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Updated August 18, 1998

Economy Stronger in June; Slower Growth
Possible in Coming Months

By Stephen S. Fuller columnist

The Washington Coincident Index, which represents the current state of the metropolitan area economy, was 107.7 in June, up 0.26 percent from its May level and up 1.59 percent from its level a year ago. This monthly gain more than off-set its one-month decline in May and the Index current stands at its highest level ever. In June, three of the Index's four components were positive.

  • Wage and salary employment registered a strong gain in June and now has been up in five consecutive months;
  • Domestic passenger volume at Reagan National Airport was up marginally over May's level, increasing for the fourth time in the past five months; and
  • Nondurable goods retail sales increased slightly after declining sharply in May; June's increase was its third in the last four months; while,
  • Consumer confidence dropped from its all-time peak level achieved in May.

    The Washington Leading Index, which is designed to forecast the performance of the metropolitan area economy 9 to 12 months in advance, declined 0.10 percent in June to 99.9. This decrease follows four monthly gains dating back to January. For the past twelve months, the Index has continue to trend up, gaining 0.98 percent since June 1997. Two of the Index's five components contributed to its small decrease in June.

    Current indicators show the Washington Area economy to have continued expanding through mid-year building on their strong performance in 1997 and the Area's leading indicators continue to point towards further growth. However, there are some indications that the economy's growth rate may moderate in coming months pointing to a slower growth path for 1999.

    Current Performance
    After some softening in its performance in May, the Washington area economy recorded a healthy gain in June with the Coincident Index now standing at its highest level ever. Over the year's first six months, the economy has registered monthly gains each month since January (with the exception of in May), growing just under 1 percentage point overall during this six-month period. This six-month increase accounts for almost two-thirds of the gain registered over the past year suggesting the economy's growth has actually been accelerating in 1998 building its strong annual performance in 1997.

    Over the year's first six months, the economy has registered monthly gains each month since January (with the exception of in May), growing just under 1 percentage point overall during this six-month period.

    This continuing strong performance in 1998 is seen in all of the individual indicators. Job growth for the last twelve months, totaling 58,000, is running 8 percent ahead of annual gains for 1997 although the composition of this year's growth is different from last year. In 1998, the number of jobs generated in the private sector are off slightly from 1997 but public sector job growth has more than made up the difference. The principal difference in job growth this year so far is the substantially slower loss of federal jobs; these were down by 5,100 while state and local job growth added 9,100 jobs between June 1997 and 1998.

    While consumer confidence slipped slightly in June from its all-time peak level achieved in May, it is up 12.1 percent since January while for the year it has gained 7.6 percent. With consumer confidence setting new records for four consecutive months (February-May), consumer spending has been up, too. Nondurable goods retail sales, which have trended down (in real dollar value) for several years, were up in June and registered strong gains in March and April. Compared to their value in June 1997, this June's nondurable goods retail sales were up 2.6 percent.

    So far this year, the hospitality industry has exceeded last year's record performance. Hotel occupancy rates are reported to be running ahead of their 1997 levels through 6 months and passenger volume at Reagan National Airport has been slowly increasing gaining in four of six months this year with June's volume exceeding last June's level by 1.9 percent.

    With the area economy recording a strong first half and this performance reflecting broad-based gains across all sectors, with the exception of federal employment (federal spending has continued to trend up), the economy's outlook should be rosy. However, sustaining this magnitude of growth month after month is taxing the economy's resources and will eventually lead to the deceleration of this growth rate. For many months, there have been signs that resource constraints are growing.

    A growing scarcity of labor resources is the most visible problem threatening the area's economy. With job growth running 2.3 percent annually and labor force growth at 0.98 percent, the area's low unemployment only confirms the tightening of the labor market. In June, which generally has the year's highest unemployment because of the entrance of large numbers of high school and college graduates and other students into the labor market, the area's unemployment rate increased to 3.4 percent from 3.0 percent in May but 0.6 percentage points below last June's 4.0 percent unemployment rate. In the suburbs, the unemployment rate dropped 0.7 points from 1997 however, in the District, its unemployment rate increased 0.4 points.

    Near-Term Outlook
    The slight decline in the Leading Index in June provides the first sign of a possible slowdown in the area's economy later this year and into 1999. This one-month decline in the Index is not a signal that the economy is about to decelerate. Rather, it provides a first alert that will be confirmed (or not) in future months based on the emerging performance pattern of the area's leading indicators.

    Growing uncertainty within the nation's and world's financial markets will likely drive consumer expectations and consumer confidence lower in August.

    The leading indicators responsible for the decline in June's Index have been performing well in previous months so there is no multi-month pattern of decline to project into the future. Rather, these early indications provide a reference point for next month's data. Already, July's consumer expectations (consumer confidence six months hence) have been reported to have declined from their June peak. Growing uncertainty within the nation's and world's financial markets will likely drive consumer expectations and consumer confidence lower in August. Lower expectations are often paralleled by weaker durable goods sales. Auto sales in Fairfax County were down 3 percent between June 1997 and 1998.

    The national economy has cooled down since the first quarter's 5.5 percent rate, with the second quarter's growth rate estimated at 1.4 percent. This softening of the national economy will likely dampen local growth in the future although this may not have any noticeable impact until late in the year or until early 1999. The key indicators to watch over the next quarter will be: consumer spending (retail sales) which has been strong so far this year; consumer confidence which stands near its peak level; and labor force performance for any slowing in job generation and weakening of demand for new workers.

    At mid-year, the Washington area economy is stronger than at this time last year and has out-performed beginning-of-the-year expectations. However, there are some signs of softening that could lower the Washington area's economic growth rate by the end of the year and establish a slower growth trend for 1999. The direction of these indicators should become clear in the third quarter.

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