Michael F. Easley, Governor Employment Security Commission of North Carolina Harry E. Payne, Jr., Chairman
Volume 4, Number 1 April 2004
INSIGHT North Carolina’s Labor and Economic Outlook
Economic Indicators in North Carolina
Economic indicators used to predict future economic activity are
referred to as leading indicators, while coincident indicators are used to
help determine changes in the economy that are concurrent with such
indicators. All graphs reflect the most recent monthly statewide data.
NC Quick Stats: March 2004
Labor Force 4,192,000
Employment 3,972,700
Unemployment 219,400
Unemployment Rate 5.2%
Note: Data are preliminary and are
seasonally adjusted. 2002 - 2003 2003 - 2004
Inside
Economic Indicators
in North Carolina ……………. 1
Employment and Wage Trends
in the Transportation and
Warehousing Sector …………. 4
Introduction ………………… 4
Employment Trends in the
Transportation and
Warehousing Sector ……… 5
Wages in the Transportation
and Warehousing Sector …. 7
Major Occupations in the
Transportation and
Warehousing Sector ……… 8
Conclusion .……���………… 9
North Carolina’s Indexes of
Economic Indicators:
Gauging Current and Future
Economic Conditions ………... 10
Introduction ………………… 10
Methodology: Choosing
Indicators and Weighting … 10
Components in North
Carolina’s Leading Index ... 11
Components in North
Carolina’s Coincident Index 12
Rejected Components ……… 12
Analysis of Economic Indexes 13
Conclusion ………………… 15
Seasonally Adjusted Unemployment Rates*
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
M A M J J A S O N D J F
Total Nonagricultural Employment, in Thousands*
Seasonally Adjusted
* Source: ESC, Labor Market Information Division ( Continued on Page 2)
3,775
3,825
3,875
M A M J J A S O N D J F
April 2004 INSIGHT 2
Economic Indicators in North Carolina ( Continued from Page 1)
2002 - 2003 2003 - 2004
Initial Claims
Average Weekly Hours Worked in Manufacturing
Sales and Use Tax Revenues, in Millions
0
20
40
60
80
100
120
140
160
M A M J J A S O N D J F
Statewide, in Thousands By ESC Local Offices
Feb.
2004
Jan.
2004
Feb.
2003
Percent Change
From Last Year
Asheville 1,285 2,580 1,357 - 5.3
Charlotte 4,294 2,912 4,163 3.1
Durham 1,012 886 948 6.8
Fayetteville 1,117 2,001 1,384 - 19.3
Goldsboro 731 1,158 527 38.7
Greensboro 2,306 2,696 2,313 - 0.3
Greenville 1,304 1,505 916 42.4
Hickory/ Newton 3,875 4,848 3,886 - 0.3
Jacksonville 465 403 468 - 0.6
Raleigh 4,093 3,760 4,145 - 1.3
Wilmington 974 1,368 1,082 - 10
Winston- Source: Employment Security Commission Salem 2,256 4,031 2,909 - 22.4
In Selected Metropolitan Statistical Areas Statewide
Feb.
2004
Jan.
2004
Feb.
2003
Percent Change
From Last Year
Asheville 42.9 43.4 43.0 - 0.2
Charlotte/ Gastonia 40.8 40.8 39.2 4.1
Greensboro/
Winston- Salem/
High Point 40.2 39.7 39.0 3.1
Raleigh/ Durham/
Chapel Hill 43.9 42.5 40.0 9.8
Source: Employment Security Commission
Statewide In Selected Cities
Sep.
2003
Aug.
2003
Sep.
2002
Percent Change
From Last Year
Asheville 6.5 6.6 6.8 - 4.4
Charlotte 28.3 27.6 28.2 0.4
Durham 10.3 9.6 10.5 - 1.9
Fayetteville 6.2 5.9 5.8 6.9
Greensboro 12.2 11.8 12.3 - 0.8
Greenville 3.8 3.1 3.4 11.8
Hickory 3.5 3.6 3.7 - 5.4
Raleigh 18.3 17.9 17.6 4.0
Wilmington 6.4 6.6 6.1 4.9
Winston- Salem 9.2 8.9 9.1 1.1
N. C. Department of Revenue, Tax Research Division
37
38
39
40
41
42
M A M J J A S O N D J F
$ 100
$ 200
$ 300
$ 400
$ 500
M A M J J A S O N D J F
3 April 2004 INSIGHT
Economic Indicators in North Carolina ( Continued)
2002 - 2003 2003 - 2004
Housing Units Authorized by Building Permits
Total Tax Revenues, in Millions
Personal Income Tax Revenues, in Millions
Insured Unemployment Rates*
New Vehicle Registrations
New Business Incorporations
Source: ESC, Labor Market Information Division Source: US Census Bureau
0%
1%
2%
3%
4%
M A M J J A S O N D J F
4,000
5,000
6,000
7,000
8,000
9,000
M A M J J A S O N D J F
15,000
20,000
25,000
30,000
35,000
40,000
45,000
M A M J J A S O N D J F
$ 500
$ 750
$ 1,000
$ 1,250
$ 1,500
$ 1,750
M A M J J A S O N D J F
Source: NC Automobile Dealers Association Source: NC Department of Revenue
0
1,000
2,000
3,000
4,000
5,000
6,000
M A M J J A S O N D J F
Source: NC Secretary of State, Corporations Division Source: NC Department of Revenue
$ 0
$ 200
$ 400
$ 600
$ 800
$ 1,000
$ 1,200
M A M J J A S O N D J F
April 2004 INSIGHT 4
Introduction
North Carolina’s economy is facing a structural
adjustment. Employment is shifting away from
traditional manufacturing industries to services.
Between 1990 and 2003, the share of nonfarm
employment in the service- providing sector has
grown from 67 percent to 78 percent. The goods-producing
sector, which includes manufacturing,
construction and mining, has declined both as a
share of employment and in the total number of jobs.
One of the important challenges North Carolina will
face in the coming years is how to shift its workforce
from manufacturing to services, without creating
disadvantages for workers in rural areas or those
with little formal education.
There are three good reasons to study the
transportation and warehousing sector. First,
companies engaged in transportation services are
highly dependent on a strong business climate in
general. When other industries are trading,
transportation services are in greater demand. In
other words, the transportation sector is cyclical.
Changes in employment in the transportation sector
are likely to show us the effects of the recession and
upturns in employment in this sector will occur
when the overall economy begins to recover.
Employment changes in other industries in North
Carolina may not follow the business cycle. Some
industries such as textiles and tobacco are facing a
long- term ( or secular) decline in employment. Other
industries such as health care and educational
services face such strong demands that they continue
to add workers even during recessions.
A second reason the transportation sector is
important to look at now is the effects of 9- 11 on the
airline industry. What has the combined effect of the
recession and the extreme shock of the terrorist
threat done to employment and wages in the airline
industry?
Third, the transportation and warehousing industry
represents a possible growth industry in North
Carolina. Workers in traditional manufacturing
industries who are facing loss of jobs can possibly
obtain comparable work in the transportation and
warehousing industries.
Given these reasons to look at the transportation and
warehousing sector, this report focuses on several
key questions:
1. How much did employment grow in this
industry during the 1990s?
2. What effect did the 2001 recession have on this
industry?
3. How do the wages in this sector compare to
those in other industries?
4. What types of jobs are available in this industry?
The first step in analyzing an industry’s labor market
is to pin down the exact industries included in that
particular sector. The United States has an official
definition of each industry sector, the North
American Industry Classification System ( or
NAICS). According to NAICS, the transportation
and warehousing sector includes industries that
engage primarily in the following activities:
1. transportation of people or cargo ( by air, roads,
water, rail or pipeline)
2. warehousing and storage
3. scenic and sightseeing transportation
4. support activities related to the other
transportation industries, such as air traffic
control and baggage handling
Employment and Wage Trends in the Transportation and Warehousing Sector
By Robert Bowles, Economist
This article highlights trends in one of the growing
service industries: transportation and warehousing.
This industry represents only a small percentage
of the state’s employment, but it is relatively more
significant for a number of reasons.
5 April 2004 INSIGHT
There are many industries that seem related to
transportation but are not included in the official
definition. A whole page could be filled with a list of
industries indirectly dependent on the road, rail or air
systems in the state. Among the more obvious of
these are the following:
1. wholesalers, who differ from warehousers
because they sell their goods directly to other
businesses
2. companies performing overhauling, rebuilding
or conversions of transportation equipment
3. hotels and restaurants
4. gas stations
5. public administration, such as the state
Department of Transportation
Employment Trends in the Transportation
and Warehousing Sector
Approximately 3 percent of North Carolina’s
nonfarm employment is in the transportation and
warehousing sector. Figure 1 shows the
employment in these industries by county for the
3rd quarter of 2003, which is the latest county-level
data currently available. The map also
displays the major interstate highways in the
state.
The majority of jobs are located in the Piedmont
region, with the largest number in Mecklenburg,
Wake, Guilford, Forsyth and Cumberland
counties. The first four of these have large
populations and major airports, while
Cumberland County has a large army
base. Most of the counties with at
least 1,000 employees in the
transportation and warehousing sector
lie along or near major US interstates
( 40, 85 and 77). The main exceptions
to this are a string of counties in the
eastern part of the state that happen to
lie along US 70.
What has been the long- term
employment trend in transportation
and warehousing industries? Figure 2
shows employment levels for the
transportation and warehousing sector
from 1990 to February 2003. The
solid line shows North Carolina’s
actual employment, while the dashed
line shows the employment levels that would have
existed if North Carolina’s employment in this sector
had grown at the national rate during this period.
The long- term trend reveals positive growth during
the 1990s. During this period, employment in the
transportation and warehousing sector in North
Carolina grew 40 percent, or 3.8 percent per year,
while the statewide nonfarm growth rate was 2.8
percent. Nationally, employment in the sector grew
2.9 percent per year during this period.
Figure 2 also shows a strong negative impact during
the recession that began in March 2001 and the
subsequent recovery. The decline in North
Figure 1. Transportation and Warehousing Employment
3rd Quarter 2003
60
70
80
90
100
110
120
130
Ja n - 9 0
Ja n - 9 1
Ja n - 9 2
Ja n - 9 3
Ja n - 9 4
Ja n - 9 5
Ja n - 9 6
Ja n - 9 7
Ja n - 9 8
Ja n - 9 9
Ja n - 0 0
Ja n - 0 1
Ja n - 0 2
Ja n - 0 3
Ja n - 0 4
In T ho usa nds
Figure 2. Employment in the Transportation
and Warehousing Sector
Jan. 1990 to Feb. 2004
( national trend shown as dashed line)
April 2004 INSIGHT 6
Carolina’s transportation and warehousing
employment was greater than the national decline in
percentage terms. This sector is generally cyclical, as
transportation services are cut when fewer goods are
sold. However, the 1990- 91 recession did not have a
major impact on employment.
The negative effects of September 11, 2001 also
contributed to the large decline in air travel, which is
an important component of the transportation sector
in North Carolina. In a later section, we look at how
several subsectors of the transportation industry,
including the airline industry, have fared since the
2001 recession.
Figure 3 compares the trend in employment in the
transportation and warehousing sector to two
similarly- sized industries: textiles and ambulatory
health care ( which includes out- patient medical
services, primarily doctors’ and dentists’ offices).
This graph paints a good picture of the structural
changes in North Carolina’s economy during the
1990s, mainly the shift from manufacturing to
services. Textile employment has been declining for
many years, a trend that accelerated around 1995,
and again in 2001. Meanwhile, employment in
health care services has been rising faster than the
state average, taking a bigger share of total
employment over the 1990s. Even the
2001 recession has not slowed growth.
( Some health care industries tend to grow
faster than normal during recessions, in
part because many of the low- wage
occupations that had shortages before the
recession can now be filled.)
Where does the transportation and
warehousing sector fit into these
changes? As stated earlier, long- term
growth in this sector in the 1990’ s was
faster than the state’s average total
nonfarm employment growth rate.
However, employment growth since
2001 has remained flat. It is too early to
tell whether employment in this sector
will get a spark and grow quickly again
or face structural declines like
manufacturing.
Figure 4 shows a breakout of
employment for the largest subsectors of
the transportation and warehousing
industry. It also shows the changes in
employment in these industries from the
3rd quarter 2001 to the 1st quarter 2003
( the latest numbers available). The truck
transportation industry has by far the
largest employment, but had the second
largest decline in employment over the
two years ( down 3,552 or approximately
7.0%). The largest percentage decline in
employment occurred in the air
transportation industry, which lost 5,116
jobs, 27.8 percent of its 3rd quarter 2001
employment. The largest job loss
occurred following the September 11,
2001 disaster.
+ 66
- 1,310
- 5,116
- 477
+ 415
- 1,291
- 3,552
0
10,000
20,000
30,000
40,000
50,000
60,000
Truck
Transportation
Postal Services Warehousing
and Storage
Couriers and
Messengers
Air
Transportation
Support
Activities
Transit and
Ground
Passenger
Transport
emp, 2001Q3 emp, 2003Q3
0
20
40
60
80
100
120
140
160
180
200
Jan- 90
Jan- 91
Jan- 92
Jan- 93
Jan- 94
Jan- 95
Jan- 96
Jan- 97
Jan- 98
Jan- 99
Jan- 00
Jan- 01
Jan- 02
Jan- 03
Jan- 04
In Thousands
Textiles
Ambulatory Health
Transportation & Warehousing
Figure 4. Employment Changes in Selected Transportation &
Warehousing Industries in North Carolina
3rd Quarter 2001 to 3rd Quarter 2003
Figure 3. Comparison of NC Employment
Trends in Three Industries
Jan. 1990 to Feb. 2004
( national recessions are shaded)
7 April 2004 INSIGHT
Wages in the Transportation and
Warehousing Sector
Figure 5 shows the average weekly
wage for several of the larger industry
sectors in North Carolina during the
3rd quarter of 2003. The average wage
in the transportation and warehousing
sector was $ 717, slightly higher than
the average wage for all industries in
the state ($ 629). The highest- paying
sectors were finance and insurance,
professional and technical services,
and information. The average wage in
manufacturing was $ 744, also higher
t h an in transport at ion and
warehousing. On the other hand,
transportation workers earned more,
on average, than workers in health
care, educational services, retail and
hotel and restaurant services.
There are significant differences in
wages among the different industries
in the transportation and warehousing
sector. Some of these industries, such
as air transportation, require very
specialized skills which pay higher
wages. Also, some of these industries
are more highly unionized than others.
Figure 6 shows the average wages for
several of the larger subsectors of
transportation and warehousing. The
highest average wage was in the air
transportation industry, which paid on
average $ 960 per week. Post services
had the second highest average
weekly wage, $ 907. This industry
comprises establishments primarily
engaged in operating the National
Postal Service. Establishments
primarily engaged in performing one
or more postal services, such as
sorting, routing, and/ or delivery, on a
contract basis ( except the bulk
transportation of mail) are included in
this industry. The subsector with the
largest employment in North Carolina,
truck transportation, paid on average
$ 660 per week, slightly more than the
statewide average for all workers.
$ 629
$ 236
$ 422
$ 618
$ 654
$ 717
$ 744
$ 911
$ 1,035
$ 923
$ 0 $ 200 $ 400 $ 600 $ 800 $ 1,000 $ 1,200
All Covered Industries
Accomodations & Food Services
Retail Trade
Educational Services
Health Care & Social Assistance
Transportation & Warehousing
Manufacturing
Information
Professional & Technical Services
Finance & Insurance
Figure 5. Average Weekly Wage in North
Carolina’s Major Industries
3rd Quarter 2003
$ 660 $ 627
$ 426
$ 629
$ 723
$ 568
$ 907
$ 960
$ 0
$ 200
$ 400
$ 600
$ 800
$ 1,000
$ 1,200
A ir
T ran sp o rta tio n
P o sta l S e rv ic e s
Su p p o rt
A c tiv itie s
T ru ck
T ran sp o rta tio n
Wareh o u sin g
an d S to rag e
Co u rie r s an d
M essen g ers
T r a n sit a n d
G ro u n d
P a sse n g e r
T ran sp o r t
S ta tew id e
Co v ered Figure 6. Average Weekly Wage of Selected
Transportation & Warehousing Industries
3rd Quarter 2003
April 2004 INSIGHT 8
The average wages of some of the
transportation and warehousing subsectors
have been adversely affected by the 2001
Recession and the effects of September 11th.
As shown in Figure 7, the average wage in
support activities actually fell considerably
from the 3rd quarter 2001 to the 3rd quarter
2003. Most of the employment in support
activities is related to air transportation.
Wages in the air transportation industry
have recently rebounded after being below
their pre- recession level. Average wages in
truck transportation grew, but grew slower
than the statewide average for all industries,
5.7 percent. However, wages in many of the
other transportation and warehousing
industries grew faster than the state average,
namely transit and ground passenger
transport, which grew 10.8 percent, and
warehousing and storage ( up 9.2%) during
those two years.
Major Occupations in the Transportation
and Warehousing Sector
Many different types of jobs can be obtained
in the transportation and warehousing
industries, from airline pilots and locomotive
engineers to mechanics and shipping clerks.
These occupations require a diverse set of
skills and pay equally diverse wages.
Figure 8 shows the distribution of five
occupational groups in several important sub-sectors
of transportation and warehousing
and for all industries nationally. As expected,
occupations related to transportation and
material moving are the largest job category
across the industries. However, other types of
workers, such as office and administrative
support staff, represent a fairly large share of
the jobs. There are even some production
jobs in the warehousing and storage industry.
Further information on the types of
occupations in each of these categories can
be accessed through the Occupational
Employment Statistics program at the North
Carolina Employment Security Commission.
Current wage rates being paid in the state for
each of the occupations are also available.
Figure 8. Shares of Selected Occupations in Key
Transportation and Warehousing Industries and in All
Industries, Nationally, 2002
0%
10%
20%
30%
40%
50%
60%
70%
80%
Management Office &
Administrative
Support
Installation,
Maintenance &
Repair
Production Transportation &
Material Moving
Ground Truck Transportation Warehousing & Storage Scheduled Air Transportation All Industries
Source: Occupational Employment and Wages, 2002, Occupational
Employment Statistics ( OES) program,
Bureau of Labor Statistics
Figure 7. Growth in Average Weekly Wage for Selected
Transportation & Warehousing Industries
3rd Quarter 2001 to 3rd Quarter 2003
3.3%
7.8%
9.2%
9.3%
8.6%
- 7.7%
10.8%
5.7%
- 10.0% - 5.0% 0.0% 5.0% 10.0% 15.0%
Truck Transport at ion
Post al Services
Warehousing and S t orage
Couriers and Messengers
Air Transport at ion
Support Act ivit ies
Transit and Ground
Passenger Transport
St atewide Covered
9 April 2004 INSIGHT
Conclusion
The transportation and warehousing sector employs
approximately 3 percent of North Carolina’s
workers. The industry experienced relatively fast
growth during the 1990s, but suffered considerably
from the 2001 downturn in the economy. Signs of
recovery are still not evident, especially in the air
transportation industry and related support activities.
The airline industry continues to seek concessions
from employees. A recent article in the Charlotte
Observer (‘ Pilots to join talks on US Airways
strategy,’ Feb. 21, 2004) cites continued competition
from low- fare airlines like Southwest Airlines for the
need for more cost- cutting at US Airways. Even
after giving up $ 1 billion annually in wages and
benefits, employees are being asked for additional
concessions. According to the newspaper report, US
Airways has approximately 5,800 employees in
Charlotte.
Last year, the federal government gave airline and
airline- related workers additional unemployment
benefits. Under the Temporary Extended
Unemployment Compensation ( TEUC) program,
these workers would have been eligible for up to 39
weeks of additional unemployment benefits in
addition to their regular 26 weeks. Unfortunately for
many workers who continue to face possible layoffs,
TEUC was canceled in January 2004.
Hopefully, the transportation and warehousing sector
will rebound this year, as most economic indicators
point upwards. These industries will benefit from a
pool of workers in North Carolina who have been
laid off from manufacturing companies and are
looking for good- paying jobs. With these factors,
along with extensive road and airport improvements
in the state in recent years, this industry may soon be
ready for another takeoff.
April 2004 INSIGHT 10
Introduction
Yet, for many, economic conditions continue to be
mixed. Although total employment in North
Carolina has stabilized over the past several months
and unemployment insurance claims have declined,
business and consumer confidence in the short- term
future of the US economy is unstable.
Since January 2001, twelve economic indicators
specific to North Carolina’s economy have been
presented in Insight. However, many economic
observers prefer to be able to summarize the ups and
downs of the economy in a single measure. This is
especially important when the individual indicators
are moving in different directions. If a single
measure were to be determined, the following
questions must be considered: How can each be
weighted to get an overall measure? Which
indicators are good at predicting future movements
in the economy and which ones are good descriptors
of the current state of the economy?
This article presents the development of two
economic indicator indexes that combine the
information from several indicators into handy
economic barometers for the state. The North
Carolina Leading Index gauges likely changes in the
economy over the next several months, while the
North Carolina Coincident Index summarizes current
conditions.
Composite economic indexes have been created at
the national level by The Conference Board.
Although North Carolina’s economic health closely
follows the nation, it is important to consider the
unique challenges the State faces in adjusting itself
to the demands of international economic forces.
Methodology: Choosing Indicators and
Weighting
The methodology used to calculate the NC
composite economic indexes was largely based upon
the model used by The Conference Board. First, a
number of relevant economic indicators are chosen.
For each economic indicator, the month- to- month
percentage changes are calculated. These changes
are then weighted and added together to construct
the change in the overall index. The indexes are
“ normalized” by setting the values at a particular
point in time to 100. In this case, we use the same
time period that the Conference Board used for the
national indexes, which is monthly.
What are the characteristics of good indicators?
When determining which components to include in
the indexes, several factors were considered:
1. timeliness / availability of the data,
2. conformity to business cycle patterns and
turning points,
3. volatility of the data ( the less volatile, the better)
4. economic significance.
Timeliness and availability of data are crucial factors
in creating indexes, especially at the sub- national
level. For example, if a particular indicator’s most
current data lags several months behind other
components and is not consistently updated on a
month- to- month basis, then it would more likely be
rejected for inclusion in the index.
North Carolina’s Indexes of Economic Indicators:
Gauging Current and Future Economic Conditions
By Phillip Anderson, Statistician
Every week, newspapers report some new business
statistic on the U. S. economy to point towards a
rebound from the most recent economic downturn.
The National Bureau of Economic Research reported
that the recession that began in March 2001 actually
ended at least for the nation as a whole in November
of that year.
11 April 2004 INSIGHT
Once the components were selected, some
adjustments to the data were necessary prior to their
inclusion in the index. If the component was
influenced by “ seasonal” factors, then the seasonal
influence had to be accounted for. For example,
initial claims tend to be noticeably higher in the
month of January than June because some firms
( noticeably in manufacturing) reduce their activity in
early winter. In most cases, the indicators used in the
indexes have been deseasonalized by the data
source.
Variables calculated in monetary units, such as retail
sales, gain in nominal value over a period of time
fueled partly by inflation. The process of deflating
the retail sales time series is thus essential to creating
an index that captures real changes in the economy.
Some economic data are vulnerable to large monthly
changes that are caused by random events. This
“ volatility” has to be accounted for or else, given the
way the indexes are created, these variables will
dominate the month- to- month changes. For example,
if the monthly percentage changes in retail sales tend
to be larger than monthly percentage changes in
industrial production, then retail sales would be a
more volatile component.
Components in North Carolina’s Leading Index
The Leading Composite Index incorporates variables
whose response to major changes in the economy
precede by several months other important variables
in the state economy. Four indicators met the
standard:
1. NC Initial Unemployment Insurance Claims
2. National Leading Index
3. NC Residential Building Permits
4. NC Average Weekly Manufacturing Hours
When considering initial unemployment insurance
claims and adjusting for seasonality, this indicator
passed all the criteria for a good component.
Although volatile compared to some other
components, initial claims conform to regular
business cycle patterns and demonstrate economic
significance by leading labor market conditions.
Increases in initial claims raise the likelihood of
future increases in the unemployment rate and
declines in total nonagricultural employment.
Conversely, lower claims raise the likelihood of
decreases in the unemployment rate and increases in
total nonagricultural employment.
Another component included in the NC Leading
Index is actually the Leading Index published by
The Conference Board at the national level. This
component includes such national variables as
consumer confidence, stock market index, money
supply, interest rate spread ( 10- year Treasury bonds
less federal funds), etc. Changes in these national
variables influence the statewide economy and are
significant enough to be applied to the statewide
leading index. Further, this component is the least
volatile component in the index and has a reliable
history of predicting future growth or downturns in
the economy. For these reasons, the National
Leading Index is included in the statewide index of
leading indicators.
NC residential building permits is another
component included in the Leading Index. The
economic significance of this component is that
increased construction employment, durable goods
orders, etc., occur after more permits are issued.
Conversely, decreasing construction employment
and durable goods orders follow decreased permits.
Similar to initial unemployment insurance claims in
its volatility, the residential building permits series
conforms to regular business cycle patterns.
Residential building permits are also useful in
representing the “ interest rate effect” in the
economy. As seen in recent years, low interest rates
can have a big impact on residential building. The
positive economic impact of lower interest rates will
inevitably have other beneficial effects on aggregate
demand, such as boosting business investment and
purchases of high priced consumer goods such as
automobiles.
The fourth and final component in the Leading Index
is NC average weekly manufacturing hours. Being a
rather non- volatile component due to its tendency to
revolve around the standard 40- hour workweek,
average weekly manufacturing hours leads economic
activity because firms tend to cut hours worked
before laying off workers if a downturn is expected
or if business conditions are deteriorating.
Conversely, firms tend to increase hours worked
before rehiring laid- off workers or new workers if
business conditions are improving.
April 2004 INSIGHT 12
Components in North Carolina’s Coincident
Index
Those variables that gauge current conditions are
grouped into the NC Coincident Index. Currently,
this index has three components:
1. US Index of Industrial Production
2. NC Total Nonagricultural Employment
3. US Real Retail Sales
The US Index of Industrial Production is a national
component but is included in the Coincident Index to
serve as a proxy for statewide industrial production,
which is not available in a timely manner. The
Federal Reserve’s monthly index of
industrial production and the related
capacity indexes and capacity
utilization rates cover manufacturing,
mining, and electric and gas utilities.
The industrial sector, together with
construction, accounts for the bulk of
the variation in national output over
the course of the business cycle.
Monthly increases in the index of
industrial production indicate growth
in the economy. Conversely,
decreases in the index of industrial
production suggest economic decline.
During the most recent recession, the
index of industrial production
declined for 15 months in a row
starting in September 2000 and
ending in December 2001.
North Carolina total nonagricultural
employment ( seasonally adjusted)
combines a broad measure of employment along
with timeliness of the data. This component is
perhaps the single most important component in the
Coincident Index because it provides a monthly
pulse of labor market conditions based on a survey
of approximately 13,000 nonagricultural
establishments statewide. Monthly increases in total
nonagricultural employment suggest growth in the
labor market and thus an expanding overall
economy. Conversely, monthly declines suggest
deterioration in the labor market and thus economic
recession. Although total nonagricultural
employment did not decline every month during the
last recession, this component did reveal a general
downward trend from June 2000 to December 2001.
The last component comprising the Coincident Index
is US real ( adjusted for inflation) retail sales, which
serves as a proxy for retail sales in North Carolina.
Although NC retail sales data are available, US retail
sales data are more timely and less volatile.
Furthermore, substituting statewide retail sales
figures in the index in place of national retail sales
figures revealed no significant differences in the
overall index from January 1992 to the present. In
fact, the beginning ( peak) and ending ( trough) of the
last NC downturn was the same when using either
national or statewide numbers ( See Figure 1). Gross
retail sales represent a substantial part of the overall
economy and were thus accounted for in the index.
Rejected Components
Why were other components not chosen for the
composite indices? Some components may have met
some of the criteria, but failed to meet all of them.
For example, new business incorporations ( a leading
indicator) generally conformed to business cycle
patterns, but provided a less clear picture of turning
points in the state’s economy than other components.
During the recession of the early 90’ s, new
incorporations dropped much less than the Leading
Index. Further, its month- to- month volatility
increased during the last several years compared to
earlier years. So, this component was not included in
the NC Leading Index.
( Note: This Index uses NC real retail sales through September 2003 compared
to US real retail sales
and is presented for comparison purposes only).
Figure 1. Comparison of North Carolina’s Coincident
Index Using Statewide vs. US Retail Sales
80
85
90
95
100
105
110
115
120
Jan- 92
Jan- 93
Jan- 94
Jan- 95
Jan- 96
Jan- 97
Jan- 98
Jan- 99
Jan- 00
Jan- 01
Jan- 02
Jan- 03
Years
Index
Using NC Real Retail Sales Using US Real Retail Sales
13 April 2004 INSIGHT
Similarly, various tax revenue- based components
such as real sales and use tax revenue were tested
but not included in the Coincident Index. Real sales
and use tax revenue presented no discernible decline
during the most recent recession. Thus, this
component failed to meet the second criteria for
inclusion in the index by not conforming to business
cycle patterns.
Analysis of Economic Indexes
The purpose of the NC composite indices is twofold.
First, the Leading Index should forecast general
movements in the Coincident Index. The time
horizon associated with this forecasting is roughly
six months. For example, if the Leading Index
reveals a pattern of general growth, then the
Coincident Index should begin to reflect this about
six months later. Conversely, if the Leading Index
shows a pattern of general decline, then the
Coincident Index should reflect this within several
months as well or at least show noticeable
slowdown. Second, the indices should
reflect true recessions and expansions by
declining during a recession and increasing
during expansions.
Did the NC Leading Index do a reasonably
good job of warning us of the most recent
downturn? The recession of the 2000 –
2001 period began to manifest itself first in
the Leading Index around April 2000
( peak) and kept falling for nearly one year,
reaching a trough in April 2001 ( Figure 2).
The state’s Coincident Index began to
reflect the downturn later, beginning its
steep decline in September 2000 and
reaching its trough in December 2001
( Figure 3). Thus, the Leading Index began
its decline six months before the Coincident
Index began to fall.
Has the Leading Index done a reasonably
good job of revealing when the state’s
economy would recover from the downturn?
The Coincident Index began to slowly
recover in January 2002 but was preceded
by an upturn in the Leading Index in
October 2001 ( a four month lag). Further,
the surge in the Leading Index over the past
nine months has been reflected by
noticeable gains in the Coincident Index for
the past four to five months.
Did the Leading Index ever inaccurately forecast
growth or decline in the Coincident Index? Although
the two indices have normally followed related
patterns, perhaps the most noticeable inconsistency
between the two indices occurred during late 1994
and into 1995. The Leading Index began to decline
markedly from October 1994 to May 1995 and
afterwards began to steadily increase. The
Coincident Index, however, did not exactly decline
during a period following these steady declines in
the Leading Index, but did seem to stagnate in 1995
for many months exhibiting virtually flat growth. In
this case, the Leading Index actually warned not of a
recession, but of a marked slowdown in the
Coincident Index.
From January 1995 to January 1996, the Coincident
Index increased only 1.5 percent compared to 5
percent from January 1994 through January 1995.
This example suggests the limitations of the Leading
Index’s predictive power - not every downward blip
leads to an actual recession.
Figure 2. North Carolina Leading Index ( 1996= 100)
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105
106
Jan- 92
Jan- 93
Jan- 94
Jan- 95
Jan- 96
Jan- 97
Jan- 98
Jan- 99
Jan- 00
Jan- 01
Jan- 02
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Jan- 04
Years
Index
Figure 3. North Carolina Coincident Index ( 1996= 100)
80
85
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95
100
105
110
115
120
Jan- 92
Jan- 93
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Jan- 95
Jan- 96
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Jan- 99
Jan- 00
Jan- 01
Jan- 02
Jan- 03
Jan- 04
Years
Index
April 2004 INSIGHT 14
Figures 4 and 5 present the most updated NC
Coincident and Leading Index changes from August
2003 to February 2004. The February 2004
Coincident Index gain of 1.1% represents a mild
increase over the six- month period. Over the past six
months, the Leading Index has experienced even
more substantive gains. How does this compare to
the outlook for the nation? North Carolina appears to
be trending with the nation as a whole but its gross
state product may well trail the national gross
domestic product.
Figure 4 Figure 5
The changes in the Leading Index barometer since April 2001 illustrate the slow but
persistent recovery from the 2001 recession.
15 April 2004 INSIGHT
Conclusion
The North Carolina Economic Indicators are a group
of statewide and national variables that measure
future and present business and economic
conditions. This is not unlike the approach taken by
such states as Kentucky and South Carolina in the
creation of their own indexes. The variables, or
components, are grouped together to form two
overall indexes: the NC Leading Index and the NC
Coincident Index. By combining several different
indicators, and giving greater weight to those that are
least volatile, the indexes provide convenient
summaries for economic analysts.
When determining which components to include in
the indexes, several factors were considered: 1)
timeliness / availability of the data; 2) conformity to
business cycle patterns and turning points; 3)
volatility of the component over time ( the less
volatile, the better); and 4) economic significance.
The NC composite indices are an interesting mix of
both statewide and national components ( Figures 6
and 7). This is due partly to the fact that national
components tend to be less volatile and can be more
timely than state data. However, to some extent, NC
also mirrors national conditions ( Figure 8) which
makes national components potential candidates for
inclusion in the indices. Further, there exists much
more information and literature concerning national
indicators than that written about any individual
state.
The recession of the 2000 – 2001 period began to
manifest itself first in the NC Leading Index around
April 2000 ( peak) and kept falling for nearly one
year, reaching a trough in April 2001. The NC
Coincident Index began to reflect the Leading Index,
beginning its steep decline in September of 2000 and
reaching its trough in December 2001. Thus, the NC
Leading Index warned of recession six months
before the NC Coincident Index began to enter
recession.
With the introduction of the inaugural NC composite
indices of economic indicators having been made,
and its limitations pointed out by the example of the
1995 period, it is important to note that they will be
reviewed periodically. More components will be
tested to see if they can add any more value to the
indices without making the process too cumbersome.
78%
18%
2%
2%
U. S. Leading Index
N. C. Average Weekly
Manufacturing Hours
N. C. Initial
Unemployment Claims
N. C. Residential
Building Permits
Figure 6. North Carolina Leading Index
Components and Weights
52%
32%
16% N. C. Total
Nonagricultural
Employment
Index of Industrial
Production
U. S. Real Retail
Sales
Figure 7. North Carolina Coincident Index
Components and Weights
North Carolina United States
Peak August 1990 July 1990
Trough April 1991 March 1991
Peak September 2000 March 2001
Trough December 2001 November 2001
Figure 8. A Comparison of Peaks and Troughs
in North Carolina and the United States
Note: US based upon dating by NBER ( National
Bureau of Economic Research). NC 1990 Peak and
1991 Trough determined by initial Coincident Index
which included the NC unemployment rate instead
of retail sales.
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