1 ECONOMIC OUTLOOK 2008: PAUSE OR DROP? Dr. Mike Walden North Carolina State University

2 Slower Growth Ahead (US Real Annualized GDP Growth Rate)

3 One Reason – Slower Corporate Profits (% change in real after-tax corporate profits)

4 Job Growth Will Slow (annualized nonfarm payroll growth rate)

5 And the Unemployment Rate Will Rise (household unemployment rate)

6 But the Consumer Hasn’t Fallen Behind (% change in real personal disposable income per capita)

7 Growth in Employee Costs Has Been Modest (annualized % increase in wages and benefits)

8 Core Inflation Has Behaved ! (annualized % increase in CPI)

9 Behind Much of the Slowdown is the Housing Market

10 Interest Rates Have Moved the Housing Market (federal funds rate, % chg in starts, and % chg. in house price)

11 Excess Supply Has Surged

12 Subprime Mortgage Problems Have Jumped (percent of loans past due)

13 And There Are More Problems to Come (subprime loan balances with nearing reset dates)

14 Gas Prices: As They Rise, Will They Bring Us Down?

15 Gas Prices Are Also an Issue, But Maybe Not as Much as Thought! (price per gallon, nominal and real $2000)

16 We’re Using Energy More Efficiently (thous. Of btus per real $ of output)

17 As a Result, the Pinch of Gas Prices Has Been Dulled (gas and oil spending as a % of total spending)

18 Another Issue – The Trade Deficit and the Dollar

19 There Is a Link (trade deficit % of GDP on left scale and dollar exchange rate against major currencies on right scale)

20 Policy

21 We’re Living with Past Policy Decisions (% growth in adjusted monetary base)

22 Relative Federal Deficits Have Dropped (deficit as % of GDP)

23 After a Run-up, Interest Rates Have Drifted Lower

24 NORTH CAROLINA

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28 Housing Price Boom Was More Modest in NC (national and NC house price appreciation rates)

29 So “Crash” Was Delayed and Milder (% change in US and NC housing starts)

30 As Always, NC Regional Growth Varies (% change in employment, 2007 and forecasted 2008)

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32 The “Returns to Education” Have Increased in NC (% change in hourly wage, after inflation, )

33 Final Comments No “official” recession, but will look and feel like one No “official” recession, but will look and feel like one Housing market is calling the shots now Housing market is calling the shots now Fed will choose growth over inflation Fed will choose growth over inflation 2008 will be a year to “hold back” – economy and election uncertainty 2008 will be a year to “hold back” – economy and election uncertainty Challenge for NC: spreading the prosperity Challenge for NC: spreading the prosperity