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).
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.