Banking on intellectual capital

Its wealth of smarts ó one reason hard times arenít as tough on the Triangle ó will keep the region competitive.

The recession wasnít as brutal to the Triangle as it was to other parts of the state, but the blows it dealt werenít all love taps. The unemployment rate stayed below double digits ó barely ó though jobs havenít been nearly as plentiful as they were a few years ago, when the unemployment rate frequently dipped under 4%. The regionís economy this year will be just a little better than the last two, N.C. State University economist Michael Walden says, but there will not be a dramatic rebound. Still, he says, the Triangle is on a path to grow faster than most metropolitan regions in the country.

BNC: How is the life-sciences sector holding up?

Walden: We havenít had the bloodbath that we had during the 2001 recession. People are cautiously optimistic about the future of life sciences and high-tech. We have too much going for us to think that we are going to backslide much. That is not to say that we wonít have some companies move out or downsize. But there has been a subtle shift in how people position this region. Clearly technology and biotechnology will continue to be important, but we have been able to attract some major financial-firm investments, with more likely to come.

Whatís the significance?

Weíre maturing into a settled metropolitan area that is going to derive more of its income from serving as a regional focus for retail and service activities. Meanwhile, in the Charlotte region, I detect a major shift from financial services into technology with the North Carolina Research Campus in Kannapolis. When you think of North Carolina, you think of the Charlotte region and Research Triangle Park. Each is in some sense infringing upon the economic base of the other. Thatís natural because both understand the importance of having a more diversified base.

How will the emergence of other research campuses affect the region?

We arenít going to see anything that will replace the dominance of RTP, at least not in North Carolina. Even in the nation, it is hard to duplicate it, other than Boston or Silicon Valley. One way to stimulate economic development in the state, particularly in areas that have been lagging, is to marry economic-development activities with a research component tied to a campus of the university system. But thatís more collaborative with RTP than competitive.

The regionís high-tech sector seems to have held up well.

Investors and companies were much more cautious about expansion after 2001, so we havenít seen that kind of debacle here in terms of job loss. On the other hand, the sector is changing. It is becoming a mature tech sector ó one of research, development, innovation and service rather than manufacturing. That is the long-term trend.

How would you evaluate the Triangleís financial sector?

It makes eminent sense that financial services will expand because the Triangle is still looked upon as one of the top metros for growth. With the expectation that this is going to be a long recovery ó taking two, three or more years ó national companies will want to find the growth markets. The Triangle will stand out even more then, particularly when you look at growth markets that have been knocked down during the recession.

Such as?

The Southwest, Nevada, California, Florida, Washington, D.C. We have certainly suffered, but we have not had the cataclysmic declines that our competitors have. People are going to look at the Triangle and say, ĎGee, thatís an area thatís got stability in bad times. Itís got great potential in good times. Itís got a great base for turning out a steady stream of college-educated workers. Itís got room to grow. Itís got a great climate and pro-business leadership.í That would include financial-services firms of all types.

What can be done to improve access to capital?

That has to come with a revival of the economy. We donít need major new efforts, particularly public-private partnerships or public provision of capital. Banks and other lenders are simply sitting on capital. Thatís natural given the anxiety over the economy. Access will come back.

The regionís unemployment rate was lower than the stateís in 2009. Does that merely reflect the stabilizing influence of state-government jobs?

Unemployment rates are always lower among the more highly educated. We have a much-above-average rate of highly educated workers here, not only compared with other counties or regions but also with the nation. Government employment has helped, and the universities have helped. We have not had mass layoffs among faculty at N.C. State, for example.

But university administrators and staff have suffered some.

Thatís right, although some of that has been shifting people around rather than sending them out the door. So, yes, having institutions of higher learning here has helped. Our health complex has helped. Health care actually has added jobs. All those have helped cushion the blow. The regional unemployment rate of 8% is nothing to sneeze at. I have been here 32 years, and thatís the highest rate over that time. But compared with the nation and the rest of the state, the Triangle has done very well.

Whatís the status of the housing and real-estate market?

In terms of percentage declines, the Triangle has been either a little worse or right at the average of the stateís metropolitan regions. That tells me the market here has been influenced by what has been going on elsewhere. The Triangle didnít develop a real-estate bubble, with the big spurts in rates of appreciation. But because the housing market really is a national market, we have suffered through the downturn at about the same rate as the nation.

Whatís to come?

Starting last summer, we have seen improvement in real-estate indicators not only here but also statewide and nationally. To what degree has that been dependent upon the federal tax credit? Will house-appreciation rates start to come back? It looks like the worst is probably over in terms of the declines of the residential real-estate market in the Triangle.

What about nonresidential construction?

Like many metropolitan regions, the Triangle experienced a sharp spike. But now vacancy rates in commercial and office space have led to projects either being halted or postponed. Nonresidential real estate is going to continue to move rather poorly for about another year. But I donít see it as something ready to burst that is going to send us into a double-dip drop.

How can the regionís outlying rural counties improve their economies?

Every governor since I have been here has talked about balanced growth. It is just hard to engineer from a public-policy standpoint. International forces over the last 20 or 30 years have really favored regions with high levels of highly educated workers. They also have favored the globalization of many sectors, including those upon which our outlying regions depended such as textiles and apparel.

Is there any hope?

Economic disparities will continue. The ring of rural counties surrounding the growing metro counties will be the first to, at some point, experience more rapid growth ó as long as energy prices donít derail that. Some people project that we are not just going to be facing $3- or $4-a-gallon gasoline within a decade but maybe $10-, $15- or $20-a-gallon gas. That may reshuffle the deck dramatically in how much international trade occurs.

How?

If it becomes very expensive to transport products internationally, then you might see people turn back to buying more of what they use locally. So you might see a big revival in agriculture in North Carolina. You might see products such as clothing and furniture manufactured here. It illustrates how dependent economic development is on large international forces over which states have almost zero control.

What impact will federal stimulus spending have on the region?

As it does just about everywhere, minor. I donít know how much of the infrastructure spending that was allocated to the state is going to Triangle projects. Even if it was a big number, itís probably a one-time big number. The bigger continuing impact in this region will be the research-and-development money that the universities get.

What is the outlook for manufacturing?

Statewide, we actually saw a gain in manufacturing jobs in October by about 2,000. Manufacturing tends to be one of the first sectors to come out of recession. You need to answer that question two ways: How important is manufacturing in income generated ó not just from salaries but also from the sale of products? Secondly, how important will it be in jobs created? What we are seeing not just in the Triangle but worldwide is a disparity between those two. Manufacturing output in North Carolina is much higher today than it was 25 years ago, yet employment is much lower. Thatís because people are being paired increasingly with better technology. I see no reason why that trend wonít continue. Manufacturing will evolve similarly to the way agriculture evolved.

Which sectors in the Triangle will grow this year?

There will be continued substantial growth in the health-care/education sector. There will be noticeable improvement in technology. Government will experience growth. The leisure-and-hospitality sector will be a sleeper. We arenít going to see a big upswing in construction activity or retail or financial services.

Do you expect any major sector to contract?

Manufacturing, in employment, because of structural changes rather than cyclical ones. Workers will be replaced because of technology. Even though we have had a gain last month, manufacturing will continue to register job losses.

Whatís the overall outlook?

Our ace in the hole continues to be the confluence of institutions of higher learning. You have people here who are working on cutting-edge projects in virtually every discipline. For an economy to be competitive in the future, it is going to have to be more reliant on innovation and R&D. We arenít going to see the kind of growth spurt that we had in the late í90s. Maybe thatís good, because it did cause issues with infrastructure and school construction.