Folwell, Custer, others share 2018 N.C. econ outlook
Appeared as a sponsored section in the February 2018 issue of Business North Carolina
Photography by Bryan Regan
U.S. economists predict solid growth and a continued decline in the jobless rate in 2018. So too, our panel is optimistic about North Carolina’s year ahead. These experts, representing some of the state’s most important sectors, gathered at N.C. State University’s Golden LEAF Biomanufacturing Training and Education Center on Centennial Campus to share their takes on what forces will shape the economy in the months ahead. The transcript was edited for brevity and clarity.
This discussion was moderated by Ben Kinney, Business North Carolina publisher. Support was provided by DPR Construction, Dixon Hughes Goodman, Grubb Properties, Live Oak Bank, NC REALTORS®, N.C. Railroad Co., N.C. State University and Wake Technical Community College.
Where do you see the state’s economy going in 2018?
FOLWELL: We manage the 26th-largest pool of money in the entire world, public money. We have over $110 billion in investments. In addition to that, I’m the state banker, which means there’s about $120 billion on top of the $110 billion that comes through our office. When you make a tuition payment, when you rent a canoe, eventually it comes through the state treasurer’s office. We’re spending close to $800 million every 30 days for pension, health care and pharmacy benefits for active and retired state employees. That’s over 300,000 [people].
North Carolina has to be the low-cost place to live and do business. Money goes where it’s invited and stays where it’s welcome. If you look at our AAA bond rating, our rainy-day fund, the pension plan — one of the five best-funded pension plans in the United States — the unemployment trust fund, I’m very excited about 2018. But it’s because of a lot of things that have been done over the last eight years that’s put North Carolina in this position and brought certainty to the people who actually create the jobs in the state.
HEDGECOCK: We have 42,000 members. That’s up from 32,000 in 2014. So, obviously, people think it’s a good time to get into real estate. We do have some slight inventory concerns. Realtors across North Carolina report historically low inventories of available residential properties. The student-debt crisis is keeping folks from buying until they’re a little bit older and have paid down a lot of that debt. Young adults living with their parents is at a rate of 16%, where it was 10% in 2003. Those things are affecting home buyership. That said, potential consumer confidence remains high.
DYE: We’re a 50-year-old employee-owned company based here in North Carolina. We have investments from Virginia to Georgia, and we’re invested here in the Triangle and the Triad and the Charlotte market as well. We continue to be bullish in North Carolina. We’re a key growth economy for two markets. Raleigh is No. 3, and Charlotte is No. 10. Some of the challenges that face the [homeownership] market help us in terms of rentership for apartments.
SAYLOR: We own 317 miles of rail line in the state leased to Norfolk Southern [Corp.]. That relationship generates working capital for economic development, and what we do with that is we invest in rail projects for freight to create jobs. We improve the railroad line also for passenger rail, and we invest for the long term. Recent projects that we’ve worked on include Triangle Tyre Co. [bringing 800 jobs to] Edgecombe County.
From where we sit, freight growth is going to continue into 2018. We’ve seen a lot of good manufacturing growth, not just in North Carolina, but around the Southeast.
I think our transportation structure in this state — highways, rail, ports and air — all are doing pretty well. When you see the world looking at flights to China and flights out of Charlotte increasing, that indicates the economic activity I think we all want to see. Challenges are going to be how to keep pace, though. It takes a long time to design and build roads and railroads. We’ve put $110 million into our railroad in the last 10 years. That’s not counting some of the recent economic-development announcements that we’ve seen in the last 18 months or so, last-mile investments to get rail to the doorstep of a new company.
BOOTHBY: Tax reform is the biggest sweeping tax legislation that’s happened in 30 years in this country and comes on the heels of a very aggressive tax policy that North Carolina put in place a few years ago. [Many people are] really hoping for a trickle-down effect of lower taxes, more corporate investment, more dollars flowing back into the economy. I think most of our clients are seeing this as a huge opportunity.
We’re a full-service accounting firm — 2,000-plus professionals up and down the eastern U.S. with offices as far west as California. It’s going to be a fun, busy season for us this year.
MCCAFFREY: DPR Construction is a 28-year-old company started in 1990 in the Bay Area of San Francisco. We have offices here in Charlotte and Raleigh and Morrisville. I think the entire industry is optimistic about 2018. A few years ago, a client wanted to build a major facility here and made a final decision to go to Europe to build their manufacturing facility. We’re optimistic, especially in the life-sciences industry, that some of that comes back. We’re fortunate to be the future builder of the home that’s going to be right across the street in the Plant Sciences Building. With a bond referendum and the approval of N.C. State, it will [address] feeding the world population. North Carolina has done a great job from a development standpoint, an infrastructure standpoint, to set the table for the biotechnical and science industry, having the foresight to invest in this type of technology and bring the Syngentas and the Bayers, to bring them together from a public-private partnership to help develop and grow that entire industry. I commend North Carolina. I think it’s a tremendous opportunity.
WHITE: You’re sitting here on Centennial Campus. We’re in our 33rd year. We have 5 million square feet of space for academia, business and government to interact and collaborate, 75 private-sector partners. You’re also sitting in the Golden LEAF Biomanufacturing Training and Education Center. This is where it all happens here in life sciences.
The $2.1 billion referendum that passed in March 2016 passed by a margin of 2 to 1. That tells you a lot about the political environment, how the citizenry in this great state feels about community colleges and universities. Wake Tech played a key role in creating 2,000 jobs [for Infosys] at Brier Creek. That was in July when Gov. Cooper announced that. In May, Credit Suisse announced 1,200 jobs paying over $100,000 average annual salary. That’s significant. That could have gone anywhere, it could have gone to Europe, could have gone to New York, could have gone to California. It came here. It was the following week [that] Gov. Cooper announced that Egger Group, an Austrian manufacturer of building materials and furniture, was announcing 700 jobs and a $700 million capital investment in Davidson County.
The elephant in the room today is Toyota/Mazda. We finished second, OK? We finished second in the United States. There were a dozen states [competing].
CUSTER: We’re headquartered in Wilmington and are right at about a $3 billion asset company today. The company has grown. We’re the largest Small Business Administration guaranteed lender in the country, sort of hard to believe out of little Wilmington, North Carolina. You’ve got great growth and opportunity in the major metro markets like Charlotte, Raleigh, Wilmington, but then you’ve got a lot of places where there really isn’t much going on.
I think Live Oak is a bank, but the buzzword today is fintech company — it’s a financial technology company. The only way we can do business from one location all over the country is through it being a digital provider. Technology is driving so much change. The pace of change, how you keep up with it, how it’s driving buying patterns — it’s a real driver of the economy. And it leads to almost two North Carolinas, from my perspective.
We’re seeing some announcements of creating jobs in [rural areas]. Sometimes momentum can create momentum, but it’s just not enough of it. I think that’s one of the challenges we have as a state solving the disparity between the haves and the have-nots. And I think North Carolina is well-positioned. Our economy as we think about 2018, we’re in a great place in the state.
SAYLOR: I go through a lot of towns and there are “for lease” signs down the street. It concerns me a great deal. We can build a lot of infrastructure, but that won’t necessarily solve [the problems]. We talk a lot in our office now about gentrification. We have a 200-foot-wide piece of real estate through the state that’s 317 miles long, so we have over 600 miles of neighbors. What we’re seeing, particularly in the urban areas, is a lot of development pressure. If you’re building commercial buildings or hotels or residential in an urban setting, you’re going to eventually run across a railroad line. Protecting that corridor, whether it’s freight or passenger [rail], is becoming a bigger challenge for us.
FOLWELL: I see a lot of these [rural] communities, and it’s maddening, and it’s sad. We’re extremely concerned about the depopulating [of] some of these areas. Any time that you’re depopulating and you have a revenue stream off water and sewer, there’s less people using that. Then, the financial stability of that system is in question or you have less property value to spread your property expense tax over, then that drives up property taxes in those areas at the very time we need to be lowering property taxes in those areas.
WHITE: We have to start thinking more in a multi-institutional and interdisciplinary fashion. When I took this job 10 years ago, I called former [N.C. State] Chancellor Larry Monteith and asked him: What should I focus on in this position? He said you’re working for a land grant institution. Go to those borders and push out west and push out east, push north and south. That’s where the need is for higher education. Our faculty love to get involved in economic development. We know the state well because that’s where we grew up, and our kids come from there. Ninety percent of our [students] are from North Carolina. So when you look at Everest Textiles, Rutherford County, 610 jobs with an $18 million capital investment and a $50 million payroll in Forest City, that’s where our challenges are. That’s where we have to see more. We’re going to continue to thrive in the Durham, Raleigh, Charlotte market, but it’s really important for us to make sure that all folks are lifted.
What are some concerns for the year ahead?
WHITE: The $1.4 trillion student loan debt. The most passionate people on our campus here at N.C. State are folks who work at career-development centers and the alumni affairs offices because they get to know our students during the course of their undergraduate and graduate careers. Many of those students are assembling quite the hefty loan burdens that they see coming due soon after graduation. So, we have programs
now that are very popular. One, called Backpacks and Briefcases, funded by the Duke Energy Foundation, helps unemployed and underemployed graduates who are out of school for 24 months secure gainful employment, preferably in something that’s germane to what they’re studying. And I would dare say we’re trying to scale that across the state. UNC Asheville has it. UNC Wilmington has it.
So I think that’s what keeps us up at night here because those career development centers and alumni-association offices that provide services are underfunded and they’re overworked. If we’re going to accentuate that as a laudable public-policy goal, are we all thriving here? We do have a lot of kids, public and private, who need some help in terms of developing those skill gaps. There’s a lot of talent here, but maybe it’s not connecting with the world of work like it should.
MCCAFFREY: And we’re constantly competing for top talent, right? We were at a career development forum [recently] and a survey was passed out. One of the questions was would our company be interested in developing some type of student loan payback program? As companies grow and develop, those are the types of things to consider to help those students come on board and be able to be even more successful.
CUSTER: We pay on average about $130,000 per full-time employee. We provide full pay, health and welfare benefits, no co-pay. We have to do things to attract that type of talent. So often in rural markets, there’s just not that type of financial resource. As companies grow, you’re almost mandated.
GREENE: It disturbs me that student debt is a reason young people are not buying houses. But first I just want to say that because of the taxpayer support in the state, our tuition is very low. This past year we served over 74,000 students, more than 30,000 in our programs and more than 40,000 in our workforce continuing education. We have transfer opportunities with our universities. There’s good reason to start with a community college, save that money, help pay for the junior or senior year or the master’s degree.
We’re very fortunate in North Carolina because we’ve always had a close connection with the business world and suspect we’re the envy in some ways of the country because of that. Our goal is to close your skills gap.
Our community colleges are also concerned about the rural and urban differences and opportunities for students in the rural areas. Where there are opportunities, our community colleges will do anything they can to help get ready for any new industry. We are opening a new campus in Research Triangle Park. Its focus will be on information technology. IT. As you know, there are many great jobs in our region in IT and more are coming. We need for more of our residents to imagine themselves in IT careers. Our IT corporate partners like Lenovo, Cisco, NetApp and IBM, for example, provide internships and work-based learning opportunities that will help our students feel a connection with the industry. At the Northern Wake Campus, we just opened beautiful facilities for the skilled trades. We’re committed also to the skilled trades because there are so many retirements coming, it’s reason to be concerned.
HEDGECOCK: I think what keeps the real-estate industry up at night is how legislation both nationally and at the state level is going to affect homeownership and commercial transactions as well. We don’t know how the impact of federal tax reform is going to affect us, the decreased mortgage deduction from $1 million to $750,000. Our median house price is lower than $750,000 in North Carolina, so that won’t change much, but it would be a good idea to index the mortgage interest deduction. Also, there’s concern on the federal level that the National Flood Insurance Program has not been reauthorized. There’s a lot of uncertainty with what the Fed is going to do, how it’s going to affect real estate.
DYE: Housing affordability is a big concern for us, whether it’s single-family homes or multifamily homes. We continue to be an attractive market, but if you can’t afford to pay the rent, you can’t afford to pay the rent. We have a product focused very much on the millennial renter, and we make those as efficient as possible. Construction costs are a big concern for us, and the ability to finance it is also a concern.
MCCAFFREY: Material prices such as steel, metal studs, ductwork, sheet metal, they’re all continuing to grow. We’re looking at material labor escalation roughly about 4% right now. It’s not just labor. It’s the skilled labor force required to put these complex buildings together, these highly technical buildings. Teaching and training a younger workforce to be able to help us develop that is something that we’re definitely looking for in the future. We’ve started manufacturing our metal studs and pre-fabricating our own wall panels, trying to see what we can do to keep that in house to be able to lower costs. In Charlotte alone, our anticipated workforce on the self-performed work side looks to double. Our administrative staff in Raleigh in the last three years, we’ve grown by about 40%.
FOLWELL: In 1974, your state treasurer’s office was sending checks to 248 90-year-olds. Last month, we sent 7,120 checks to 90-year-olds who are on a pension plan. The amount of money that we’re going to spend in the state health plan this year exceeds the entire General Assembly appropriation to the entire university system, exceeds the total amount of appropriation to the justice and public safety system of North Carolina. These are huge expenditures. That’s why we’re trying to figure out what’s right, get it right and keep it right so that it continues to bring certainty to the General Assembly.
How can businesses prepare for 2018?
CUSTER: We all have a pretty rosy view of 2018. We’re talking about the prospective view. If you had assembled a panel in 2006, there would have been an equally rosy view of the world and 18 months later, we were headed into the worst recession of our lifetime. I worry a little bit that our collective memory is not as good as it should be. I hope the lessons of that are there and we don’t commit some of the same mistakes.
BOOTHBY: The one topic we haven’t talked a lot about is still-rising health care costs. I think there are more and more solutions out there that are very innovative [compared with] traditional systems. Some of those things aren’t working very well for companies. The self-insured markets, the ability for companies to drive their own destiny when it comes to health care costs, working hand-in-hand with their employees to make sure they create healthy work environments, those are things we see more of our clients doing. I think it will jumble up the system a bit because traditional methods, at times, it’s a burden. The days of 10%-plus increases in health insurance premiums, those aren’t over.
FOLWELL: The state health plan is the largest purchaser of health care in North Carolina. This state health plan is $34 billion in debt, seven times the size of the state’s debt, on a per capita basis right behind Illinois. Not the pension, the health care plan. So the only option I have is to take these things we call participants and turn them into watchdogs. And the only way I can do that is by educating them about whose money this is that they’re spending when they pull [their] card out of their pocket. Why did I start charging a $25 per month premium for state employees this year? Well, the reason is that we have the lowest participation of families on the state health plan in the United States. We’ve got to do something to get young, healthy people on the state health plan and not just people like me.
Everybody in this room has a different opinion about what level of government we should have, but there’s one thing that brings us all together and that is whatever level that we end up with, we want it to work for the people of the state. That’s what I do. That’s what our 400 employees at the state treasurer’s office do. And I think that’s generally what most public servants, represented by people on this panel, do on a daily basis. They try to make government work.