Babson Capital/UNC Charlotte Economic Forecast

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Babson Capital/UNC CharlotteEconomic ForecastJune 3, 2015The data used in this report comes from the websites for the U.S. Department of Commerce's Bureau of Economic Analysis (www.bea.gov)and the North Carolina Employment Security Commission (www.ncesc.com) as of May 22, 2015. The opinions expressed in this Forecastby Professor Connaughton (the Babson Capital Professor of Economics at the Belk College of Business) and UNC Charlotte do notnecessarily represent the views of Babson Capital Management LLC or its affiliates.

FORECAST HIGHLIGHTSAnnual Growth Rates In Real GSP5 Ten of the state’s fifteen economic sectors experienced output increasesduring 2014. The sectors with the strongest growth were construction with areal increase of 6.6 percent; business and professional services with a realincrease of 5.7 percent; transportation, warehousing, and utilities (TWU) with areal increase of 4.0 percent; information with a real increase of 3.4 percent; andhospitality and leisure services with a real increase of 2.8 percent.43212.62.52.12.40.80 For 2014, NORTH CAROLINA real GSP is increased by 0.8 percent over the2013 level. For 2014, NORTH CAROLINA establishments added 110,200 net additionaljobs, an increase of 2.7 percent.2012201320142015f2016fGSP/Gross State Product is a yardstick that measuresthe total output of a state’s economy for a given year.It is analogous to the U.S. Gross Domestic Product(GDP).Year-End Seasonally Adjusted North CarolinaUnemployment Rates1412108642 For 2015, NORTH CAROLINA real GSP is forecast to increase by 2.5percent over the 2014 level. Fourteen of the state’s fifteen economic sectors are forecast to experienceoutput increases during 2015. The sectors with the strongest expected growthare construction with a projected real increase of 4.2 percent; information with aprojected real increase of 3.9 percent; finance, insurance, and real estate with aprojected real increase of 3.9 percent; business and professional services with aprojected real growth rate of 3.4 percent; and hospitality and leisure serviceswith a projected real increase of 3.4 percent For 2015, NORTH CAROLINA establishments are forecast to add 82,100 netjobs, an increase of 2.0 percent.8.920126.95.45.04.9201320142015f2016f By December of 2015, the North Carolina unemployment rate is expected tobe around 5.0 percent. Gross State Product (GSP) is expected to reach a level of 524,360.5 million in2016 an increase by 2.4 percent over the 2016 level.

4Quarterly Growth Ratesin Real GSP2014 GSP322.8100.40.72014 I2014 IIGross State Product (GSP) reached a level of 482,148.9 million in 2014.Real (inflation-adjusted) GSP increased by 0.8 percent over the 2013 level.This growth in 2014 would follow two years of modest growth in NorthCarolina GSP. The growth experienced in 2014 is less than the 2.6 percentincrease in 2012 and the 2.2 percent increase in 2013.3.4For 2014, first quarter GSP increased by an annualized real rate of 0.4percent. During the second quarter, GSP increased at an annualized realrate of 0.7 percent. In the third quarter, GSP increased at an annualized realgrowth rate of 2.8 percent. In the fourth quarter of 2014, GSP grew at anannualized real rate of 3.4 percent.2014 III 2014 IV2014 Highlights2014 *Current DollarsTotal Gross Product482,148.9PercentChange2.3Constant (2009 Dollars)Total Gross Durable GoodsNondurable GoodsTWUWholesale TradeRetail 0.7-0.34.01.71.23.4-1.55.70.22.80.9-0.5* millions of dollarsAfter a dismal first half of 2014, several factors came together to enableboth the U.S. and North Carolina economies to generate stronger growthduring the second half of the year. First, the “Fed” has continued to keepinterest rates low and provided no indication to increase rates during 2014.Second, there was a dramatic decline in oil prices over the last severalmonths of the year that significantly increased consumer discretionaryincome. After a peak price at the end of June of 103, oil pricesconsistently declined to less than 65 by the end of 2014. In June of 2014the average price of regular gasoline in the U.S. was 3.77. By Decemberthe price of regular gasoline had fallen to 2.86. This gas price declinebetween June and December resulted in an additional 240 billion ofdiscretionary income annually for consumers.Offsetting the positive effect of low interest rates and low gasoline prices, isthe fact that baby boomers are reaching retirement age. As they retire, theyreduce their level of purchases and reduce the absolute size of the laborforce, thus reducing potential GDP and lowering economic growth. Inaddition, the Eurozone economy slowed dramatically in the second half of2014, with the expectation of continued slow growth for 2015.

2014 Total Real GSP Growth 0.8%Percent of Total Real GSP0.90.34.23.7Agriculture -12.0Mining 1.2TWU 4.0Construction 6.67.8Durables -0.713.1Nondurables -0.35.4Wholesale Trade 1.75.4Retail Trade 1.23.1Information 3.418.3FIRE -1.511.3B&P Services 5.77.7E&H Services 0.23.41.9H&L Services 2.8Other Services 0.913.7Government -0.5Percent of Real Sector Growth2014 GSP SECTOR ANALYSISThe chart to the left presents the projected contributions of each majoreconomic sector to North Carolina’s Gross State Product (GSP). The real(inflation-adjusted) growth rate for 2014 is increased by 0.8 percent.Real growth rates for each sector (displayed in black type) are plotted onthe horizontal axis. Percentages of GSP contributed by each sector(displayed in green type) are plotted on the vertical axis. The resultingrectangles show the weighted importance of each sector’s growth during2014. All of the sector information presented in the table to the left isbased on the new North American Industry Classification System(NAICS) definitions.Ten of the state’s fifteen economic sectors experienced output increasesduring 2014. The sectors with the strongest growth were constructionwith a real increase of 6.6 percent; business and professional serviceswith a real increase of 5.7 percent; transportation, warehousing, andutilities (TWU) with a real increase of 4.0 percent; information with areal increase of 3.4 percent; hospitality and leisure services with a realincrease of 2.8 percent; wholesale trade with a real increase of 1.7percent; mining with a real increase of 1.2 percent; retail trade with a realincrease of 1.2 percent; and other services with a real increase of 0.9percent.One other sector experienced growth, but at levels below the overall 0.8percent GSP growth rate. This sector was educational and healthservices with a real increase of 0.2 percent.Five sectors experienced output declines during 2014. These sectorsinclude, nondurable goods manufacturing with a real decline of 0.3percent; government with a real decline of 0.5 percent; durable goodsmanufacturing with real decline of 0.7 percent; finance, insurance, andreal estate with a real decline of 1.5 percent; and agriculture with a realdecline of 12.0 percent.

2015 GSPQuarterly Growth Ratesin Forecasted Real GSPGross State Product (GSP) is expected to reach a level of 501,943.7million in 2015. Real (inflation-adjusted) GSP is expected to increase by2.5 percent over the 2014 level. This growth in 2015 would follow threeyears of modest growth in North Carolina GSP. The 2.5 percent growthexpected in 2015 is consistent with the GSP growth experienced in NorthCarolina in 2012 and 2013.43212.61.63.23.1For 2015, first quarter GSP is expected to increase at an annualized realrate of 1.6 percent. During the second quarter, GSP is expected to increaseat an annualized real rate of 2.6 percent. In the third quarter, GSP isexpected to record an annualized real growth rate of 3.2 percent. In thefourth quarter of 2015, GSP is expected to grow at an annualized real rateof 3.1 percent.02015 I2015 II2015 III 2015 IV2015 Highlights2015 *Current DollarsTotal Gross Product501,943.7PercentChange4.1Constant (2009 Dollars)Total Gross Durable GoodsNondurable GoodsTWUWholesale TradeRetail 0.12.52.31.73.93.93.43.03.43.21.4* millions of dollarsPositive economic growth in 2015 would represent the sixth consecutiveyear of economic growth for the North Carolina economy. While this is animpressive string of growth, the size of that economic growth has beensomewhat lacking. Based on the expected growth in 2015, the averageGSP growth during the six year period would only be 2.0 percent. Since2000, both the U.S. and North Carolina economies have been unable toachieve an average 3.0 percent GDP growth rate that had been fairlyconsistent during the second half of the 20th century.Because of several long-term trends that are now emerging, we need torecalibrate our sense of what level of real GDP growth we should expect.There are several factors responsible for slowing down the potential longterm growth rate. First, is the aging of the labor force. Baby boomers arereaching retirement age and when they retire, they reduce their level ofpurchases, thus reducing overall consumption and lowering economicgrowth. Second, as baby boomers retire, there is a reduction in theabsolute size of the labor force, thus reducing potential GDP and loweringeconomic growth. This second factor is most critical in slowing thegrowth of potential GDP. The most troubling aspect is that we are at thebeginning stages of this problem and it will be with us for several decades.

2015 Total Real GSP Growth 2.5%0.90.34.2Percent of Total Real GSP3.7Agriculture 2.5Mining -6.8TWU 2.5Construction 4.27.8Durables 2.512.7Nondurables 0.15.4Wholesale Trade 2.35.3Retail Trade 1.73.2Information 3.918.5FIRE 3.911.4B&P Services 3.47.7E&H Services 3.03.41.9H&L Services 3.4Other Services 3.213.6Government 1.4Percent of Real Sector Growth2015 GSP SECTOR ANALYSISThe chart to the left presents the projected contributions of each majoreconomic sector to North Carolina’s Gross State Product (GSP). The real(inflation-adjusted) growth rate for 2015 is forecast to increase by 2.5percent. Projected real growth rates for each sector (displayed in blacktype) are plotted on the horizontal axis. Projected percentages of GSPcontributed by each sector (displayed in green type) are plotted on thevertical axis. The resulting rectangles show the expected weightedimportance of each sector’s growth during 2015. All of the sectorinformation presented in the table to the left is based on the new NorthAmerican Industry Classification System (NAICS) definitions.Fourteen of the state’s fifteen economic sectors are forecast to experienceoutput increases during 2015. The sectors with the strongest expectedgrowth are construction with a projected real increase of 4.2 percent;information with a projected real increase of 3.9 percent; finance,insurance, and real estate with a projected real increase of 3.9 percent;business and professional services with a projected real growth rate of3.4 percent; hospitality and leisure services with a projected real increaseof 3.4 percent; other services with a projected real increase of 3.2percent; and educational and health services with a projected realincrease of 3.0 percent.Seven other sectors are expected to experience growth, but at levels at orbelow the overall 2.5 percent GSP growth rate. These sectors aredurable goods manufacturing with a projected real increase of 2.5percent; transportation, warehousing, and utilities (TWU) with aprojected real increase of 2.5 percent; agriculture with a projected realincrease of 2.5 percent; wholesale trade with a projected real increase of2.3 percent; retail trade with a projected real increase of 1.7 percent;government with a projected real increase of 1.4 percent; and nondurablegoods manufacturing with a projected real increase of 0.1 percent.Only one sector, mining, is projected to experience a decline in outputduring 2015.

2014 Year-End Employment Trends0.14.45.8Durables 3.45.0Nondurables 1.3TWU 2.9WholesaleTrade2.93.14.3Percent of Total EmploymentMining 0.0Construction 5.511.4Retail Trade 2.91.8Information 3.2FIRE 2.95.12014 EMPLOYMENTSECTOR ANALYSISThe sector employment analysis presented on this page is based on thenew North American Industrial Classification System (NAICS).Seasonally adjusted nonagricultural employment in North Carolinareached 4,203,100 persons in December 2014, an increase of 2.7percent over the employment level in December 2013. The state gained110,200 net jobs during 2014.Twelve of the state's fourteen nonagricultural sectors of the economyexperienced employment increases during 2014. The sectors with thestrongest employment increases in 2014 were business and professionalservices at 6.0 percent, construction at 5.5 percent, and durable goodsmanufacturing at 3.4 percent.2014 Employment Highlights14.0B&P Services 6.013.6E&H Services 1.910.7H&L Services 2.83.6Other Services 2.917.0Government -0.2Percent of Sector Employment GrowthYear-End*Total n184.4Manufacturing455.2Durable Goods245.4Nondurable Goods209.8Wholesale Trade180.1Retail Trade480.5TWU129.6Information73.8FIRE213.9B&P Services587.8E&H Services572.4H&L Services451.4Other Services152.6Government715.8*thousands of 2.96.01.92.82.9-0.2

2015 Year-End Employment Trends0.14.7Mining -6.2Construction 8.95.9Durables 2.64.93.1Percent of Total Employment4.3Nondurables0.3TWU 2.92015 EMPLOYMENTSECTOR ANALYSISThe sector employment analysis presented on this page is based on thenew North American Industrial Classification System (NAICS).Seasonally adjusted nonagricultural employment in North Carolina isexpected to reach 4,285,200 persons by December 2015, an increase of2.0 percent over the employment level in December 2014. The state isexpected to gain 82,100 net jobs during the year.Wholesale Trade 2.611.3Retail Trade 0.81.75.0Information 0.4FIRE -0.6Eleven of the state's fourteen nonagricultural sectors of the economyare expected to experience employment increases during 2015. Thesectors with the strongest employment increases in 2015 areconstruction at 8.9 percent, hospitality and leisure services at 3.5percent, and TWU and other services at 2.9 percent.2015 Employment Highlights14.1B&P Services 2.713.6E&H Services 2.210.9H&L Services 3.53.7Other Services 2.916.7Government -0.1Percent of Sector Employment GrowthYear-End*Total n200.8Manufacturing462.2Durable Goods251.7Nondurable Goods210.5Wholesale Trade184.8Retail Trade484.3TWU133.3Information74.1FIRE212.6B&P Services603.7E&H Services584.9H&L Services467.3Other Services157.0Government714.9*thousands of 4-0.62.72.23.52.9-0.1

2016 OUTLOOK2016 Quarterly Growth Ratesin Forecasted Real GSP4Gross State Product (GSP) is expected to reach a level of 524,360.5million in 2016. Real (inflation adjusted) GSP is expected to increase by2.4 percent over the 2016 level. This growth in 2016 would follow 2.5percent growth in 2015 and result in seven years of modest, but sustainedeconomic growth for the North Carolina economy. The North Carolinaeconomy is expected to add 93,200 jobs in 2016, reducing theunemployment rate to around 4.8 percent by December 2016.3212.21.92015 I2015 II2.02.202015 III 2015 IV2016 GSP Highlights2015 *2016 Employment HighlightsCurrent DollarsTotal Gross Product524,360.5PercentChange4.5Constant (2000 Dollars)Total Gross Durable GoodsNondurable GoodsTWUWholesale TradeRetail 91.01.92.62.33.33.72.82.83.33.01.5* millions of dollarsYear-End*Total n214.4Manufacturing471.4Durable Goods258.9Nondurable Goods212.5Wholesale Trade189.4Retail Trade494.9TWU137.3Information74.4FIRE212.7B&P Services617.8E&H Services593.3H&L Services483.1Other Services163.9Government720.8*thousands of 40.12.31.43.44.40.8

2014-2015 NORTH CAROLINA UNEMPLOYMENT RATE87.576.565.554.54JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DECNC Seasonally AdjustedNC Seasonally Adjusted ForecastFORECAST reports historical seasonally adjusted monthly unemployment rates for North Carolina and the United States andforecasts the seasonally adjusted monthly unemployment rate for North Carolina. The seasonal adjustment accounts for variationsin labor market conditions that cause regular fluctuations in the unemployment level each month.The graph at the top of this page provides a summary of the monthly unemployment rates for 2014 and the expected rates in 2015.The solid green line represents the North Carolina seasonally adjusted historic unemployment rate. The seasonally adjustedunemployment rate for the United States is represented by the solid blue line. The North Carolina seasonally adjustedunemployment rate forecast is represented by the solid yellow line. The seasonally adjusted rates for the United States and NorthCarolina can be compared directly and provide more reliable estimates than the unadjusted rates.The North Carolina seasonally adjusted unemployment rate began 2014 at 6.7 percent, while the United States rate was 6.6 percent.By December, the North Carolina rate had fallen to 5.5 percent, while the United States rate had fallen to 5.6 percent. While theU.S. unemployment rate has continued a downward trend during the first few months 2015, the North Carolina rate has increasedslightly as discouraged workers re-enter the labor force. However, by December 2015 both the U.S. and North Carolinaunemployment rates are expected to be around 5.0 percent.

Economic Forecast June 3, 2015 The data used in this report comes from the websites for the U.S. Department of Commerce's Bureau of Economic Analysis ( www.bea.gov) and the North Carolina Employment Security Commission ( www.ncesc.com) as of May 22, 2015. The opinions expressed in this Forecast

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