Economic Forecast Round Table January 2013

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 Better times ahead

North Carolina’s economy is expected to record temperate growth this year as it continues to recover from its recession hangover.

An interesting stage has been set for North Carolina this year. The state is still climbing out of a recession, and a fiercely contested election in November put new faces with new ideas in Raleigh and Washington, D.C. So what’s in store for the Tar Heel economy? A panel of experts recently gathered to share their predictions for the year. Participating were Randy Brodd, partner-in-charge of Charlotte-based Dixon Hughes Goodman LLP’s eastern North Carolina practice, which includes offices in Raleigh, Greenville and Southern Pines; Dan Gerlach, president of Rocky Mount-based Golden LEAF Foundation; Brooks Raiford, president and CEO of the Raleigh-based North Carolina Technology Association; Michael Walden, professor and extension economist at N.C. State University; and Patrice Willetts, president of the Greensboro-based North Carolina Association of Realtors. The round table was hosted and sponsored by N.C. State University’s Jenkins MBA Program at the Poole College of Management, with additional support from Dixon Hughes Goodman and the state Realtors association. Business North Carolina Publisher Ben Kinney and Special Projects Editor Peter Anderson moderated the discussion. The following transcript has been edited for brevity and clarity.

What are some economic trends to expect this year?

Walden: If you look at recoveries from previous recessions, it takes North Carolina some time to get going. After the 2001 recession, the state really accelerated in year three. That’s when job growth started to outperform the nation. Since the job market bottomed out in 2010, the state’s workforce has grown 3% while the nation’s has increased 3.5%. The state is entering year four, so expect employment to pick up steam. I’m pointing to 68,000 net, new nonfarm jobs, compared with 40,000 in 2011. Of course, the growth is not going to be evenly spread across the state. The metro areas will see better numbers than rural areas, which has been a long-term issue. Charlotte is really coming on now, and the Raleigh-Cary metro area is back to its pre-recessionary jobs level. The loss of construction jobs hit North Carolina harder than it did the nation. We’ve not seen a big recovery there, so I’m looking for those jobs to start to come back. Real estate here suffered more than the nation, not because of a larger price depreciation but because the state had a large real-estate sector. That meant a bigger chunk of the economy was affected.

Willetts: There was a large inventory of real estate that needed time to be absorbed. Mix that with homeowners trying to sell their properties despite being underwater on their mortgages, and prices depreciated and building stopped. Listings are starting to see multiple offers, which has been rare the past three years. Now if a property is priced right, clients need to make their best offer because the property will sell. I think that’s a positive sign. Investors rule the market right now. I worked with one who bought 10 properties last year — all cash.

Gerlach: Over the last 12 months, manufacturing has grown in North Carolina, which you can’t say about any other year the past decade. There are many European companies that are going to want into the aerospace and automobile markets. They will find North Carolina an attractive place with a high-quality workforce groomed by the community-college system.

How are businesses and consumers positioned for the coming year?

Brodd: If you look at hiring nationwide, only about half of the jobs lost since the beginning of the recession have been recovered. There is going to be continued hesitancy on hiring for two reasons. First, businesses have figured out how to get lean and take on additional work without additional employees. Then there is technology: The mechanized manufacturing that returns to North Carolina won’t use assembly lines with thousands of people. We’re not going to see the job growth that we would like to see.

Walden: The key to our economy is the consumer who spends 70 cents of every dollar. The consumer is in much better shape now than she was five years ago. If you look at the average household’s spending for necessities — debt, food, fuel, etc. — it’s at a 30-year low because of interest rates, and $1.2 trillion of household debt has been paid off over the last four years. Households are positioned to spend more in 2013, and that’s going to drive the economy.

Willetts: Homebuyers, especially first-timers, are much more educated because they realize how their credit scores define purchasing power. If they don’t have a good credit score, they aren’t going to be able to take advantage of low interest rates.

Raiford: About two-thirds of our members are technology companies, and the other third represent a range of businesses. They are all cautiously optimistic. The association is hitting its 20th anniversary soon, and its four strongest years have been the last four. Charlotte is the fastest-growing market for new members three years running. In fact, the association’s first regional office, opened in 2012, was there. We’re seeing a lot of growth as that region’s banking-based economy begins to diversify. The energy sector is huge there, as is technology.

Which industry will experience the most growth?

Walden: Manufacturing will be a big producer in terms of output but not necessarily jobs. It’s typically the most volatile sector, and North Carolina’s big manufacturing footprint leads to a higher unemployment rate during recessions. Health care and broadly based services will continue to improve in output and number of jobs. Agriculture has output potential but not necessarily for jobs. Prices for farmland have gone way up, causing worries of an investment bubble. Transportation-related businesses, particularly in the Charlotte region, will see improvement with the revival of vehicle sales. Textiles and furniture-makers will see more activity as home sales increase and demand for furnishings follows. The aerospace industry in the Triad and east will continue to grow. That doesn’t mean tens of thousands of jobs in these sectors, but any growth pushes a positive effect through the economy. I’m optimistic about North Carolina’s future. It’s a progressive state that has many great doers and assets. Evidence of all those traits can be found in the continued popularity of the state, which had the fifth-highest in-migration rate in the country during the recession.

Raiford: Some technology-related clusters will see growth, including health-care information technology and energy, especially smart-grid companies. Analytics is the latest thing, and the state is well-positioned there. The data-center corridor in the west has high employment with a strong ripple effect. Brand names attract other brand names: There is a reason that Facebook, Google, AT&T and Disney have built data centers there.

What’s the role of a well-trained workforce this year?

Walden: We’re a top-10 state in output per worker, which businesses look at favorably because it means more bang for the buck. But keeping a trained workforce to attract new business
is challenging for educators. Training is great at the community-college level, but maybe it should start earlier. Wake County, for example, is building a self-standing technology high school that is going to turn out kids ready for today’s workforce. The mantra that everyone needs to go to a four-year college has to be readdressed. There will be job opportunities outside of that type of training. We need to-the-point video and application-based training so companies can have the workers they need in the most cost- and time-effective manner possible.

Brodd: I think a great example of that is in the Triad with Greensboro-based Honda Aircraft Co. and the community-college system. The old economy in North Carolina was tobacco, textiles and furniture. That whole workforce is being reinvented with the right training at the grass-roots level.

Raiford: Greensboro-based RF Micro Devices Inc. is filling many of its positions for clean-room technicians with displaced textile and furniture workers. The manual dexterity they developed is complemented by precise training from the community-college system. That’s another ingenious example of taking a traditional skill and translating it into a modern workplace. There is a lot of anecdotal evidence of pent-up demand for hiring. I have CEOs telling me every day that they could hire anywhere from one to hundreds — depending on the size of the company — if they had the talent pool to draw from. The talent-pipeline issue is not going to be solved with just a workforce-training system. People also need to continue to relocate here.

Gerlach: Golden LEAF funds training from middle schools through four-year institutions. Successful grants engage the business community to meet the entire community’s needs. The key is giving employers the confidence that the workers they need will be supplied. There has to be project-based learning on current equipment, so it is relevant to students. Community colleges are perhaps the best at this, but school superintendents are catching on. Universities are trying to do this through various strategic-planning initiatives.

How will North Carolina’s location come into play?

Walden: One big thing is the Panama Canal expansion. Instead of freight going ashore in Long Beach, Calif., and then rolling across the country by truck or train, it will float through the canal directly to East Coast ports. North Carolina doesn’t have a port that’s going to benefit directly from that, but if some of that cargo comes ashore in Charleston, it will travel through North Carolina to East Coast markets. This could spur growth in transportation and warehousing and is why the study and upgrading of Interstate 95 is so important.

Gerlach: The northeastern part of the state has a strong connection to the port in Norfolk and will continue to benefit from it, especially from the wood pellets that are being exported to Europe for use in power generation. That region has an abundance of timber resources and people who will do a good day’s work for a good day’s pay.

What effect will the elections have on the economy?

Gerlach: Gov. Pat McCrory is an excellent and capable economic-development salesman. He will continue the strong tradition set by the governors who preceded him. The community colleges are really hitting their stride in helping economic development, and policy leaders realize that needs to continue. The budget is stable enough that lawmakers will have some breathing room to get used to working together and to start moving forward, unless there’s some kind of catastrophic economic event.

Willetts: Discussions about taxes on services, which started the morning after the election, are causing concern. If you’ve ever purchased a home, you
know how many services are on a U.S. Department of Housing and Urban Development statement. We need to make sure that the people who want to buy their first home are not priced out of the market because of additional taxes on the home inspector, the surveyor,
the attorney, the Realtor — whoever provides a service during the transaction. If you’re a service-based business, what will that do to you?

What economic issues will lawmakers be dealing with?

Gerlach: A big issue for the General Assembly is the unemployment-insurance challenges facing employers and beneficiaries. If nothing is done, the debt will continue to grow, compounding the burden and cutting benefits. Unless interest payments on the debt are kept from becoming a larger percentage of the budget, the pressure on businesses, which are trying to be competitive in a global economy, is not going to be relieved.

Walden: State budgeters are also facing Medicaid expansion under the Affordable Care Act. The Supreme Court ruled states could opt out if they want, but that would mean missing out on the feds picking up the bill for the first few years of the expansion. Eventually, the state is going to have greater Medicaid expenditures, and that will make balancing a budget more difficult. Some states have received waivers to manage Medicaid funds differently. Maybe that’s something that should be looked at here. Also, falling property values over the last five years present challenges for county commissioners in terms of what they do with tax rates. Though the state-budget situation looks better, it’s certainly not that way for all local governments.

Willetts: One federal issue is changes to the mortgage-interest deduction. I would like to see that totally off the table because of how much damage it could do. Taking it away will affect many people, even those who own summer homes on the beach or ski places in the mountains. My mother’s investment is the equity that she has in her home, which she owns free and clear. When she goes to sell it, if she has to deal with taxes on services when her HUD statement comes through or if she was to lose out on the mortgage-interest deduction, that’s going to hurt her investment and ultimately impact the quality of her life.

This article originally appeared in the February 2013 issue of Business North Carolina magazine.