Economic Forecast Round Table February 2014

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Pockmarked positivity

The numbers point to faster economic growth for North Carolina this year,

but companies will still have to clear obstacles such as health care.

Companies crave certainty. Good or bad, a stable marketplace allows them to prepare for the future. So having an idea of what the state’s economy will look like in 2014 helps build confidence. Business North Carolina recently gathered a panel of business executives and state leaders in Raleigh to share expectations for the new year. 
Participants:
Scott Daugherty, executive director of the Raleigh-based North Carolina Small Business and Technology Development Center
Ed Fritsch, CEO of Raleigh-based Highwoods Properties Inc.
Lyons Gray, secretary of the N.C. Department of Revenue in Raleigh
Jackie Keener, acting director of the Raleigh-based N.C. Department of Commerce’s Labor and Economic Analysis Division
Nicholas Kottyan, president and CEO of Winston-Salem-based DataChambers LLC
N.C. Rep. Tim Moffitt, a Republican from Buncombe County and chairman of the House Committee on Regulatory Affairs and vice chairman of the Committee on Commerce and Job Development, CEO of Asheville-based Moffitt International Inc.
Bill Pully, president of Cary-based North Carolina Hospital Association
R. Bruce Thompson II, partner at Charlotte-based Parker Poe Adams & Bernstein LLP
Brad Wilson, president and CEO of Chapel Hill-based Blue Cross Blue Shield of North Carolina
Campbell University’s Lundy Fetterman School of Business sponsored the discussion and hosted it at the university’s law school. Blue Cross, DataChambers and Highwoods Properties provided additional support. Peter Anderson, BNC special projects editor, moderated the discussion. The following transcript has been edited for brevity and clarity.

What shape was the state’s economy in at the start of 2014? How did it get there, and what does that mean for the rest of the year? 

Keener: North Carolina is still climbing from the hole that the Great Recession put it in. The state lost 334,500 jobs during the economic downturn. The manufacturing and construction workforces took big hits. Since December 2007, which is about when the recession started, the state is still down 81,000 private jobs. An average of 6,200 jobs per month were added during the last 20 months, so it should take until early 2015 
to reach prerecession levels. The professional- and business-services sectors added the most jobs in 2013 — 27,000. Trade and transportation added 18,000. Education and health services added 16,300. So we are increasing but not at the pace that everybody wants. The unemployment rate in November was 7.4%, and that’s down from about a year ago. The state should see continued growth this year but at a quicker pace than in 2013.

Gray: This will be an interesting year. North Carolina should see about 100,000 jobs added. Most of them will be in Mecklenburg, Orange, Wake and Durham counties. Growth will continue along the Interstate 85 corridor but will 
be sluggish in the eastern part of the state. As a whole, North Carolina is still suffering through the transition from a manufacturing-based economy to a service-based one, though the Triangle and Charlotte regions are having an easier time. Unemployment will probably fall about 0.5% in 2014. In the Triangle and Charlotte regions it will probably fall to about 5%, which will be below statewide and national rates.

Daugherty: A promising indicator for this year is that small-business lending reached a six-year high in October 2013. Growth usually appears in the first or second quarter after those loans are made. Companies are tooling up and stocking inventories. 

 

In 2013, the General Assembly passed several pieces of legislation, including tax reform, intended to help businesses and economic development. How will they affect the state’s economy this year?

Moffitt: Policymaking is like farming: You hope you plant the right thing now so you have a robust harvest down the road. We think the regulatory and tax reform passed in 2013 sowed the right seeds, and we anticipate more robust growth in our economy this year. 

Gray: We won’t see the full effect of tax reform until 2015, when 2014 taxes are filed. But we hope the lower rate gives people more money to spend now. Sales tax is the major indicator of consumer spending in this state. It will be important to watch this year.  

Fritsch: Lower income taxes help attract and retain companies. They are essential to retaining retirees — who have higher rates of discretionary spending — in this state.

Thompson: Tax reform can’t be a one-time event. Over the next couple of sessions, the legislature should take a hard look at how the corporate-income tax is calculated. The No. 1 thing that can be done to attract investment is to go to a single-sales factor, which would tax just the percentage of a company’s sales made to North Carolina residents. That will reward companies that make capital expenditures and have employees here. I worked on an economic-development deal to bring in a large data center to the western part of the state several years ago. The company was not interested in traditional incentives. It wanted the single factor of sales for its income tax. That is available but only with 
a $1 billion investment. That’s a hurdle that not all companies can jump, but the single-sales factor has shown that it can attract investment, and it should be available to all companies.

 

What are you expecting this year in your respective industry?

Kottyan: From what DataChambers experienced in 2013, this year and beyond looks good. We opened a 50,000-square-foot data center in Raleigh in July and recently broke ground on another there and one at North Carolina Research Campus in Kannapolis. We are expanding in Winston-Salem. We’re expecting a 3% to 5% increase in spending on servers and equipment. Many of them will be made in Research Triangle Park. The national deficit and health care concern us most.

Thompson: The urban parts of the state will see the most job growth and opportunities. We need to drive investment into rural communities. Some of the towns in eastern North Carolina once boomed because of manufacturing, tobacco and the other traditional Tar Heel industries. We need to make sure that we’re pushing investments there, such as renewable energy on farms, turning their waste into energy, and building wind and solar farms. That will improve the tax base and create jobs.

 

How will North Carolina’s workforce fare this year?

Pully: North Carolina hospitals will have to cut costs by about $1 billion this year because of changes being made under the Patient Protection and Affordable Care Act. The only place to find that much savings is personnel. They will shed jobs and reduce services. Small hospitals will continue to feel revenue pressure. Many are eliminating vital services because there’s no revenue to pay for them. Hospitals are the largest employer in many communities. It’s estimated that every hospital job creates 0.9 other jobs. Ten thousand of the about 200,000 hospital jobs statewide will be eliminated this year. That means about 9,000 more jobs will be lost.

Kottyan: Technology companies are working with community colleges to train the workforce we need. Our younger students need more science, technology, engineering and math courses so that we can produce the kind of high-school, community-college and university graduates who can support the agriculture, technology and manufacturing businesses that we’re trying to grow. Last year, the state’s high-school graduation rate rose 10%, but we’re still not where we want to be. North Carolina is better than many other places, but it still lags in high-school graduates. We need to improve that, and it doesn’t start in high school. 
It starts long before that.

Fritsch: Highwoods Properties is building 500,000 square feet of office space in Cary for New York-based MetLife Inc.’s Global Technology and Operations center. The project will cost $110 million and is part of the insurer’s recently announced investment in the Charlotte and Triangle regions. When we first met with MetLife executives almost two years ago, the whole move was about recruiting and retaining employees. We’re thrilled that they saw North Carolina has an available workforce with the intellect and work ethic to accommodate their needs. They have received a tsunami of job applications. Highwoods also is leasing 120,000 square feet of space to DB Global Technologies, which 
is a wholly owned subsidiary of Deutsche Bank. These companies worry about the same things — employee recruitment and retention.

 

How is health care going to affect the economy this year?

Wilson: Health care is going to be a bigger topic than in 2013 and stay that way for the foreseeable future. When you realize that 18% of the nation’s GDP depends on health care, you can’t have a conversation about the economy without it. The Congressional Budget Office predicts that health-care costs will consume 20% of gross invested profit by 2020 if they are not curtailed. That’s a problem. The stress that many hospitals are facing highlights the difficulty of balancing cost efficiency and increased quality. What concerns Blue Cross most, and what it has focused on with its partners around the state, is the ever-increasing costs. Of every premium dollar paid, 87 cents goes to a provider. The remaining 13 cents covers taxes and administrative costs. 

 

Where will businesses see the effects of health-care reform?

Kottyan: Over the last six months or so, the No. 1 question our employees have asked is what’s going to happen to their health-care benefits. They’re reading about companies changing plans or cutting benefits. We’re not sure of what the changes are going to mean to the company so answering their questions has been difficult. I’m glad that North Carolina took steps to ease our taxes, but I hope the money saved there isn’t needed to pay higher health-care costs. DataChambers almost doubled its workforce — from 23 to 42 people — in 2013, and we’ll add 23 or 24 people this year. Those aren’t big numbers, but the jobs pay close to six figures. Our health-care benefits play a role in recruiting employees. At times they mean more to an applicant than more money somewhere else. In the past these benefits may have been a given. They aren’t now.

Fritsch: Highwoods Properties reaches from Missouri to Pennsylvania to Florida. When we ask our 2,500 customers about needing more space this year, they ask for some certainty on health-care costs. That will determine how many people they can afford to hire. 

Wilson: There are many people who never paid attention to it before now engaged in health-care conversations. Developing a point of view about health care — its value, how it works, its cost, its most effective application — is important and a good byproduct of the anxiety that has swirled around it for some time. We have not paid enough attention to the workings and funding of health care. There is much opportunity within that discussion to collaborate and figure out the best paradigms for our state. We’re doing our best to find the answers, but this week’s answer may change by next week because new regulations are regularly enacted. That lack of certainty increases anxiety 
and costs. I don’t see that getting 
better soon.

Daugherty: Almost 95% of companies employing more than 50 people provide health-care benefits. It’s about 35% for companies with fewer than 50 people. North Carolina lags both of those national percentages by a few points. It’s 
a cost-related issue, and it’s challenging for small businesses. 

Pully: We all know it costs too much. Addressing all of the underlying reasons for that is hard. The good news is there is so much wrong that there are many opportunities to fix it. Ten percent of the population uses 50% of health-care resources. Moving them into care-management programs that make sure they’re seeing their primary-care doctor regularly and taking their medications would help keep them out of more expensive settings such as emergency rooms and hospital beds. The large number of North Carolinians who do not have health-care coverage also increases costs. Because of underpayments from Medicare and Medicaid, insured patients pay 140% of the cost of their care. That’s not fair. There are some positive things being done, including efforts by the government and the private sector to change health care from a volume-based 
to a fee-for-service system, moving our sick-care system into a health-care system, where keeping people well is rewarded financially. I love the fact that businesses are engaged. They’re paying most of the freight for health care. 

 

What will be the role of entrepreneurs and startups?

Daugherty: North Carolina is a state 
of entrepreneurs. They are big drivers in the economy. One of the things the center has discovered was that fast-growing companies are everywhere; it’s not an urban phenomenon. They also are in all sectors. Somebody gets a really good idea for a retail operation, and then the next thing you know they’ve got 16 stores. Small companies with entrepreneurial activities, some of which will grow to be quite large, are a big part 
of our future and driving growth in rural communities.

Kottyan: Entrepreneurialism is alive and well in North Carolina, but it can be better. The reduction in personal- and corporate-income taxes will help entrepreneurs because a lack of financing is stunting growth. Most of that comes from investment-capital firms, which are scarce in North Carolina. The big money comes from New York, Chicago or Silicon Valley. If we can attract more of those dollars here we’ll see a jump in startups. That’s going to be driven by income. Lower taxes will help these companies make more money and lure entrepreneurs here from states with higher taxes.

Thompson: One of the best entrepreneurial stories is about Vivian Howard, a young woman born in the Lenoir County town of Deep Run, population 200. She went to N.C. State, and then she left for New York to find fortune and fame. But what she really wanted to do was return home and open a restaurant in downtown Kinston. 
So she did. Now her adventure and restaurant, Chef and The Farmer, is a television show on PBS. When I watch 
it, I’m struck by the kids working for her. What other opportunities would they have had in Kinston if she didn’t hire them? They might have had to move to Raleigh or Greenville to find a job. She’s opening a second restaurant. The folks who opened Mother Earth Brewing in Kinston are following in her footsteps. They say she showed them how to do it. 

 

What are other factors that will affect the economy this year?

Daugherty: North Carolina will continue to be among the fastest-growing states in the country. That’s a big driver in our economy. Many people are not moving here for a job but because of North Carolina’s reputation for opportunity — such as its quality of life and quality colleges and universities. It’s a great place to raise families. That’s a positive thing. Having said that, many places in our state aren’t growing as much as others. We have to develop strategies that spread growth statewide. The state Economic Development Board, which makes recommendations to the governor, secretary of commerce and the General Assembly,  made a big first step in its latest strategic plan. It recognizes — for the first time — that agriculture is part of economic development. It’s a $70 billion a year industry in the state, and it will only increase. Much of it is based in eastern North Carolina, so that’s promising because growth is needed there. It will open opportunities in manufacturing, transportation and warehousing there, too. 

Wilson: Bioagriculture and biotechnology, in large measures driven by the North Carolina Biotechnology Center in Research Triangle Park, will be key to the state’s future. We’re already known around the world as an agricultural state. We need to leverage that even more. A person from N.C. State recently told me that either last year or the year before was the first time — since the Great Depression, for sure — that the number of small farms, 25 acres or less, in America increased. Many of those are in North Carolina. Younger people, who see the connection between agriculture, economic development and health care, are driving that increase.

Moffitt: This is a political year because of midterm elections in November. The state’s economy is on the rebound. We are getting our footing, but I’m concerned that the acrimony that has developed between the far left and far right will drown out good ideas. No one party has all the right ideas. I don’t see any simple issues ahead. They are complex and will touch all of us. We’ve got a young General Assembly, but it’s full of good people. I don’t want to see all of the ground that we’ve recently gained lost simply for political expediency. We’re better than that, and we need to remember that.