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Friday, May 24, 2024

Economic forecast round table: Academic and business experts expect a modest downturn as North Carolina stays strong

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••• SPONSORED SECTION •••

In early January, Business North Carolina publisher Ben Kinney invited six business, academic and political leaders to Campbell University’s downtown Raleigh campus to discuss their outlooks for 2023.  While a recession is looming, North Carolina is better positioned than most states to weather a downturn, panelists agreed. 

Photography by Bryan Regan


Lundy-Fetterman School of Business at Campbell University, NC Rural Center, Brooks Pierce, First Bank and PBMares sponsored the discussion. It was moderated by Ben Kinney, publisher of Business North Carolina. It was edited for brevity and clarity.


 

WHAT IS THE ECONOMY LOOKING LIKE IN 2023? IS THERE A RECESSION AHEAD?

Steckbeck: We’re actually looking at much better prospects (since late 2022) although I still think pretty certainly we’ll be in a recession sometime this year. In November, inflation was hitting over 9%. The most recent number was 7.1%. That’s a big drop. We are seeing the supply chains coming back to normal with a strong dollar because of the Fed’s
rate increases have reduced export demand, which is helping to
alleviate inflation.

It’s a unique time. We’re seeing recession indicators, but strong employment numbers. Well, we now have to worry about some geopolitical issues that may instantaneously change things.

The unemployment rate, which was nationally 3.5%, is now 3.7%. It is 3.9% in North Carolina. When the unemployment rate increases by half a percentage point over its average for the year, — which again is about 3.5% — that tends to be an indicator of a recession.

Whenever the Fed has had to reduce inflation by raising interest rates, that has always been followed by a recession, for the past 50 years. And so we really are looking sometime this year, we will be facing a recession. The question is will it be a hard or soft landing? We could look at maybe a 1% reduction in GDP lasting probably anywhere from three to six months If we have a soft landing. If it’s a little harder, we’re probably looking at unemployment of 6%, maybe 7%, which would be pretty high. We’d look at a 2% decrease in GDP and something that might last a year or even more. I think the possibility of that happening has lessened. I think we economists are more in line with looking at the softer landing. In North Carolina, we are in a unique situation. We have a lot of growth happening with the ninth-fastest growing population. We were just nominated No. 1 for economic development in the United States. (There are) 100,000 jobs and $110 billion in business investments happening here. We’re seeing tourism picking up. Manufacturing has had a drop, but it’s picked up again.

Saine: We’ve got some new faces at the legislative building, where we’re just one short of a supermajority in the House of Representatives. We’ve been close over the last several years, but have worked on bipartisan legislation and bills and budgets over the last years. We’ve finally found a way to work on budgets with the Cooper administration. We’re working with Governor Cooper on his priorities as well.

We’ve been very wise in how we’ve invested in our state. When you look at the good news that we have, I do believe (a recession) will probably be much softer and a lot easier for us in our state than what I’ve seen in other states.

The pandemic showed where our weaknesses were. A lot of our rural communities don’t have high speed Internet. But we’re getting there and we want to make sure that we stay on track. It’s good to see that inflation is coming down because we’ve got a lot of building that’s going on. We’ve put together a capital expenditure fund over the last several legislative sessions and we keep reinvesting back in the state. We’re investing in our university system and our community colleges and our workforce. We know that having that workforce and developing that workforce is crucial. So those are big priorities that happen at the legislative building. 

Whether or not we expand Medicaid, I won’t make any predictions there. I think it’s at a better place than it was last session. We’ll have hot topics like sports betting and medical marijuana that will always surface to the top. 

We’ve got tax reform that’s already baked into the budget that we just passed last year, that’s lowering rates for individuals and corporations. I think from a leadership perspective and from talking to my friends on the other side of the aisle, people are ready to get to work. 

Currie: I’ve always predicted a tough year ahead (in past round tables) and I might finally be right and predict the same thing again. Just like my colleagues up here, I believe there will probably be a recession in 2023. Bankers always worry about these things.

If you think about 1% shrinking of GDP, that’s okay. You know, most companies and most individuals can absorb that. And that’s not to say that there won’t be some pain, but if you think about the last two recessions that we’ve been through at the start of COVID, with unemployment being suddenly 15% or 17% and overnight losing 30% of GDP, I don’t foresee that happening again in 2023.

And then if you look back to 2008, which was the greatest financial crisis since the Great Depression and kind of a once-in-a-century type of event, I don’t see that happening either. So when we talk about a recession or economic softness, soft landing, hard landing, all of the buzzwords that you hear thrown around, what is reality? We probably will have a slower year this year than we’ve had in the past. Things probably need to slow down a little bit. I think obviously prices and inflation need to slow. I think employment needs to slow a little bit.

I’m sure there are other business leaders in this room that are having trouble hiring great people and attracting great people. I think this year is going to provide a little bit of balancing. There will be some tough times ahead. But as a country and more as a state, we’re probably better positioned to absorb them than we have been in the past. I don’t think there’s a place in the country where you’d rather be as both someone in business and just to live your life.

I’m looking at statewide data and national data and I also look at our company. Some of the things that I look for are our credit card balances increasing, our home equity line balances increasing and our checking account balances decreasing. Across two states and 300,000 customers we’re not seeing these things yet. 

We’re seeing credit card balances go up slightly. We’re seeing home equity loan balances going up slightly, but checking account balances are staying pretty steady amongst businesses and individuals. So we’ll continue to monitor those things.

Copeland: North Carolina set a record for jobs and capital investment in the history of the state. Even with the Fed continuing to use the blunt stick of raising interest rates, I think North Carolina will weather this and get through it. We have too many fundamental things in place. Number one is we have a tax structure, thanks to the legislature, that gives an authorizing environment for all of us, but individuals and companies to prosper and grow. If you look at every major project that’s come in the state since 2017, it has either been led or actively run by the General Assembly. They have passed new incentive measures. They have actually appropriated cash for infrastructure. And I don’t see that stopping. It has put us on a new level of economic development that we weren’t on before. We’re one of the only states in the country that has 700,000 people enrolled at any given day in private and public universities and community colleges. There’s a pipeline for employees.

We grew a million people during the last 10 years. We’ve doubled our population size since 1968. We’ve gone from 5 million to 10 million people, and we’re continuing to do that. What hasn’t come back is labor. I agree it’s not because people won’t come back to work. At this point. I think most of that (stimulus) money is finished sloshing around in the economy. I think a lot of people probably retired and didn’t come back.

Woodie: Well, I guess I would begin by saying I’m a 30-year plus year rural economic developer, so I’m an eternal optimist. You have to be if you’re if you’re going to be in this career. And I really am optimistic. At the Rural Center, as we look at the demographics, it is incredible to me how much the state has changed over the years. The rural center is 37 years old. If you go back to the day we opened our doors in 1987, almost 60% of the population of the state were rural citizens. Today, we’re at about 30% to 34% of the population. For the first time in the state’s history, we’re equally divided between rural, urban and suburban citizens.

One thing that stands out to me is there’s more variation among those 3.6 million rural North Carolinians that live in 78 rural counties in North Carolina than there is among the 16 suburban counties and the six urban counties. How well you’re doing, how you may feel about the economy does have a lot to do with the geography of this state and where you’re standing within that geography at a given point in time. And there clearly are places that are struggling that have bigger challenges than other places.

One of the common perceptions is that everybody’s leaving rural North Carolina. It’s actually not true. There are 51 counties in this state that between 2010 and 2020 lost population. But in 30 of those counties that lost population, that is really minor. We’ll see what the future holds for the next few years. But it’s not really cause for alarm. 

I do think we need to be prepared. And the state certainly recognizes this. I am amazed if you told me the investments we would have been making in rural broadband and infrastructure or in workforce development. Representative Saine, I remember talking to you and fighting for a state based rural broadband grants program and asking for $10 million a year.

Over the next five years, we’re going to have $3 billion from a combination of federal and state sources that are aimed toward addressing this issue of getting rural broadband infrastructure to every home and every business in every place, all across this state.

We just can’t lose sight of the fact that there are some places that clearly have been left behind, arguably since the turn of the century. You can really see how that plays out in the numbers. So we have to pay attention to those places and care about those places. But I think a lot of the fundamentals are sound. I hear optimism from even those more isolated rural parts of the state, from the leadership that is there. It’s an enthusiasm that I haven’t quite felt in a while.

Mattina: I’ll talk a little bit about where we see the consumer going in 2023 as consumer spending makes up 70% of the U.S. economy. We may have 3.7% unemployment, but consumers are hearing about 153,000 tech jobs that have recently been lost in companies, including Cisco, which has a presence here. This morning, you saw Salesforce announcing 10% cuts in 2023. Vimeo is going to reduce their workforce by 11%. Goldman Sachs is going to cut employment by 8%. More job cuts are coming. So consumers are not hearing a lot of great things right now in terms of the job market.

Holiday debt was 24% higher this year than last year. The other thing we think about was that prior to the pandemic in 2019, the personal savings rate was 8.8%. It was down to 2.4% in November. 

We have what we call the French toast index. French toast involves bread, milk and eggs. Those are the staples on the grocery list. In November, you were paying 33% more for bread, milk and eggs than you were in January 2022. If you’re the person doing the weekly grocery shopping, you think everything else in the grocery store is costing you 33% more also.  

Perception is reality to the consumer. So that’s a real challenge. And if I’m spending 33% more to make French toast, well, that’s 33% less that someone can spend on our
client’s products like home improvement products and everything else. So there is an issue there. 

This all factors into consumer confidence. The University of Michigan consumer sentiment score hit the lowest level ever in June 2020, at 50. It’s come back up to 59, but that’s lower than the 71 it was last December and the 81 from December 2020. So that’s a challenge. We sure are seeing confidence at its low point for that index. 

We created an index that measures confidence in the U.S. economy right now, expectations of your household income this year versus last year, and the likelihood that you will delay purchases based on uncertainty. The year started about 27%, which means about a quarter of the population felt this anxiety. It crept up to about 34% at the end of the year.

So we’ve gone from a quarter to about a third saying that there is anxiety out there. The more anxious consumers are, the less willing they will be to spend and take on more debt. We did see spikes that went above 40% when gas went over $5 a gallon and mortgages went over 7% for the very first time. But from everything that we’re seeing, we don’t necessarily see consumer confidence taking a turn any time soon. I’m not smart enough to say we’re going to be in a recession or not a recession. What we can say is we don’t see consumers necessarily opening their wallets more, at least in the first half of the year. They’re probably at that point right now where they’re just waiting for the next shoe to drop. This will determine where consumer confidence goes in the second half of 2023. 

WHAT ARE SOME OPPORTUNITIES FOR THE STATE MOVING FORWARD?

Woodie: I’d like to bring up how we are learning to live with COVID. I don’t know if there is a post-COVID era in which we learn to live with it and things return to normal. Thank God we’re not doing this discussion on Zoom. We’re actually here in person with each other. Everybody on the planet is rethinking the circumstances under which they want to live their lives. And part of that involves thinking about workplace flexibility that is probably with us to stay, to some extent. There may be some tightening of that as time goes on. I think we’re going to have more flexible work days for workers, and it’s going to allow them to think about where they live and how they live.

There may be some investment in some of our smaller towns as people make lifestyle decisions about where they want to live their life and under what circumstances. 

I’ve talked to several rural school superintendents who see enrollment expanding. Some families whose primary residence has been in the Triangle or Charlotte are making a lifestyle decision for their second home to be a permanent residence in a rural community. Does that constitute a trend? I hope so. This is an opportunity for every small town in this state. 

Mattina: I think that the affordability of housing has to be addressed, because I think that’s a huge issue. You know, we talk a lot about the growth, and I’ve only been in Raleigh for one year. I’m out in the Apex area and I just see the boom that’s happening. I also talk to a lot of the Gen Zs at the company I work with and I’m floored by the price of rents that they pay. Fifty-two percent of millennials do not own a home right now. And I think I’ve heard recently that 22% of millennials think they’ll never own a home because of the affordability out there. So I think It’s crucial to address the affordability issues for the millennials to get more of them to become homeowners.

Currie: I’ve read something recently about the growth in the urban areas and rural areas as well. Charlotte’s population grew by about 74,000 people last year. I started to think about that and what that meant. And if you think about the thriving market of Wilmington, which has been cited as one of the fastest growing or in-migration cities in the country. The whole area around Wilmington is a big, thriving place. The Wilmington MSA has about 280,000 people.  Think about the growth in Charlotte and the growth in Raleigh and supporting that growth. Think about all those houses and all those shopping centers and all those office buildings and all those restaurants and all that infrastructure, all those roads… You have to build a city the size of Wilmington every four years or so in Charlotte and in Raleigh to keep up with the growth. And it’s not just those two markets that are growing, you have Asheville, Greensboro, the Carolina Core growing. I just think we’re really well positioned and we’re going to continue to grow for the next decade or more.

Saine: I agree with that. You know, capital investment is going to matter. We’ve done that over the last decade and it will continue. I have a friend who was a legislator in Texas and he’s one of those involuntary retirees in politics. But he has a financial advising business. When he first got to Cashiers, he didn’t have the broadband connection he needed. But as broadband came online there, people would come visit and fall in love with Cashiers. The firm has now moved there and does most of their business in North Carolina. It’s not a company that we had to go out and incentivize to come to North Carolina.

There’s even more wealth coming into the state. One that’s important to remember is that as we grow from a rural perspective and open up those markets to businesses just like that, it’s not always 500 jobs or a thousand jobs. It’s those smaller firms, too, that contribute. So that’s very important to think about. 

Steckbeck: I think the prices of rents are already going down and we’ll continue to see that happening. One of the things that has happened, millennials are more likely to live alone as opposed to when I was 20. But we do need to keep building with the growth rate of this population. There are a lot of obstacles for developers to get stuff built. It adds about 25% to the price of a home. So I hope the legislature will start looking at that. I think the growth in the population is really going to be a big factor that does help us. It will continue providing the labor force that’s needed.

Copeland: Probably nobody’s expecting this, but one of the things that goes in all of these projects I’ve been involved in since 2017 is energy, both its cost and its predictability. In North Carolina, the integrity of our energy network is really second to none. We have to maintain the integrity of that and continue to keep building those sources if we’re going to grow. I mean, a semiconductor plant can use almost the whole capacity of a nuclear power plant.

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