The “Future” Economy is NowNorth Carolina Local Government

Budget Association

John Silvia, Chief EconomistDecember 7, 2006

2

I. National Economic GrowthFive Key National Economic Questions

–What is your outlook for:>Growth?>Inflation?>Interest Rates?>Profits?>Dollar?

3

Sustained Growth Below TrendReal GDP

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Forecast

4

2002-2004 2005 2006(f) 2007(f)Consumer Spending 2.22% 2.48% 2.23% 2.04%Residential Investment 0.39% 0.41% -0.20% -0.56%Business Fixed Investment 0.95% 0.73% 0.85% 0.62%Government Spending 0.58% 0.16% 0.36% 0.38%11/14/2006

Percentage Point Contribution to Real GDP

5

Manufacturing Sector: Growth SlowdownISM Composite Index

35

40

45

50

55

60

65

70

1997 1998 1999 2000 2001 2002 2003 2004 2005 200635

40

45

50

55

60

65

70

ISM Index: Nov @ 49.5

6

II. Regional Factors>Labor>Capital>Entrepreneurship>Technology

7

Share of Nonfarm EmploymentNorth Carolina Nonfarm Employment

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

90 92 94 96 98 00 02 04 0610.0%

15.0%

20.0%

25.0%

30.0%Services Share (Right Axis)Manufacturing Share (Left Axis)

8

Nonfarm Employment Growth: North CarolinaJanuary 2005 - October 2006, Thousands of Jobs

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Finance &Professional Business

Services

Leisure & HospitalityServices

Education & HealthServices

Manufacturing-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

9

Excess Demand>Finance>Professional & Business Services>Education>Healthcare

Excess Supply>Manufacturing

10

Employment and Earnings Growth by IndustryOctober 2006

Sector

Year-over-Year Percentage Change in

Employment

Year-over-Year Percentage Change in

Average Hourly EarningsConstruction 1.96% 3.17%Manufacturing -0.11% 1.26%Durables 0.45% 1.83%Nondurables -1.05% 0.07%Trade, Transports, Utilities 0.45% 3.46%Wholesale Trade 1.64% 4.15%Retail Trade -0.41% 2.33%Transportation and Warehousing 1.95% 3.75%Utilities 0.07% 1.66%Information 0.10% 3.75%Financial Activities 1.95% 5.69%Professional and Business Services 2.75% 6.01%Education and Health Services 2.47% 3.49%Leisure and Hospitality 2.51% 5.31%Other Services 1.02% 1.59%

11

North Carolina Employment: 1984Percent of Total Non-Farm Employment

FIRE4.08%

Wholesale Trade5.10%

Construction5.10%

Services16.33%

Retail Trade16.33%

Government16.33%

Manufacturing33.67%

Transportation & Utilities3.06%

12

North Carolina Employment: 2005Percent of Total Non-Farm Employment

Other Services 4.42%

Wholesale Trade 4.31%

Educational & Health Services

11.88%

Manufacturing 14.51%

Government 17.01%

Information 1.96%Transporation &

Utilities 3.25%

Professional & Business Services

11.35%

Retail Trade 11.27%

Leisure & Hospitality 9.09%

Construction 5.90%

Financial 5.06%

13

Mean Family Income by Education of HeadThousands of 2004 Dollars

$0

$20

$40

$60

$80

$100

$120

$140

No High School Diploma High School Diploma Some College College Degree$0

$20

$40

$60

$80

$100

$120

$14019952004

Source: Federal Reserve, 2004 Survey of Consumer Finance

14

Durables vs. Non-Durable Goods ManufacturingIndustrial Production

70

80

90

100

110

120

130

1997 1998 1999 2000 2001 2002 2003 2004 2005 200670

80

90

100

110

120

130Nondurable Goods: Oct @ 104.6Durable Goods: Oct @ 126.5

15

Key Regional Issues–Structural Change–Education–Demographics–Comparative Advantage at National Level

16

Traditional Industries Share of GDP by State: North CarolinaTraditional Industries: Agriculture, Furniture, Textiles & Apparel

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1997 1998 1999 2000 2001 2002 2003 20040.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

17

Educational Attainment: 2005Population 25 Years and Older

StateRank by Bachelors

DegreePercentage Obtained High School Diploma

Percentage Obtained Bachelors Degree

District of Columbia 1 84.1 46.9Connecticut 2 90.0 36.8Massachusetts 3 87.5 36.6Maryland 4 86.9 36.3New Jersey 5 86.9 36.3

North Carolina 32 84.0 25.3

Arkansas 50 81.4 17.5West Virginia 51 82.5 15.1

18

Educational Attainment: 2002Population 25 Years and Older

MSAPercentage Obtained High School Diploma

Rank of 36 Measured MSAs

Minneapolis-St. Paul, MN-WI 93.6% 1Seattle-Tacoma-Brem., WA 92.2% 2Salt Lake City-Odgen, UT 92.0% 3Kansas City, MO-KS 91.5% 4

Indianapolis, IN 89.5% 9Atlanta, GA 87.7% 14Tampa-St. Petersburg-Clrwtr, FL 84.6% 26

Providence-Fall River, RI-MA 79.5% 33Charlotte-Gastonia, NC-SC 79.3% 34San Antonio, TX 78.6% 35Los Angeles-Riv.-Orange, CA 77.3% 36

19

North Carolina Housing PermitsSeasonally Adjusted Annual Rate, In Thousands

0

10

20

30

40

50

60

70

80

90

100

89 91 93 95 97 99 01 03 050

10

20

30

40

50

60

70

80

90

100Single Family Multi-Family

20

Total Net MigrationPersons

State 2004 2005Asheville 4,776 5,030Charlotte 24,316 34,084Fayetteville -977 -4,414Goldsboro 244 -533Greensboro 2,324 4,719Greenville 1,237 1,153Hickory 999 1,468Jacksonville 261 -4,595Raleigh 18,492 25,586Rocky Mount 276 -16Wilimington 8,829 11,152

21

Seven Sisters: Comparative Advantage– Biotech

> Triad, Greenville, Raleigh– Banking and Finance and Professional & Business Services

> Charlotte– Leisure & Hospitality

> Asheville and Wilmington– Instruments, Capital Goods & Auto Parts– Education & Health

> Raleigh– Furniture

> Central Piedmont West of I-85– Textiles

> Central Piedmont West of I-85

22

Three Levels of Separation>Macro >Micro>Rural

–Not>Mountains>Piedmont>Coastal

23

III. Inflation & Monetary Policy–Labor Markets–Energy–Market Expectations–Outlook – Core Still Above Target

24

Market-Basd PCE DeflatorYear-over-Year Percentage Change

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

02 03 04 05 060.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%PCE Deflator Year/Year: Oct @ 1.1%Core Year/Year: Oct @ 2.1%

25

Unemployment and Wage RatesSeasonally Adjusted

3%

4%

5%

6%

7%

8%

86 88 90 92 94 96 98 00 02 04 060%

1%

2%

3%

4%

5%

6%

Unemployment Rate: Oct @ 4.4% (Left Axis)Hourly Earnings: Oct @ 3.9% (Right Axis)

26

Price of Crude OilWest Texas Intermediate, USD per Barrel

20

30

40

50

60

70

80

2003 2004 2005 200620

30

40

50

60

70

80West Texas Intermediate

27

10 Year Market Implied Inflation Expectations: Down10Yr Treasury Yield- 10 Year TIPS Yield

1.40%

1.60%

1.80%

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

2003 2004 2005 20061.40%

1.60%

1.80%

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%10Yr-TIPS: Dec @ 2.14%

28

Federal Funds Rate Trends Towards NeutralReal Fed Funds Rate* vs M2 Money Growth

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1992 1994 1996 1998 2000 2002 2004 2006*Fed Funds Rate Minus "Core" CPI

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%Real Fed Funds Rate: Oct @ 2.5%M2 Growth: Oct @ 4.8%

29

Yield Curve: FlatUS Treasuries, Active Issues

1.75%

2.25%

2.75%

3.25%

3.75%

4.25%

4.75%

5.25%

5.75%

3M 2Y 3Y 5Y 10Y

30Y

1.75%

2.25%

2.75%

3.25%

3.75%

4.25%

4.75%

5.25%

5.75%

11/30/200610/30/200611/30/20051/3/2005

30

IV. Demographics and Fiscal Policy–Entitlements–Demographics –Migration Patterns

31

Federal Spending vs. RevenueAs Percent of GDP

15%

17%

19%

21%

23%

25%

70 75 80 85 90 95 00 0515%

17%

19%

21%

23%

25%Revenue: Sep @ 18.0%Spending: Sep @ 19.8%

32

Social Security, Medicare and Medicaid Spending ProjectionsPercent of GDP

0%

5%

10%

15%

20%

25%

30%

2000 2010 2020 2030 2040 2050 2060 2070 20800%

5%

10%

15%

20%

25%

30%MedicareMedicaidSocial Security

Medicare

Medicaid

Social Security

Note: Social Security and Medicare projections based on the intermediate assumptions of the 2004 Trustees’ Reports. Medicaid projections based on CBO’s January 2004 short-term Medicaid estimates and CBO’s December 2003 long-term Medicaid projections under mid-range assumptions.Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary, Centers for Medicare andMedicaid Services, and the Congressional Budget Office.

33

Federal Subsidy Programs Total Number of Programs

1,019 1,009

1,123

1,013

1,176

1,3901,425

1,696

800

1,000

1,200

1,400

1,600

1,800

1970 1975 1980 1985 1990 1995 2000 2006800

1,000

1,200

1,400

1,600

1,800

Source: Edwards, Chris. CATO Institute. 2006.

34

Average Domestic Net Migration: NorthNumber of Persons

State 1990-2000 2000-2004New York -196,449 -182,886New Jersey -39,507 -32,147Pennsylvania -28,906 -3,399Delaware 3,671 4,765Maryland -5,707 5,420

35

Average Domestic Net Migration: SouthNumber of Persons

State 1990-2000 2000-2004Alabama 10,603 99Mississippi 4,879 -2,528Virginia 12,055 20,535North Carolina 58,069 39,137South Carolina 15,423 18,756Georgia 72,334 41,298Florida 112,454 190,894Tennessee 37,169 16,634Texas 61,638 36,566

36

North Carolina Government Spending GrowthAnnual Percent Change

0.0%

4.0%

8.0%

12.0%

16.0%

1998 1999 2000 2001 2002 2003 2004 20050.0%

4.0%

8.0%

12.0%

16.0%NC Government SpendingNorth Carolina GSP

37

Major North Carolina Government Expenditures by FunctionThousands of Dollars

Sector 2005 2002 Percent ChangePrimary & Secondary Education 7,713,265$ 6,802,662$ 13.4%Higher Education 3,576,766$ 2,519,624$ 42.0%Health & Human Services 13,376,364$ 10,398,386$ 28.6%Public Safety 2,123,837$ 2,070,166$ 2.6%Transportation 3,511,161$ 2,992,187$ 17.3%All Other 2,905,676$ 2,459,973$ 18.1%Total 33,207,069$ 27,242,998$ 21.9%

Note: Gross Domestic Product by State for North Carolina grew 10.0% from 2002-2005

38

State Business Tax Climate Index1 is the Best Tax Climate

State IndexFlorida 4Virginia 19Tennessee 15Georgia 21South Carolina 30North Carolina 37Tax Foundation, 2006

39

Tax RatesSales Income

Mecklenburg 7.5% 8.3%South Carolina 5.0% 7.0%Tennessee 7.0% 0.0%Virginia 3.5% 5.8%

40

North Carolina MSA InformationThousands

MSA Population EmploymentBuilding Permits

Existing Home Price

Net Migration

Greenville 162.6 70.2 1.4 118.7 1.2Burlington 140.5 59.2 1.5 128.6 1.5Fayetteville 345.5 124.5 2.9 110.7 -4.4Hickory 355.7 162.8 1.5 117.1 1.5Jacksonville 152.4 41.5 1.7 122.3 -4.6Rocky Mount 145.5 62.1 0.7 105.3 0.0Wilmington 315.1 133.1 7.7 193.0 11.2

41

Per Capita Personal Income GrowthCompound Annual Growth Rate

State 1989-2005North Carolina 9.9%South Carolina 13.5%Georgia 11.5%Virginia 12.4%

42

V. Globalization–Dollar

>Growth Abroad>Capital Flows

43

GlobalizationU.S. Exports and Imports as a Percentage of Nominal GDP

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1970 1975 1980 1985 1990 1995 2000 20050.0%

5.0%

10.0%

15.0%

20.0%

25.0%

44

Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2000 2001 2002 2003 2004 2005 2006-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%Compound Annual Growth: Q3 @ 2.1%Year-over-Year Percent Change: Q3 @ 2.6%

45

Real Global GDP GrowthYear-over-Year Percent Change, 2nd Quarter 2006

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

China India Russia Brazil UK Japan0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

46

Foreign Purchases of U.S. Securities by Type 12-Month Moving Sum, Billions of USD

-$100

$0

$100

$200

$300

$400

$500

98 99 00 01 02 03 04 05 06-$100

$0

$100

$200

$300

$400

$500Treasury: Sep @ $160 BillionCorporate: Sep @ $426 BillionEquity: Sep @ $101 BillionAgency: Sep @ $208 Billion

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Wachovia Economics

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wachovia.comMark Vitner Senior Economist (704) 383-5635 mark.vitner@wachovia.comJay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wachovia.comSam Bullard Economist (704) 383-7372 sam.bullard@wachovia.comGina Martin, CFA Financial Economist (704) 383-6805 gina.martin@wachovia.comHuiwen Lai, Ph.D. Quantitative Analyst (704) 715-7415 huiwen.lai@wachovia.comJason Schenker Economist (704) 383-3695 jason.schenker@wachovia.comPhillip Neuhart Economic Analyst (704) 715-8457 phillip.neuhart@wachovia.comAdam York Economic Analyst (704) 715-9660 adam.york@wachovia.com

Wachovia Corporation Economics Group publications are distributed by Wachovia Corporation directly and throughsubsidiaries including, but not limited to, Wachovia Capital Markets, LLC, Wachovia Securities, LLC and WachoviaSecurities International Limited.

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