Economic forecast round table: Bridled growth
North Carolina’s gross domestic product grew 4.1% from 2005 to the second quarter of 2015, according to the U.S. Department of Commerce’s Bureau of Economic Analysis, while the nation’s GDP grew 3.8%. The state’s economy will continue to grow this year, say the experts on the panel recently assembled by Business North Carolina magazine. They also offered insight into what will fuel the growth and advice on solving the problems that will affect businesses in the coming years.
The discussion was moderated by Ben Kinney,Business North Carolina publisher, and hosted by Campbell University’s Lundy-Fetterman School of Business at the university’s law school in Raleigh. Additional support was provided by North Carolina Association of Realtors and First Citizens Bank. The transcript was edited for brevity and clarity.
What will North Carolina’s economy look like this year?
ABBEY: I see continued growth fostered partly by the state’s lower income and corporate tax rates. I expect growth to be 2.4%, even in light of the Federal Reserve raising interest rates in December. That’s in line with U.S. GDP growth projections.
DOCTOR: Some energy sectors will improve, and others will hold their own. Nuclear will be flat for the next few years, but small modular reactors, which are a cost-effective alternative to building traditional-sized nuclear plants, are on the horizon. Several Carolina companies are researching, designing or developing components for them. Solar will continue to be big despite what you’ve heard about North Carolina winding down incentives. Many of the East’s largest solar developers are in North Carolina. The Atlantic Coast Pipeline, which is being built and managed in part by soon-to-be-merged [Charlotte-based] Duke Energy Corp. and [Charlotte-based] Piedmont Natural Gas Co., will add natural-gas access on the East Coast and spur industry. The power-generation industry is decommissioning coal plants and replacing them with natural-gas power plants.
DAUGHERTY: Growth has been relatively modest over the last several years as we exited the recession and solved financing challenges. We’re optimistic that North Carolina’s economy will grow this year because of a number of factors, including strong small-to-midsize businesses. They account for 45% of private-sector employment and 45% of the state’s GDP.
CILIANO: It will be a tale of two halves. The slow global growth and persistently low inflation of the last six months of 2015 will continue through the first half of 2016. North Carolina’s GDP receives twice the contribution from manufacturing than the national average. Manufacturing numbers were bad in the December Federal Reserve Bank of Philadelphia’s Business Outlook Survey. Those might add pressure over the first six months. We’ve had an implosion of commodities, whether it’s oil, base or ferrous metals, agricultural products or livestock. All that sounds dire, but global growth will resume in 2016’s second half if we get some stabilization, specifically in commodities. A strong dollar doesn’t help businesses, especially from an international perspective. The dollar, while it’s likely to stay strong, has fiscal policy stimulus from European Central Bank, Bank of Japan and People’s Bank of China. The dollar will rise slower this year than last.
SMITH: Lawrence Yun, [Chicago-based] National Association of Realtors’ chief economist and senior vice president of research, spoke at a convention for North and South Carolina Realtor associations. He forecasted that the economy should be good for the next four or five years, though the upcoming election and recent interest-rate hike could spur a small contraction. We’re looking forward to a promising year in North Carolina real estate. Urban markets have been robust. There is a shortage of workforce housing — units priced to about $350,000 — in Wilmington, Raleigh and Charlotte, where the housing supply was three months and 10 days in December. A six-month supply represents a balanced market. Charlotte home sellers are in a good spot because sales in 2015 were higher than in 2014. Housing starts also are up in the Queen City. They would be even higher if there were more lots available.
CARPENTER: Small to moderate increases are forecasted for research funding, such as what comes from [Arlington, Va.-based] National Science Foundation or [Bethesda, Md.-based] National Institutes of Health. There is pressure to add additional funding restrictions, such as trying to force all research to be immediately applicable. That’s a bad idea. Much of the technology we enjoy today was created without really knowing its applications. Universities are in the middle of managing student debt, which is always a risk of higher education.
What workforce concerns will the state face?
CARPENTER: Baby boomers were more than a third of North Carolina’s adult population in 2014, according to the N.C. Office of State Budget and Management. Many of them are retiring, especially from jobs based in STEM — science, technology, engineering and mathematics. We’ve been producing too few engineers and haven’t attracted enough underrepresented students to the field for a long time. The number of female engineers has been static for 20 years. Last year was the first time that minority students were the majority in U.S. kindergarten classes, so we have 12 years to fix our engineer recruiting problems.
DOCTOR: Utility workers used to climb poles, but today they use sophisticated technology. Many of them are retiring. The workforce that’s following them lacks the STEM skills needed for those jobs. Utilities are having difficulty filling these jobs. The industry has to help people realize that these are attractive and well-paying jobs. That’s a challenge, and utilities are using education and training sectors to help parents, counselors and students as young as middle-school age understand.
What economic issues need to be addressed?
DAUGHERTY: North Carolina should chase every big-company relocation, but it’s not going to land them all. We need to nurture startups, growing them to midsize companies, which provide about half of the state’s private-sector employment. The number of North Carolina startups has fallen since the recession. The decline is a concern because it has been underway many years, and that has implications 10 years from now. A portion of small-to-midsize business growth is fueled by having plentiful startups. Survival rates have always been a bit short for businesses, which close for many reasons. Many people start home businesses, for example, and realize a few years later that it isn’t what they expected.
CILIANO: The last six-and-a-half years were unprecedented. From March 2007 to the end of 2014, $1.45 trillion went into fixed-income investments. Sixty-two percent of that was credit, the largest consumption of fixed income in history. Between now and 2018, 45% of all investment grade, sub-investment grade debt, leveraged loans and floating-rate notes must be refinanced. Between now and 2022, 68% of all debt will be refinanced with capital at twice or triple its current cost. We stress cash-flow management to clients, because you’re toast if you get over your skis, no matter how good your business is. Know your business and your customers. That will put you in a good position. Be wary of taking more leverage and debt.
SMITH: Homeownership is at a 50-year low. Folks are renting more than ever despite it costing more than ever. Money has to become more available. [Washington, D.C.-based] Federal National Mortgage Association and [McLean, Va.-based] Federal Home Loan Mortgage Corp. are working on a much-needed lower down-payment program. [Washington, D.C.-based] Federal Housing Administration premiums are at a prerecession level. Many of its nonperforming loans have been sold to hedge funds and private investors, which essentially represents the foreclosure rate that you did not see. HUD told those investors to hold the notes and work to keep owners in the homes for two years before foreclosing. Those two years will end soon, and those properties will be liquidated or turned into investments still held by those hedge funds, which heavily invested in Wake and Mecklenburg counties. Rental property managers [Dallas-based] Invitation Homes LP and [Agoura Hills, Calif.-based] American Homes 4 Rent have massive nationwide portfolios filled with properties. Eventually, they will return those properties to the market. Will it be in a way that the market can handle, or will it be the next bubble?
DOCTOR: The energy industry must ensure a sufficient supply chain. Some energy-industry sectors are being pushed to performance levels beyond what they’ve experienced the past five years, and it’s straining their current supply chain. I recently talked to a solar developer who was concerned about a project because a required component couldn’t be delivered in a timely fashion.
What does the future hold for longtime North Carolina industries?
CARPENTER: Manufacturing will transform in the next five to eight years. There are prototype 3-D printers that will extrude anything — plastic, water, you name it — to create an almost endless array of items. They will become more accessible as their prices fall.
DOCTOR: The Carolinas are attractive to energy companies because there’s such a large concentration here already. The infrastructure they need is here. The banks know how to deal with energy companies, as do the accounting and law firms. The colleges and universities are producing graduates who are oriented toward energy. You grow by bringing in more dollars than you send out. Foreign trade helps that. We’ve been contacted by officials from South Korea, Turkmenistan, Belgium, France, Philippines, Canada, Mexico, China and several African countries over the past year. They recognize the energy cluster in the Carolinas. They can make one stop, find what they need and go home. Promoting that will bring more dollars here. The energy industry is policy sensitive. [Washington, D.C.-based] Environmental Protection Agency’s Clean Power Plan brings uncertainty, but the economy, regardless of law, is deciding that low- or no-carbon power production is good business. The nuclear industry is policy sensitive. Nuclear has become so expensive as a result of regulation that the industry is pausing and saying, ‘We need to rethink regulations.’ That may swing the other way in the coming years. There are many emerging technologies, including batteries, fuel cells and wind power. You’re going to see local initiatives that result in wind-power and offshore-drilling policies, particularly along the coast.
DAUGHERTY: International trade is important to North Carolina, and agriculture needs to be front and center. East of Interstate 95 is a huge agricultural producing region, and the state has been slow to develop products from agricultural raw materials. North Carolina harvested 50,000 acres of sweet potatoes in 2010, the most in the nation, for example, but it was 2013 when a factory capable of making increasingly popular sweet-potato french fries opened in Pembroke. Prior to that, Tar Heel sweet potatoes were processed into fries in Canada. It was a struggle to reauthorize [Washington, D.C.-based] Export-Import Bank of the United States, which has become a political lightning rod. The [N.C. Small Business and Technology Development Center] helps develop export opportunities for small companies. Their big challenge is the credit risk that comes with foreign customers. The bank has an insurance program that provides for loss of payment receipts on outstanding credits. It’s self-sustaining because it’s funded by participants’ premiums. We need to be more considerate about our policies and programs.
CILIANO: The rate at which service businesses are moving from the Northeast to the Carolinas is quasi-exponential. That’s a good thing. Almost all of the world’s economies are becoming more reliant on service rather than manufacturing. There has been a merger-and-acquisition mania, and it’s going to continue because there’s so much cash sloshing, trying to find a home. When I give everybody easy money, they want to buy and expand, especially if their business is slowing. It’s easier to acquire a business than build one. But the underlying problem is that the cost of capital is rising. Every business is more expensive than it was a few years ago because we’ve had almost seven years of bull market. Mergers will continue at a good rate for the next couple of years, only slowing as capital costs grow.
How do we bridge the economic gap between the state’s rural and urban regions?
ABBEY: Universities are crucial to rural economic development. Campbell recently hosted a discussion on rural economic development featuring professionals and leaders from its hometown county, Harnett, one of the state’s most economically distressed rural counties. We used it to develop a long-term strategic economic-development plan. Entrepreneurship, for example, is important in rural regions, so we scheduled five public meetups. Individuals, students and young entrepreneurs are invited to build networks and fuel an entrepreneurial spirit. My students work on real-world projects in the local economy. The ultimate goal is handing Harnett’s economic-development department and businesses something they can use. We tend to think about large-scale solutions, but rural communities need smaller ones such as entrepreneurism. They give individuals opportunities to live there. I never returned to my native Maine because it lacks opportunities.
CARPENTER: By putting an engineering school in a rural county, we’re reaching students who probably wouldn’t have the chance to study engineering. And for all the urban engineering jobs, there are many opportunities in rural communities, too. Students from rural regions have a unique perspective, identifying issues that those from bigger cities wouldn’t recognize. By educating students here, we add to the business market and provide students who are interested in staying in those regions a life and career.
DAUGHERTY: The state’s rapid population growth addresses some of the issue. Mecklenburg County, for example, passed a population of 1 million last year, and Wake County is expected to do the same shortly. That’s pushing people into neighboring counties. When I moved to North Carolina many years ago, living in Wake Forest and commuting to Raleigh was a foreign concept. That’s no longer true. Research Triangle Park workers, for example, commute from Harnett County. There are regions with shrinking populations. In [eastern North Carolina], for example, large-scale farming no longer requires many hands. There are rural regions without high-speed Internet service. You can argue that today you need it to live, much less run a business. We’ve created connectivity, but it’s deciding to carry that access “the last mile” to rural regions that needs to be addressed.
DOCTOR: The energy industry, to a degree, is in less-populated regions, where it’s associated with natural resources, such as acreage for solar farms or water for cooling. You’re going to find pipelines or transmission lines that run through rural regions, and companies have an outpost there for maintenance. But for the most part, the industry focuses on urban regions, where there are universities for workforce and technology development. It’s where bankers, accountants, lawyers and other service providers are located. It’s where the skilled workforce lives. That will only change if, through university initiatives or government policy changes, rural regions are made more attractive to companies.
SMITH: A Cleveland County Realtor recently told me how good things have been in that market. Several companies have opened or expanded there, including [Lincoln, Neb.-based Universal Manufacturing Co.-owned] Ultra Armoring LLC in Shelby, which transforms SUVs into armored cars. This Realtor sold its executives houses, and the guys who work there earn about $25 an hour, which means they can buy homes, too. Jobs are the key, but you need a workforce to fill them. On today’s farm, for example, there aren’t jobs for tractor drivers. They’re for the people who program the GPS that makes the tractor drive itself.
What effect will global issues have on the economy?
CILIANO: When the market reopened after 9/11, it fell almost 700 points on its first day, its biggest one-day drop. After the November terrorist attack in Paris, the market was more resilient, almost thumbing its nose at the terroristic nonsense. It’s a more ever-present threat, because of the way that terrorists have mobilized their efforts, but you can’t live in fear. This is an election year, and that’s causing some consternation. That can stop businesses from making large capital expenditures because they don’t understand the tax policy that might be coming down the pike. One thing that we have to address from a national perspective is tax inversion, corporations moving their legal domicile offshore in search of lower taxes. That cuts U.S. tax revenue.
ABBEY: North Carolina’s top three trade partners are Canada, Mexico and the European Union. China is there, too. If global growth slows, North Carolina’s economy could be affected. Raising interest rates, especially in a measured fashion, won’t necessarily hurt the economy, but a strong dollar affects exports. Business leaders need to address that.