Late return on early withdrawal

The credit crisis clobbered the nationís No. 2 finanical center, and itíll take years for the Charlotte region to bounce back.

Few places in the U.S. suffered as much as Charlotte during the near meltdown of the nationís financial sector in late 2008. It gimped along in 2009, having lost its second-largest megabank, Wachovia, to an out-of-state buyer and struggling with an unemployment rate higher than any other region of the state. Its economy wonít get much better this year, says Mark Vitner, a Charlotte-based senior economist at Wells Fargo & Co., the San Francisco-based bank that bought Wachovia. Many of the federal stimulus programs started last year will be winding down, and the private sector might not be ready to stand on its own.

BNC: Is the regionís financial sector on the mend?

Vitner: The rate of decline has clearly moderated, but the industry is focused on containing losses more than growing. A good bit of the growth in financial services during the past decade in Charlotte has been in the investment-banking world ó specifically tied to the structured-products industry. That industry is really at the center of the storm right now, and it has seen very little recovery.

Recovery will be slow this year?

It is likely to be slow for the next several years. We should see some improvement in 2010 if nothing else goes wrong, and there is always the potential for something to go wrong. The credit cycle seems to be elongated in this go-round. There have been extraordinary efforts put in place by the government to hold off mortgage foreclosures and to allow banks to keep struggling loans on their books. That means problems are hanging around longer.

What would happen to the regionís economy if Bank of America moves its headquarters?

The immediate impact may not be bad. But longer term, as more decision makers are outside Charlotte, the region would suffer. The loss of any headquarters means that you no longer have the same commitment to the community.

Duke Energy CEO Jim Rogers says the region needs to diversify its economy.

It needs to diversify its economy, and it is diversified. The energy sector is becoming more important, but it is still small relative to banking. It is hard for a person or an entity to restructure an economy. But we are moving in that direction. The North Carolina Research Campus in Kannapolis holds great promise.

Why?

Because of how well it is funded and its tie-ins with universities. It will bring a lot more research-and-development jobs to Charlotte, and this will be a key growth industry in the 21st century. Every food company is going to have to identify the risks associated with its products and how its food interacts with different people. And that is going to involve a whole new body of research, which is at the heart of the biotech campus in Kannapolis.

How long will it take for the research campus to gain traction?

Itís probably going to take at least 10 years to gain significant momentum, where you have a large nucleus of companies that help attract even more companies.

What can the region expect from the energy sector?

Virtually everyone involved in designing and building power plants has a presence here. The Shaw Group was one of the first. Those are wonderful jobs. Not only are they high-paying, but they are not necessarily tied to the local or U.S. economy because these folks are designing power plants all over the world. Those design services are among our biggest exports. The outlook for the energy sector is a notable bright spot.

Are there others?

There is one that gets overlooked ó advanced manufacturing. Most people see the textile industry as a dying industry, and it is not. It has emerged into a real high-tech sector. A lot of products made in the textile industry go into some of the most sophisticated products made in the United States.

But textiles employment is shrinking in North Carolina.

Thatís because we have lost a lot of jobs in the most labor-intensive parts of the industry. But they are making things like fire-protection gear, military uniforms woven with Kevlar and parts of commercial airliners. We have a lot of manufacturing that continues to build in the region.

What about tourism and hospitality?

Itís a growth industry. It has hit a soft spot because of the problems with NASCAR, but NASCAR will ramp back up. The new arena has allowed us to go after more concerts and shows and basketball tournaments. Weíve got the ACC football championship coming this year. That is an important new element in the Charlotte economy.

What are the prospects for counties outside of Mecklenburg?

Unemployment rates are 15% in places such as Gastonia or Lincolnton, where manufacturing makes up 30% or 40% of employment. Industry continues to move into these areas but not fast enough to offset the losses. This year is going to be a tough one all around, just like 2009 was. But the unemployment rate will probably top out, if it hasnít already, in the early part of the year.

What about places where manufacturing accounts for much of the workforce?

We may actually see a speedier recovery ó at least in the unemployment rate ó because many of these areas have not had strong labor-force growth. As workers get recalled, the unemployment rate will fall relatively quickly.

Will the Apple data center in Catawba County spawn other jobs?

It is hard to say. The economic-development folks in Hickory are certainly targeting more industries like Apple and Google to set up data centers in the area. But there is no real advantage to locating next to a data center. You are not going to get faster connections. But the infrastructure put in to attract these centers should be fairly easy to upgrade to attract similar industries. The brand is a nice selling point for the region.

Whatís the outlook for retailers?

Very difficult. They grew too rapidly during the boom years. Consumers were trading the equity out of their homes and running up their credit cards. Now that the bill has come due and access to credit has been curtailed, folks have to find a way to live within their means. Discount retailer Family Dollar is actually benefiting from this.

What about residential construction?

The housing market here was not as overbuilt as many other parts of the country throughout most of the housing boom. But builders recognized that, and they flocked here as housing was beginning to slow in other parts of the country. As a result, the regionís housing became overbuilt later in the cycle. So we have made less progress clearing out excess inventories of homes and buildable lots than many other communities. Our population is still growing, but many folks moving here are unwilling to buy a home because they canít sell their old home.

The regionís foreclosure rate was about 25% through the first 10 months of 2009. Why so high?

The dramatic increase in unemployment, particularly in the outlying areas. Another reason is that so much of the boom in housing occurred so late in the cycle that many of the folks who were foreclosed on didnít have any equity. If you bought the home in 2006 or 2007 and the values have come down and you didnít have any equity in the home, the loss from foreclosure is far less.

Will construction recover soon?

The single-family market has probably bottomed out. There could be a small increase over the next year. The commercial market is likely to be slow for some time. We have a lot of vacant space downtown. But demand has been reasonably strong. The Ballantyne area of south Charlotte continues to see very strong demand for space. I think there will be some opportunities for office and industrial construction within the market. Not a whole lot of opportunity for retail development.

Is there a sector that gets more attention than it deserves?

Given the size of Carolinas Medical Center and Presbyterian Hospital, people might think the health-care industry provides a bigger lift to Charlotteís economy than it actually does. But that sector is no larger in Charlotte than it is in other cities its size. And we donít have a medical research facility here because we donít have a medical school here.

What role do you see for the so-called creative economy?

One of the things that helps attract industries is a vibrant arts community. Charlotte has always had that. But we are on the verge of significantly increasing the size of our arts community with the African-American Cultural Center, the new Mint Museum and the Bechtler Museum of Modern Art. Those museums are really going to catapult Charlotte into another league, and the attention the city will get with the nearly simultaneous opening of them is really going to be spectacular. I can imagine The New York Times and The Washington Post coming down to do stories about the new arts community in Charlotte.

The regionís unemployment rate was in double digits through most of 2009. Besides the increase in foreclosures, what are some of the effects?

The rate only captures the unemployment situation at a point in time. Over the course of the year, you could essentially double the rate to get the share of the population that experienced unemployment during the period. Many have been unemployed for long periods. Their incomes have taken a huge hit, and many have fallen behind in their mortgages or car payments or credit-card loans. Many have dipped into savings or their 401(k)s. There will be lasting damage throughout the region. Workers are going to have to reduce their expectations for how much wealth they are likely to accumulate. The net result is that they are likely to spend less over their lifetime.

Can they at least hope that prices will go down or not rise very quickly?

We are more likely to get the worst of all worlds: We are going to have less income growth and higher inflation. But the higher inflation is likely to occur years out ó 2013, í14, í15.

Will the unemployment rate come down by then?

It should. But Iím not sure that we are going to get out of double digits until 2011 or 2012.