Analysis Brief – January 10, 2014


This post may be updated as information become available over the course of the next couple days.

With the New Year comes resolutions, and predictions. This is especially true about the direction of the economy. During our Winter Conference, Wells Fargo Economist Michael Brown shared a few, as noted in the following slides:

The day before this presentation in Asheville, fellow Wells Fargo Economists John Silvia, Jay Bryson and Mark Vitner shared their 2014 Economic Outlook. Overall, they see continued growth in the overall economy, while they are less “excited” about accelerating employment growth, a challenging issue for many places across North Carolina and the rest of the country.

This week, economic outlook presentations hosted by the North Carolina Chamber of Commerce (Monday) and Greater Raleigh Chamber of Commerce (Friday) offered additional perspectives.

NC Chamber/NC Bankers Association Economic Outlook

Most notable presentations during this annual morning meeting and luncheon were a conversation on the future of North Carolina’s military presence, and its economic impact, along with an update from Governor Pat McCrory.

Click Here for NC Military Presence Discussion Video

Click Here for Governor McCrory’s Remakrs Video

 (Running Commentary)

Presentations Coming Soon

Greater Raleigh Chamber 2014 Economic Outlook

Two of the strongest economic voices in the Mid-Atlantic headlined this event. Wells Fargo’s John Silvia joined Richmond Fed District President Jeffrey Lacker for a comparative presentation of outlooks for the coming year, as well as discussion with the audience.

Click Here for Video of the Presentations by Silvia & Lacker

 (Running Commentary)

Click Here for Richmond Fed President Lacker’s Prepared Remarks

Forecasts from North Carolina Economists

Several noted economists across the state have updated their outlooks for the coming year.

Dr. Michael Walden shared his seasonal and start-of-year outlook back in December. Dr. Walden anticipates 2.75% growth in 2014 for the national economy, with 100,000 new jobs for North Carolina residents, though many of those will be concentrated in select metropolitan areas, like Asheville, Charlotte, Raleigh and Durham.

Click Here for Dr. Walden’s Winter 2013/14 Outlook

Dr. Woody Hall with UNC-Wilmington shared his outlook for Southeastern North Carolina earlier this week during a forum hosted by the Wilmington Area Chamber of Commerce. Hall predicts 2.5% economic growth for the Wilmington-New Hanover County area in 2014, consistent with 2.5% growth this past year.

Click Here for Dr. Hall’s 2014 Outlook Presentation

Appalachain State’s Harry Davis offered an overview during the NC Chamber of Commerce/NC Bankers Association forum this past Monday. Click here for an article summarizing his comments (TBJ).

Dr. John Connaughton of UNC-Charlotte has not yet released an outlook for 2014 (stay tuned for an update).

Wells Fargo: NC Economy “downshift”-ing from early year growth

Michael Brown, an Economist with Wells Fargo Economics Group, will present an economic update at the Winter 2012 NCLGBA Conference in Concord

North Carolina’s strong cyclical tie to national economic trends forced conditions within the state to decline over the past couple months of 2012 compared to growth experienced earlier in the year, according to yesterday’s North Carolina Outlook released by Charlotte-based Wells Fargo Economics Group.

North Carolina’s economy began the year with robust employment growth and improving personal income. As the year has progressed, the downshift in the U.S. and global economies along with heightened uncertainty surrounding fiscal policy has slowed job growth and, as a result, economic output. Given the slowdown around the state, it is not surprising that the employment dynamics have changed little compared to this time last year.

The report was drafted by Senior Economic Mark Vitner, along with Economist Michael Brown and Economic Analyst Sarah Watt. Michael Brown will present the Economic Update at the Winter 2012 NCLGBA Conference in Concord, December 5th-7th (Click Here for Registration Info).

Click Here for Wells Fargo’s latest North Carolina Outlook

Year-to-year employment in North Carolina (as of September 2012) is only up 0.7% statewide (0.1% 3-month rolling average), with the State unemployment rate at a relatively-high 9.6% (compared to 7.8% national rate)

Higher-skilled labor markets (Charlotte, Raleigh/Durham) are outperforming the rest of the state in workforce recovery. However, there is some signs of manufacturing growth, as the state saw 5,000 new jobs in the sector so far for 2012, with growth leaning towards durable goods.

Downward pressure on North Carolina’s economy is closely tied to the current global economic slowdown and increased domestic uncertainty resulting from the Federal “fiscal cliff” situation (see this analysis of Mark Vitner’s October Commentary for more insight).

Global slowdown is causing a deceleration in export of goods and services from the state to places abroad, though levels are higher than last year. Exports to China have fallen off 4% compared to last year, and the Eurozone debt crisis led exports to Europe to fall 6% in the first half of 2012. Growth in exports to Canada and Mexico helped offset these declines.

Recovery and growth in the durable goods sector also posses some risks:

…the move toward more manufacturing jobs being concentrated in durable goods production has made the state’s manufacturing base more susceptible to a cyclical downturn, which is somewhat troubling as we expect domestic growth to slow in 2013 and for global growth to remain tepid for the next few years. Not only is the durable goods sector more cyclical, but it is also more susceptible to exogenous events, such as shifts in tax policy, geopolitical events and swings in exchange rates.

The outlook draws attention to concerns regarding the “Fiscal Cliff” and its impact within North Carolina, given the strong presence of the military within the state, potential tax policy implications and more:

The impact on the North Carolina economy could be quite severe if all of the scheduled federal spending reductions and tax increases are allowed to go into effect. We do not believe this is the baseline case, rather there will likely be a compromise of some tax increases and more modest spending reductions. Nonetheless, even under this baseline case there will be negative effects on North Carolina, specifically relating to personal income and employment growth.

Impact of an economic slowdown and Federal policy uncertainty could put further pressure on limited personal income growth. While we saw 4% growth for the second quarter 2012, consumer spending could be curtailed following the holiday season into the start of 2013.

With respect to government’s role in North Carolina’s economy, it accounts for 25% of total personal compensation.

The bulk of government income is tied to state and local employees, including school teachers and administrators. It is likely that budget reductions beginning next year will put downward pressure on compensation for these individuals and thus serve as a headwind to income growth for the state. Moreover, around 9 percent of the state’s compensation is derived from federal or military employment. If the sequestration clause from the Budget Control Act goes into effect in January 2013, the Defense Department faces a $492 billion cut to funding over the next eight years.2 This could have some negative repercussions on military-related spending in North Carolina, which is higher on a per capita basis than the U.S. average.

Looking ahead, the outlook sees a mixed landscape for the Tar Heel State. While employment is picking up some, and home prices are improving at a relatively-strong rate, “headwinds” created by declining activity in Europe and China, as well as the uncertainty of the “fiscal cliff” could continue to exert negative pressure on potential growth. Their lackluster projections of 1% US GDP growth for the First Quarter 2013, combined with strong state ties to the overall national economy, could create continued sluggishness, especially in parts of the state that have yet to see significant growth following considerable recession period losses.

The outlook also includes summaries of economic activity and projections for key NC metropolitan areas.

Click Here for Wells Fargo’s latest North Carolina Outlook

Silvia, Brown discuss State of NC Economy

Silvia, Brown discuss State of NC Economy

On Tuesday, June 14th, Dr. John Silvia and Michael Brown of the Wells Fargo Economics Group hosted a conference call discussion on their analysis of the state of North Carolina’s current economy.

Their analysis showed that economic growth in North Carolina (based on GDP) is sustained, but not as the pace of prior recoveries. From an employment perspective, Dr. Silvia concluded that the Tar Heel State is encountering “a whole new ballgame.”

The call included a review of a presentation on economic indicators for the State as a whole, as well as four of its metropolitan areas. Silvia and Brown also responded to listener questions, providing some significant insight on the long term future for the State as it moves forward from a prolonged recession and recovery.

Copies of the presentation, along with information on accessing a replay recording of the conference call (good until July 15th), are available for download:

Download June 14th NC Economy Conference Call Presentation Here (PDF)

Download Information for June 14th NC Economy Conference Call Replay Here (PDF)

Link to News&Observer Story on Conference Call

Below is an itemized summary of conference call highlights:

From Presentation on Overall North Carolina Economy

  • Don’t have enough data for all NC metro areas, but do have enough consistent data for a certain set
  • Economic growth (based on GDP) is sustained, but not as the pace of prior recoveries
    • Poses a challenge for businesses and governments
  • Employment performance reflects “a different ballgame”
  • NC Coincident Index currently shows 1.3% growth
  • Total NC GSP grew 4% in 2010, diversified across most sectors (due to diversified economic mix)
    • Government GSP grew 1%
    • Information grew most at 7%
    • Manufacturing grew 6% (doing well on output, not as much on job growth)
  • Slide 8 (NC employment cycle) shows that statewide employment is still 7% below pre-recession peak level, has remained there for about 18 months
    • Labor market is changing
  • Most growth in Professional and Business Services employment (5%), Leisure and Hospitality (2.5%) and Finance (2%); Government down almost 2%; statewide employment change in last year up little less than 1%
  • Raleigh is best performing of metros on relative employment; Greensboro performing below state average
  • Personal income growing since 2009Q4 (up 4.2% in 2010)
  • Charlotte and Raleigh have per capita income higher than state average, rest of metros at or below average
  • NC has among least disparities of per capita income between metropolitan areas
  • Most significant job growth and income is in Professional and Technical Services, followed by Health Care (reflective of education)
  • Personal income cycle (for the employed) has broken back above pre-recession area (after long, deep decline)
  • Office absorption doing well
MSA Discussion (Asheville, Charlotte, Raleigh and Greensboro)

  • Significant contraction with business and professional services (fewer retirees moving in), but continued growth in hospitality and leisure
  • Employment still 6% below pre-recession peak (trough lasting 24 months so far)
  • Asheville is a “drive to” destination, and gas prices will impact tourism
  • Nearly 6% growth in past year with professional and business services; declines with goods production, education, health services and government
  • Total employment still 8% less than pre-recession peak (has lasted about 24 months)
  • Some recent good news with job growth (Freightliner adding 600 jobs)
  • Some “headwinds” toward stability
  • MB: Based on current (slow) pace of recovery, it is likely that it will take “several years” for employment to return to pre-recession peak levels
  • JS: Charlotte will see a “quick blip” from the Democratic National Convention next year, creating unusual numbers created by temporary employment
  • 2.5% gob growth in past year, 9% for professional and business services, all sectors listed have seen growth or minimal decline (even government grew 2%, mostly on local level due to minimal tax base disruption)
  • Continue to see attractive environment for high-paying jobs
  • Employment cycle shows road to recovery, now 2% below pre-recession peak, though moving positively
  • Stagnant overall job activity in last year (slight increase); and layoff announcements continuing that reflect structural changes (10.3% unemployment rate)
  • Employment cycle shows that MSA is still more than 8% below pre-recession peak (almost reached 10% decline); long recovery a reality
Q&A (did best to capture their comments; did not inject commentary, so this what they said)
JS = John Silvia & MB=Michael Brown
  • It is important that North Carolina “deal with the hand its dealt” and “aspire for better times”
  • Current economy reflects modest employment gains, especially for modest and low skilled workers
  • Consumer spending is more modest
  • More than likely, state income and sales tax revenue will grow at a more modest rate than in the past, poses challenges
  • Home prices are down, and building permits are weak; mean that property tax bases will not be growing
  • Advantages for NC: well-educated, tech-savvy population; good climate; low (general) business costs
  • Economic growth within the state right now is “subpar”
  • Tourism growth will be limited by economic growth in general, will directly impact locations dependent on this industry (i.e., Asheville)
  • JS: Important to consider “pace of economic growth” compared to “pace of growth of commitments”; not where it was expected
  • Changes in structural unemployment? JS: Challenge today is that high school graduates do not have the skills they need for employment, even in manufacturing (computer literacy); big current challenge is lack of computer literacy amongst older population
  • Challenge for the unemployed include developing new skills and relocating
    • JS: “How do you get people to understand that they may have to move? What is your alternative?”
    • Greater magnitude problem for North Carolina since WWII
  • JS: Recovery losing steam? Market projected that economy would get back to 3% growth, and that’s not happening. Economy has lost steam due to several issues (Europe, gas prices, natural disasters); we do have sustained growth, but we have to deal with a 2% to 2.5% situation (unlike the past); don’t need to “dream” about a different hand
  • JS: Distribution of post-recovery jobs are very skewed; reflect competitive strengths and market preferences
    • We can compete on the basis of smart jobs, not unskilled
  • JS: Non-residential construction is improving (not overbuilt, seeing growth w/architectural buildings); state and federal governments see need for infrastructure development (Yadkin River Bridge); residential construction still in a 2-3 year (if not longer) “work out” period
  • JS: Seeing the same pattern with employment that NC has shown for last 20 years (pockets of decline in isolated, rural areas); NC has tried to help these areas, but they are just not economically competitive (if that means moving, that means moving)
  • JS: Inflation is rising, but this is not Jimmy Carter inflation; we’re seeing 3% inflation, higher rate than many retiree portfolios focused on cash and treasuries; don’t worry about deflation or hyperinflation, but focus on impact of 3% inflation
  • JS: Manufacturing output is growing, and it has higher value than before
  • JS: For younger people, goal is to encourage them to get at least a technical education (will provide sufficient opportunity, even better than 4-year schools)
  • MB: From an economic development perspective, educational composition of workforce is important to attracting jobs; climate is favorable to reducing supply chain disruption
  • MB: Does the (local) population have the skills sets for the jobs of tomorrow?
  • JS: “Hope” is not a strategy; there are some opportunities for older workers in their hometowns, but there are no guarantees on anything; more than likely, they need to get more education and move (started getting a little frustrated here); America has always been a country of movers; we need to get this across to people, including high school students (what to do? where to go?)
  • JS (on Agriculture): People like to eat and drink wine, so there is opportunity; dollars to doughnuts, this state can do it; challenge is dealing with technology involved and global competition; world is moving up the protein chain (opportunity for us)
  • JS (on inflation): Food and energy prices are coming up; significant impact on middle and lower income citizens; composition of spending by income category is different; less exposure to inflation the more income you earn