THE NORTH CAROLINA ECONOMIC OUTLOOK, 1 st QUARTER 2018

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1 THE NORTH CAROLINA ECONOMIC OUTLOOK, st QUARTER 8 Prepared by Dr. Michael L. Walden, William Neal Reynolds Distinguished Professor, Department of Agricultural and Resource Economics, North Carolina State University Contact Methods: phone: ; michael_walden@ncsu.edu TEN NORTH CAROLINA ECONOMIC HEADLINES FOR 7 AND 8. North Carolina s economic growth rate has accelerated since 3 and has beaten the broadest national growth rate for three straight years, although falling short of the Southeast region growth rate in 7.. The Information, Professional and Business Services, and Leisure and Food Services sectors have been the fastest growing since. 3. Non-durable Manufacturing including tobacco products, textiles, and apparel continues to contract and is a major factor in the on-going urban/rural divide in the state. 4. Residential construction expanded in 7 and has grown on trend since ; however, economic activity levels in the sector are well below pre-recessionary levels. 5. North Carolina s payroll job growth rates have exceeded national payroll job growth rates in seven of the past eight years; however job growth decelerated in Each of the major measures of unemployment in North Carolina have been halved since. 7. The hollowing-out of North Carolina s labor market continued in 7, although at a slightly less pronounced rate than in the previous seven years. 8. The five largest metropolitan regions in the state accounted for 83% of the growth in payroll jobs in The state will experience another year of economic growth in 8, with real GDP expanding by.8%, the headline jobless rate falling to 3.6%, and over 7, payroll jobs being created.. The Asheville, Durham, and Raleigh metropolitan regions will have the lowest unemployment rates at the end of 8, at or near 3%.

2 % Statewide and Total Sector Trends Estimates for 7 of the broadest measure of economic growth real (inflationadjusted) Gross Domestic Product (GDP) - suggests North Carolina s aggregate growth rate again surpassed the national growth rate for the third straight year. However, the state s growth rate fell short of the real GDP growth rate for the Southeast (Figure ). Also, since the state s population grew faster than the nation s population, North Carolina s growth rate per person (per capita) was less robust. One estimate for 7 shows the state s real GDP growth rate per capita the same as the national rate. An avidly debated issue is the impact of the significant tax rate reductions that began implementation in 4. For the five years from to 4, North Carolina s real GDP growth rate fell short of the national rate in four of the years. But in the three years from 5 to 7, North Carolina s growth rate consistently exceeded the national rate. There is some research suggesting that reductions in a state s income tax rate especially the corporate tax rate can stimulate economic growth. However, an alternative explanation is that consumers slow recovery from the Great Recession especially in their spending on manufactured durable goods- delayed the rebound in North Carolina s manufacturing-heavy economy. Figure. Real GDP Annual Growth Rate (%) in the North Carolina, US, and Southeast States Economies, NC US SE Source: U.S. Bureau of Economic Analysis. Data for 7 are for Q, 6 to Q, 7. Michael L. Walden, Recovery from the Great Recession: Explaining the Differences among States, Journal of Regional Analysis and Policy, 44(): 66-74, 4.

3 Figure. Economic Sector Growth Rate (%) in North Carolina, 9-7. Information Prof & businsess serv Leisure & food service Farming & forestry Trade Durable manuf Transp & warehousing Financial services Educ & health care Construction Non-durable manuf % Source: U.S. Bureau of Economic Analysis. Since the end of the Great Recession in mid-9, economic growth has been uneven among North Carolina s major sectors (Figure ). Fastest growth has been in the Information, Professional and Business Services, and Leisure and Food Service sectors, while the slowest growth has been in the Education and Health Care, Construction, and Non-durable Manufacturing sectors. Indeed, output in Non-durable Manufacturing, which importantly includes tobacco manufacturing (primarily cigarettes), textiles, and apparel, has dropped almost % since the conclusion of the Great Recession. These results suggest the long-running restructuring of the North Carolina economy is continuing. Unfortunately, the decline in Nondurable Manufacturing has a disproportionate negative impact on small town and rural areas. As a result of its severe contraction during the Great Recession, the health of the residential housing market has been closely watched. Figure 3 shows a measure of residential housing market activity in years prior to the Great Recession (4-6), during the Great Recession (7-9), and in the recovery following the Great Recession (-7). Residential construction activity in the state made a tepid rebound in the early years of the recovery, but since 5 the pace of recovery has accelerated. Residential building permits in North Carolina in 7 were the highest in a decade, although they were still well below the boom years of

4 # Figure 3. Annual Residential Building Permits, North Carolina, Source: U.S. Census Bureau. Statewide Labor Market Trends Figure 4 shows annual payroll job growth rates for North Carolina and the U.S. from through 7. In all but one year (), North Carolina s growth has exceeded national growth, and this pattern continued in 7. However, the pace of job growth slackened in 7, after hitting a peak in 5. The slowing pace of job growth is a typical pattern as economic recoveries age. More easily employable individuals with marketable skills are initially hired as the economy expands. As recoveries mature, more of the unemployed are less qualified for available work, thereby slowing the pace of hiring. Each of the three major unemployment rates continued to drop in 7 in both North Carolina and the nation (Figure 5). The headline rate only counts an individual as unemployed if she or he has no job, desires a job, and has actively looked for a job in the past month. The U5 measure only requires an individual to not have a job and to want a job in order to be categorized as unemployed. The U6 rate is the broadest measure of unemployment, including those counted as unemployed by the U5 rate as well as those individuals working part-time only because full-time work cannot be found. 4

5 % % Figure 4. Annual Job Growth Rates (%) in North Carolina and the U.S., NC US Source: Nonfarm employment numbers from the U.S. Bureau of Labor Statistics based on July to July values. Figure 5. Alternative Unemployment Rate (%) Measures for NC and the US, and Headline U5 U6 NC NC 7 US US 7 Source: U.S. Bureau of Labor Statistics; annual averages. 5

6 % Each of the rates in 7 was less than half their level in, both for North Carolina and the nation. However, in 7 North Carolina s average annual headline and U5 rates were slightly higher than their national counterparts, while the state s U6 unemployment rate was slightly lower than the comparable national U6 rate. North Carolina s labor force participation rate also improved in 7, rising to 6.6% in October. The rate measures the percentage of individuals aged 6 years and older who are in the labor force, meaning they are working or actively looking for work. The state s rate continues to track the national rate, but has been averaging a full percentage point higher. North Carolina workers saw larger gains than their national counterparts in their real hourly wages wage gains after subtracting inflation in 7 (Figure 6). This repeats the result seen in 5 and reverses the pattern experienced for most of the years immediately after the recession when national gains exceeded North Carolina gains. A likely reason is the faster growing North Carolina economy compared to the national economy in recent years. Last, Figure 7 shows that the labor market phenomenon of hollowing-out persisted in 7 in North Carolina. Hollowing-out means growth in jobs occurs at both the high-paying end as well as the low-paying end, with little or no growth in middle-paying jobs. Although the annual rates in 7 were slightly lower for high-paying and low-paying jobs Figure 6. Annual Real Wage Rate Changes (%), NC and the U.S., Axis Title NC US Source: U.S. Bureau of Labor Statistics; October of each year using the CPI deflator; private sector wages. For the definitions of high-paying, middle-paying, and low-paying, see Michael L. Walden, North Carolina s U-Turn and Alternative Economic Paths of the State s Regions, Studies in the North Carolina Economy, July 7. 6

7 % Figure 7. The Hollowing-Out of the Labor Market, Percentage Change, 9-6 and 7 (Annualized Percentage Change in Jobs Classified by Level of Pay in North Carolina) High Paying Middle Paying Low Paying Source: U.S. Bureau of Labor Statistics. and slightly higher for middle-paying jobs compared to the annual rates in the 9-6 period, the pattern was clearly the same. Like the nation, North Carolina still has a problem in creating sufficient jobs paying a middle-income salary Regional Trends A clear urban/rural divide has persisted in North Carolina for several decades, and 7 did little to change that observation. Aggregate payroll job growth rates for North Carolina regions between and 7 are shown in Figure 8. Clearly the Charlotte and Raleigh metropolitan areas have been in a class by themselves, with job growth rates approaching 5%. Wilmington, Asheville, and Durham also had aggregate job growth rates above the state average. Next are the Triad and mid-sized metros, followed by the slowest job growth in rural North Carolina and the smallest regions. Goldsboro and Rocky Mount lost payroll jobs over the period. 7

8 Figure 8. Job Growth Rates (% Change) in North Carolina Regions, -7. Charlotte Raleigh Wilmington Asheville Durham State Burlington Winston-Sal Greensboro Hickory Greenville Rural NC New Bern Jacksonville Fayetteville Goldsboro Rocky Mt % Source: U.S. Bureau of Labor Statistics, based nonfarm employment from February (low point of job market) to October 7 (latest available data) using seasonally-adjusted data. Rural NC includes counties outside the listed metropolitan areas. Figure 9 provides similar information for the regions grouped into size categories. In 7 the large and medium sized regions had the fastest job growth. Indeed, the five largest metropolitan areas in the state accounted for 83% of the state s payroll job growth in 7. Forecasts The NCSU Index of North Carolina Leading Economic Indicators (Figure ) has followed a modest upward trend since late 5, suggesting gradual improvement in economic growth into the early months of 8. Importantly, there is no indication of a downward trend in the Index, thus suggesting no occurrence of a recession in the immediate future. As Figure shows, the Index was successful in predicting the 7-9 Great Recession by over a sixmonth lead. 8

9 7 feb 7 may 7 aug 7 nov 8 feb 8 may 8 aug 8 nov 9 feb 9 may 9 aug 9 nov feb may aug nov feb may aug nov feb may aug nov 3 feb 3 may 3 aug 3 nov 4 feb 4 may 4 aug 4 nov 5 mar 5 jun 5 sep 5 dec 6 mar 6 june 6 sep 6 dec 7 mar 7 june 7 sep Figure 9. Annualized Payroll Job Growth Rates in North Carolina Regions Classified by Size, 7 and % Large metros Medium metros Small metros Non-Metros Source: U.S. Bureau of Labor Statistics; a large metros are Charlotte, Durham-Chapel Hill, Greensboro, Raleigh, and Winston-Salem; medium metros include Asheville, Burlington, Fayetteville, Greenville, Hickory, and Wilmington; small metros are composed of Goldsboro, Jacksonville, New Bern, and Rocky Mount; and non-metros are counties not included in the large, medium, and small metro categories Figure. NCSU Index of North Carolina Leading Economic Indicators 5 NCSU INDEX OF NORTH CAROLINA LEADING ECONOMIC INDICATORS Source: calculations by Dr. Michael Walden 9

10 Like most states, North Carolina s economy in 8 will be strongly influenced by national economic events. A large majority of contemporary economic forecasts are presently indicating a continuation of national economic growth in 8. With a new national income tax plan enacted for 8, North Carolina could see some added economic growth motivated by the plan s lower marginal tax rates. If a national infrastructure plan is submitted and passed during 8, more state construction programs could be planned. However, there are rumors a national plan would require an 8% funding commitment from states. If true, there would be a challenge about how North Carolina would generate its contribution. The North American Free Trade Agreement (NAFTA) is currently being renegotiated by treaty partners Mexico, Canada, and the U.S. If negotiations fail, there is a likelihood NAFTA would be terminated. While a termination would create both winners and losers in North Carolina, a recent study suggested the short-run impacts would be relatively minor in the context of the total state economy. 3 For 8, it is forecasted North Carolina real GDP will increase by.8% - one-tenth percentage point faster than the national rate - and payroll employment in the state will grow by.6% - the same rate as the nation. The payroll job growth rate will translate to approximately 7, net new positions. Predicting the most-used unemployment rate the headline rate - is more difficult. The rate will drop as more jobs are added and nothing else changes. But if some individuals who had dropped-out of the labor force because they could not find work and therefore are not officially counted as unemployed resume looking for work as labor market conditions improve, the jobless rate can remain the same, or perhaps rise, as jobs increase. The lowest state unemployment during the economic expansion of the s decade was 4.6%; the lowest state rate during the economic expansion of the 99s decade was 3%. Economic conditions today such as globalization - are much more like the s than the 99s, with an estimated, to 3, able-bodied, working-age individuals having left the labor force in North Carolina. As labor market conditions continue to improve, it would be expected significant numbers of this hidden labor force will actively look for work, thereby moderating any reductions in the unemployment rate. Therefore, a year-end statewide unemployment rate of 3.6% is expected in 8. This would represent half the drop seen in the 7 jobless rate with a comparable number of payroll jobs added. Regional unemployment rate forecasts are presented in Table. Asheville, Durham, and Raleigh are predicted to have the lowest end-of-year jobless rates in 8, at or near 3%. With a tighter labor market, real (inflation-adjusted) wage growth should accelerate from its.8% rate in 7 to.9% in 8. This represents a major improvement over the fall in real wage rates in the state between and 4. 3 Michael L. Walden, How Would Ending NAFTA Impact the North Carolina Economy? Studies in the North Carolina Economy, November 7,

11 Table. North Carolina Regional Unemployment Rate Forecasts. Region October 7 Rate Forecasted October 8 Rate Asheville 3.3% 3.% Burlington 3.8% 3.4% Charlotte 3.9% 3.5% Durham 3.6% 3.% Fayetteville 5.% 4.6% Greensboro 4.3% 3.9% Greenville 4.5% 3.8% Goldsboro 4.6% 4.% Hickory 4.% 3.8% Jacksonville 4.7% 4.4% New Bern 4.3% 3.8% Raleigh 3.6% 3.% Rocky Mount 6.% 5.4% Wilmington 3.9% 3.5% Winston-Salem 4.% 3.7% Source: U.S. Bureau of Labor Statistics; author s forecasts. There is no expectation that either the household income divide or the geographic economic divide in North Carolina will significantly change in 8. The forces providing advantages to large metropolitan areas transportation linkages, vibrant downtowns attracting a college-educated workforce, international ties, and a st century economy based on higher education, technology, finance will still give those regions strong advantages. Also, technology will continue to disrupt the occupational market by producing machinery and programs that can increasingly substitute for a broader range of human-performed tasks. Those with cognitive abilities not (yet!) able to be performed by technology will be rewarded in the job market, while those workers competing with technology-based applications will find it more difficult to be valued. So, 8 will be a further year of economic growth in North Carolina, with both income and employment improving. But beneath the broad statewide picture will linger economic disparities that are yet to be closed.

NC STATE ECONOMIST COLLEGE OF AGRICULTURE AND LIFE SCIENCES

Winter 08 NC STATE ECONOMIST COLLEGE OF AGRICULTURE AND LIFE SCIENCES 08 ECONOMIC OUTLOOK: A SHIFT TO A HIGHER GEAR? M. L. Walden, William Neal Reynolds Distinguished Professor and Extension Economist,