultural                percent generated over 44,400            mond-Petersburg Metropoli-
employment grew by 2.7 per-                   jobs, accounting for 48 percent          tan Statistical Area (MSA)
cent, increasing by 92,300 jobs               of the statewide increase.               slightly lagged the statewide
during fiscal year 2000. The                  Growth in services employ-               average, growing at a 2.4 per-
Virginia economy of the new                   ment continued to lead the               cent rate during fiscal year
millennium is a service-based                 region by creating 27,200 jobs,          2000. The region added 13,100
economy. One out of every                     a robust 6.3 percent increase.           new jobs, which represents
two new jobs created in fiscal                                                         almost 14 percent of the state-
                                                  The technology sector is
year 2000 was in the services                                                          wide increase. Services
                                              the real engine of job-creation,
sector. The dominance of the                                                           growth of 2.7 percent contri-
                                              growth, and business expan-
services sector reflects at least                                                      buted most of the gain (3,900
                                              sion in the region. Northern
a decade-long trend. The un-                                                           jobs).
                                              Virginia has the highest con-
employment rate fell to 2.7                   centration of high-tech com-                  Because of the mergers of
percent, over a half of a per-                panies outside of Silicon Val-           its banks and investment
centage point lower than the                                                           firms, Richmond is no longer a
                                                                                       major player in the finance in-
                                                                                       dustry. Driven by growth in
        Strongest growth has been in services                                          nondepository institutions,
          and trade sectors of the economy                                             however, the finance, insur-
                               Jobs in thousands                                       ance, and real estate employ-
                                                                                       ment (FIRE) sector added 2,400
             Federal
                                                                                       jobs.
                                                                       2000
               FIRE*                                                                   Norfolk/Newport
                                                                       1999
                                                                                       News/Virginia Beach
     Construction
                                                                                           Employment in the Nor-
               TCPU
                                                                                       folk-Newport News-Virginia
     State & Local                                                                     Beach MSA grew by 2.0 per-
                                                                                       cent. The Tidewater area add-
               Trade
                                                                                       ed 13,500 new jobs, 15 percent
           Services                                                                    of the statewide increase.
                    -20           0         20           40          60          80        The services and transpor-
                                                                                       tation, communications, and
 Finance, Insurance, and Real Estate (FIRE). Transportation, Communication, and Pub-
 lic Utilities (TCPU). Source: Department of Taxation.
                                                                                       public utilities (TCPU) sectors
                                                                                       led the growth with annual

                                                                                            ECONOMIC FORECAST A-19
increases of 2.2 percent and 7.7       year 2001 and 6.7 percent                   is expected to experience
percent, respectively. Em-             in fiscal year 2002.                        another year of solid
ployment in transportation                                                         growth in fiscal year 2001,
equipment increased by 900            In fiscal year 2001, Virginia               growing by 2.7 percent.
jobs.                                  is expected to add 70,900                   Growth is forecast to slow
                                       nonagricultural jobs for                    in fiscal year 2002 to 2.4
Balance of the state                   growth of 2.0 percent. The                  percent.
    The balance of the state           service sector is expected
lagged statewide job growth            to again lead job growth                   Employment in wholesale
with an increase of 2.0 percent,       with gains of 41,300 jobs.                  and retail trade is expected
or 21,200 jobs. This represents        Wholesale and retail trade                  to continue the slow,
over 23 percent of the state-          is expected to add almost                   steady growth seen in fis-
wide increase. Services and            12,100 jobs.                                cal year 2000.
trade employment were re-
                                      Job growth is expected to                  Virginia's manufacturing
sponsible for the bulk of the
                                       be slightly faster in fiscal                sector is expected to
growth in the balance of the
                                       year 2002. Jobs are ex-                     slightly decline once again
state. Like the other regions,
                                       pected to grow by 2.3 per-                  in fiscal year 2001 before
the services sector produced
                                       cent.                                       rebounding in fiscal year
the most new jobs in this re-
                                                                                   2002.
gion, increasing by 13,800 jobs.      Services employment is
                                       forecast to grow at 3.7 per-               The finance, insurance,
                                       cent in fiscal year 2001. In                and real estate employ-
Virginia’s economy
                                       fiscal year 2002, services                  ment (FIRE) sector is ex-
is still expected to                   employment growth is ex-                    pected to weaken slightly
outpace the nation’s                   pected to slow slightly to                  over the forecast horizon
                                       3.6 percent.                                with growth of 1.7 percent


T
       he Virginia standard                                                        and 0.8 percent in fiscal
       forecast expects the           Construction employment                     years 2001 and 2002. This
       Commonwealth to out-
perform the nation in terms of
job growth and wages and sal-                   Virginia employment growth again
ary growth over the forecast                     expected to outpace the nation’s
horizon. However, growth
will be slower than Virginia              Percentage growth in nonagricultural employment
has been experiencing in re-
cent years.
    Here is a look at what
economists are predicting for
Virginia over the next two
years:

   Total personal income in
    Virginia is forecast to grow
    at 6.2 percent and 5.9 per-
    cent in fiscal years 2001
    and 2002, respectively.
    Wages and salaries, the
    largest portion of personal
    income, is expected to in-         Data for 2001 through 2004 are forecasts. Source: Department of Taxation
    crease 6.8 percent in fiscal

A-20 ECONOMIC FORECAST
           Personal income growth in Virginia
           expected to slightly lag U.S. in 2001
                Percentage growth in personal income




     Data for 2001 through 2004 are forecasts. Source: Department of Taxation




    sector will continue to ex-            Predictions for the
    perience positive net
                                           near future
    growth due to the strong



                                           I
    performance of nondeposi-                  n summary, economic
    tory credit institutions and               growth in Virginia over the
    insurance carriers.                        next two fiscal years is ex-
    State and local govern-               pected to moderate significant-
    ment employment is ex-                 ly from the expansionary pace
    pected to grow moderately              of the last few years. Slowing
    at 2.4 percent in fiscal year          growth will be due mostly to
    2001 and 1.6 percent in fis-           national and international eco-
    cal year 2002. Local gov-              nomic events such as the Fed-
    ernments are expected to               eral Reserve Board interest rate
    add 16,000 new jobs over               increases, the decline in equity
    the next three years, pro-             markets, and surging fuel
    viding most of the growth              costs.
    in this sector.                             In addition, growth in the
                                           high-tech sector, one of the
                                           Virginia economy’s main driv-
                                           ers, has begun to decelerate,
                                           and it remains to be seen what
                                           impact the NASDAQ and dot-
                                           com fallout will have on em-
                                           ployment and income growth
                                           in this sector.



                                                                                ECONOMIC FORECAST A-21

				
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