Economic Outlook - September 2009

Recession has hit North Carolina’s job market harder than most. The gap between the state’s unemployment rate and the nation’s widened late last year, and Matthew Martin says the U.S. economy will recover quicker than North Carolina’s. Earlier this year, Martin became Charlotte regional executive for the Federal Reserve Bank of Richmond. Before that, he was a Fed regional economist.

BNC: Fed Chairman Ben Bernanke told Congress he expects economic activity nationwide to start rising again by the end of the year. What about North Carolina?

Martin: I agree with the chairman, and North Carolina is going to need the national recovery to buttress the manufacturing sector, in particular. So the state will lag the national economy some. No matter what the exact timing, even by early next year, it’s probably still not going to feel like a recovery has taken hold by the measure people most care about — jobs.

What’s troubling the state economy?

A confluence of things. One is long-standing structural change. It’s moving away from manufacturing jobs, and the job base is more service-oriented. In the meantime, we had this very sharp business cycle downturn. The downturn in the housing market arrived here late, but then it hit with full force, so we caught up quickly. And one of the two main pillars of growth in this state — Charlotte — hasn’t held up well, in part because of what’s going on with banking.

How would you fix those problems?

You can’t fix the structural change that’s necessary. Particularly in the larger urban areas, growth in service sectors has driven growth in the state. What you can do, maybe, is get a work force that has more of the skills needed for those areas in which job growth has occurred. The state has a great community-college system, and making full use of that — getting those who are unemployed retrained and viable in the job market — is a key element to getting us out of this recession.

What else has driven up the state’s unemployment rate?

The areas that have seen the largest job losses in percentage terms nationwide have been manufacturing and construction. This is still a manufacturing-heavy state. That’s one reason the unemployment rate is higher than it is nationally. Another is that labor-force growth is stronger here. During periods of recession when you have people moving in, it’s harder to absorb those extra people.

In 2007, you said North Carolina’s housing market was one of the strongest east of the Mississippi. What’s it like now?

There are some early signs of stability. The housing market is groping for bottom. I don’t think we’re quite there yet, but we’ll only know after it’s happened. Things aren’t getting worse at a rapid pace anymore.

Is it still one of the strongest in the East?

On house prices, this state has held up better than a lot. But by other measures, such as home construction, activity has pulled back at least to match the pullback nationally. Based on home construction, I wouldn’t say it’s one of the strongest in the East anymore.

Has this been North Carolina’s worst downturn since the Depression?

It may be the worst since the Great Depression, but it’s not of the same magnitude as the Great Depression. It’s certainly worse than previous downturns in recent history, and for most people this will have been the sharpest economic downturn in the state in their working lives.

State and federal leaders are pushing environmentally friendly goods and services as a way to get the economy back on track. Will it work?

Targeted policies can buttress marketplace incentives to develop alternative energy sources, but some of these policy mandates might simply divert resources from one economic activity to another and they’re not, on net, stimulative. It’s not clear that helps us recover faster, though it might provide some very real long-term economic benefits.

What does that mean for North Carolina?

I’m not sure. Not long ago, the governor talked about Charlotte as an energy-industry hub. I was skeptical. Green energy and energy-type issues are at the forefront. A lot of places are going to have those initiatives, and not all of them are going to be successful. But since then, there have been three or four major additions to the energy industry in Charlotte. So maybe North Carolina will become a net gainer. I’m surprised at the early success.

What’s the state economy’s biggest strength?

People want to live and work here. So long as you have people, particularly skilled workers, who want to move to where you are, that in turn makes companies sit up and take notice.

What about banking in North Carolina?

The industry as a whole is healthy, and as the economy begins to bottom out and as the housing market begins to bottom out, there will be lots of opportunities for banks to make loans, be profitable and work their way out of any lingering troubles they may have.

How will the North Carolina economy look a year from now?

Unemployment will still be high in comparison with early 2008, but the recovery will have started and opportunities will be growing. Economic conditions won’t be back to normal, with full employment and a full-blown mature expansion, but there will be much more optimism. Consumers will be less guarded than they are today.