Economic Impact: College degrees provide resiliency amid change

Apparently a college degree does make a difference — at least when it comes to a region’s ability to recover from recession.

Northern Virginia is a driver of growth in our state. This was the case in the period between the last two recessions. From 2002 through 2007, employment in the Northern Virginia portion of the Washington metro area expanded at an annual average rate of 2.7 percent, compared with a 1.5 percent rate statewide.

Employment in Northern Virginia also recovered from the most recent recession more quickly than the state and nation. It reached the former peak in employment early in 2011, compared with 2014 in both the state and the nation.

Then came federal budget cuts and a government shutdown. During this period, the lack of growth in Northern Virginia caused the economy in Virginia to stall.

Employment growth in Northern Virginia contracted 0.7 percent on a year-over-year basis in February 2014 and drove the overall state growth down 0.3 percent during the same period. In contrast, employment growth in the nation was accelerating and stood at 1.6 percent.

One would expect such a sharp slowdown in employment that is caused by one industry sector — federal spending — to generate a prolonged slowdown in economic activity as displaced workers try to find other employment.

Similar to the 1990s, when a cut in military spending slowed growth in Northern Virginia for a short time, the latest employment report shows the region growing at the same rate as the nation. For the 12 months ending with September 2015, employment grew 2 percent in Northern Virginia compared with 2 percent in the nation and 0.9 percent in the state.

A highly educated population is a major reason for the quick rebound in Northern Virginia.

Based on census data from 2013, 54 percent of residents in the region have a bachelor’s degree or higher, compared with 30.5 percent in the nation. The unemployment rate for people in the labor force with a bachelor’s degree was 2.5 percent in September, compared with 5.2 percent for those who have only a high school diploma.

Skills that come with a bachelor’s degree are more easily transferable from one industry to another. It’s not quite as easy as changing a consultant’s letterhead from Defense Inc. to Cyber Security LLC, but the transferable skills possessed by workers in Northern Virginia clearly give the region resiliency during times of economic change.

The number of people in college-age range is declining

Colleges and universities may want to take note: The number of people in the college age range of 18 to 24 is falling.

The nation's population is expected to grow by more than 13 million, or an annual average of 0.8 percent a year, from this year through 2020.

Virginia will see 403,585 new residents, or 0.9 percent a year, in the next five years. And the Richmond metropolitan statistical area will gain 67,346 people, or 1 percent a year.

However, not all age groups will grow over that period. While the number of echo boomers and retirees will increase, the number of college attendees over this next five-year period will decline, according to data based on the U.S. Census projections.

The “echo boom” births in the United States peaked in 1990. The children of that peak became college-freshman around 2008. Since then, the population of 18 to 19 year olds in the nation has trailed off.

Children born at the peak of the echo boom are now about age 25, and most are out of college. As a result, the size of the prime college-aged population is on the downswing.

The prime college-attending ages of 18 to 24 makes up about 58 percent of the college student population according to fall 2013 enrollment data from the 2014 Digest of Education Statistics. The U.S. population of people in that age range peaked in 2013 at 31,535,000.

As of 2015, this segment of the population has slipped 1 percent to about 31,214,000.

This downturn is expected to continue until 2020 when the number of people 18 to 24 hits a trough of about 30,555,000 - a drop of 2.1 percent from 2015 levels. 

Some areas of the country will see more drastic declines, while other areas can expect to see no drop at all.

Nine states are projected to grow in the 18 to 24 segment in the next five years, including Utah (up 3.9 percent) and Texas (up 3.4 percent).

States forecast to see steeper-than-average declines include Michigan (down 6.9 percent) and New Mexico (down 6.8 percent).

By comparison, Virginia is expected to see a 0.9 percent drop and the Richmond metro area is projected to decline by 1.0 percent.

There is some good news for those wanting to see an increase of population in the college-aged segment.

The number of U.S. births hit a trough in 1997. Many children born in that year are beginning their freshman years in college.

Following 1997, the number of births began trending upward and peaked in 2007 at a height surpassing that of the echo boom.

So while post-secondary schools are facing unfavorable demographics in the short run, another swell is on its way.

On another end of the pendulum, retirees - aged 69 and older - are growing by double digits. 

Nationwide, the population in that age group is expected to increase by 18 percent from 2015 through 2020.  The growth of this segment in Virginia (up 19 percent) and the Richmond metro area (up 21 percent) are both faster than the nation.

The fastest growing states are expected to be Alaska (27 percent) and District of Columbia (26.1 percent), while the slowest growth is expected in Connecticut (14.5 percent) and Rhode Island (14.9 percent).

This demographic group will put increased demand on the health care system for many years to come.

Economic Impact: Jobs are being created but workers are underemployed

The unemployment rate is dropping and jobs are becoming more plentiful, but that doesn’t mean workers are in their ideal jobs.

Some people who are working are “underemployed.”

The Bureau of Labor Statistics officially defines underemployment as someone who wants to work full-time and can only find part-time work.

Arizona and California had the highest number of underemployment among states for the four quarters that ended in March, BLS data shows.

Underemployment can be measured at the state level by looking at the difference between two different jobless rates that the BLS compiles.

Arizona and California had the largest gap between the two rates, having a difference of 6.2 percentage points each. Nevada followed with 6.1 percentage point difference.

The state with the least amount of underemployment, because workers are employed part time for economic reasons, was North Dakota with a 1.8 percentage point gap.

For the U.S., the difference between the two rates that the BLS compiles was 4.4 percentage points for the four quarters that ended in March.

Virginia ranked with the 32nd gap in the nation at 3.8 percentage points.

However, BLS’s definition does not capture those who are working in an occupation below their level of qualifications. For example, it doesn't count someone with a master’s degree who is working as a retail salesperson.

There is no official measure of such underemployment by occupation.

But it can be estimated by comparing the educational skills  of residents in a region to the education achievements required by occupations employed by industries in the same region.

Looking at all 381 metropolitan statistical areas, the three MSAs with the largest surpluses of high-skilled workers are Barnstable, Mass., with a 13.2 percentage point surplus; Washington, D.C. with a 12.5 percentage point surplus; and San Francisco, with an 11.5 percentage point surplus.

Some of those are desirable areas to live that attract many high-skilled residents. Some of those are college towns where a lot of graduates choose to stay.

The three MSAs with the largest deficits of high-skilled workers are Hanford-Corcoran, Calif., with a 16.3 percentage point deficit; Hinesville, Ga., with a 14.7 percentage point deficit; and Cumberland, Md., with a 14.6 percentage point deficit.

In Virginia, the Richmond MSA is ranked 78th nationally with a 1.3 percentage point surplus of high-skilled workers, indicating that underemployment here is not as much of an issue as it is in other regions.

The Hampton Roads MSA has a 3.4 percentage point deficit of high-skilled workers (ranked 177th), indicating a less severe issue of underemployment by occupation.

Viewing underemployment across the nation shows that even as the unemployment rate continues to drop, underemployment will vary by metropolitan area.

Economic Impact: When will the Fed raise rates?

After six years of an essentially zero percent federal funds rate target, it looks like rates will begin increasing soon.

The timing of that rate increase is based on the current and future strength of the economy.

However, we get clues about when the rate increase will occur from speeches and interviews of voting members of the Federal Open Market Committee, which is the Federal Reserve’s policy-making committee.

Federal Reserve Chair Janet Yellen reaffirmed in a speech about 10 days ago that she believes it will be appropriate to raise rates this year.

“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy,” she said in her speech.

But she is not the only voting member.

For instance, Fed Governor Daniel Tarullo takes an opposite view of when to raise interest rates.  “In my view, it likely will not be appropriate to begin raising the federal funds rate until sometime in early 2016,” he said in a presentation May 4.

Richmond Fed President Jeffrey M. Lacker, a voting member this year of the FOMC, was quoted by Reuters last week saying, “What I’ve said is that a case might be strong in June. I still think that’s possible. But as I said . . .I haven’t made up my mind yet about June.”

The upcoming rate increase is good news.

It means that the FOMC members believe the economy is strong enough to continue growing with higher interest rates. Yet, policy makers also are concerned that a premature rate increase could dampen the recovery if it is still not strong enough.

The rate hike also is great news for savers. When the Fed raises the federal funds rate target, which is the rate that banks use when they borrow from each other on an overnight basis, banks then increase the rate they pay depositors.

The iMoneyNet money fund average, the seven-day average yield over all taxable money market funds, is currently  0.02 percent in the nation. Late in 2008, when the federal funds rate target was 0.50 percent, the money fund average was 1.22 percent.

Some analysts believe that the federal funds rate target will eventually get back to a more normal rate of 3 percent over the next two years. If historical relationships hold true, savers will see a money fund average around 3 percent as well. This would certainly help retirees who are on a fixed budget.

On the other hand, borrowers will find that it costs more to get a home mortgage or to use a credit card.

The interest rate on many loans is tied to either the prime lending rate or LIBOR. The prime rate is currently at 3.25 percent and the one-month LIBOR is 0.18 percent.

In 2008, we saw how quickly the prime and LIBOR rates fell when the Fed dropped the federal funds rate.

While the federal funds rate target stood at 3 percent in February 2008, the prime rate was 6 percent and the one-month LIBOR rate was 3.14 percent. It dramatically changed by November, when the federal funds rate target was 0.50 percent and the prime rate was 4 percent and the 1-month LIBOR rate was 1.44 percent.

Longer-term interest rates also typically rise with increases in the federal funds rate, but are more dependent on inflation expectations.

The average rate for a 30-year fixed mortgage was 3.87 percent as of Thursday, up from 3.84 percent a week earlier and matching the level at the end of 2014, mortgage lender Freddie Mac said. The average 15-year rate increased to 3.11 percent from 3.05 percent.

A forecast from Chmura Economics & Analytics expects the 30-year fixed mortgage rate to rise to 6 percent by the end of 2016.

For now, it looks like higher interest rates are still possible by year’s end.

As many Fed officials say, the exact time of liftoff is data dependent. But it’s important to track FOMC member comments because not everyone interprets the data the same way.