REGIONALREPORT Western

At first glance, Black Mountain-based Ingles Markets Inc. seems to be sitting on top of the world. The grocery chain, with 202 stores in Georgia, North Carolina, South Carolina, Tennessee, Virginia and Alabama, produced net sales of $3.4 billion in the fiscal year that ended in September — its 46th straight annual increase. Net income totaled $31.7 million, up 10% from the year before. That looks great until you compare it with 2007, when it netted $58.6 million, or the $52.1 million it made in 2008. So what happened?

In a few words: The economy weakened, and the competition stiffened. Ingles goes toe-to-toe with discount retailers such as Aldi, Bi-Lo, Food City, Food Lion, Kroger, Publix, Target and Wal-Mart. It has had to slash prices — and its profit margin — to boost sales and retain market share. Meanwhile, expenses have gone up from $564 million in 2007 to $653.7 million last year. Salaries and wages made up the biggest part of the increase. Ingles now has about 18,800 employees, compared with about 17,000 in 2007. The company closed three stores and opened eight during that time, with the average store size increasing from 49,382 square feet in 2007 to 53,524 in 2010.

Company executives don’t discuss much about their operations, but Chief Financial Officer Ron Freeman told analysts during a recent conference call that Ingles plans to continue its expansion by building or remodeling five stores in 2011 and adding six gas stations either at those new stores or other locations. In all, he says, the company will spend between $100 million and $140 million — more than the $92 million it spent in 2010.

He says the company hopes to continue to improve sales in all four of its categories — groceries, which includes canned, frozen and dairy products; nonfoods, which encompasses alcoholic beverages, tobacco and pharmacy items; perishables such as meats, produce and delicatessen and bakery goods; and gasoline. Customers made 5.4% more trips to the stores last year but spent less per trip.

Meanwhile, investors are paying less for the company’s stock than they did in 2007. Shares closed at $18.85 in the first week of January, down 29% from the corresponding week four years ago but up more than 32% from the first week of January 2010.

Freeman expects the company’s fortunes to continue to get better as consumers gain more confidence in the economy and return to pre-recession spending. “Overall, they’re feeling a little better, but like most things in the economy these days, it’s going to be a slow, incremental move forward,” he told analysts. “You hope that it continues to be a move forward.”

Shop until you drop. It’s the American way, says James F. Smith, professor of finance at UNC Chapel Hill’s Kenan-Flagler Business School. “When income goes up, spending goes up.”

And income has been going up in North Carolina. Personal income increased to $249.1 billion in the second quarter of 2004, a 6% jump from the second quarter of 2003, according to the U.S. Bureau of Economic Analysis. “That’s an all-time record for growth in personal income for North Carolina,” Smith says.

Retail sales rose 5% during the fiscal year that ended in June, according to the state Department of Revenue. Smith projected 7% growth for calendar 2004. Michael Walden, an economist at N.C. State University, projected an 8% increase. Sales grew just 1% in 2003. “I think 2004 will be the year when we turned the corner and paved the way for more economic growth,” Walden says.

Economists attribute the income gain to changes in employment: Job losses slowed in the state’s traditional manufacturing strongholds — textiles, furniture and tobacco — while job creation was ahead of the national pace. At the same time, interest rates remained low, making borrowing for large purchases more attractive.

Those with money found many more places to spend it in 2004 as high-end retailers such as Saks Fifth Avenue, Burberry, Louis Vuitton and Kate Spade opened their first stores in North Carolina. Birmingham, Ala.-based Saks opened an 80,000-square-foot store in Raleigh at Triangle Town Center in September. Though that store was doing 50% more business than it expected, Saks, discouraged by a developer’s delays, backed away from plans to open one in Charlotte (Tar Heel Tattler, January).

Charlotte shoppers weren’t without opportunity to buy pricey wares. SouthPark mall opened a cache of upscale shops as part of a $100 million renovation and expansion. Nordstrom opened its second North Carolina store there in March, two years after opening one in Durham. “Getting a Nordstrom is the mark of a metropolitan area that has advanced,” Smith says. “It says it’s a good market, and people want to be in it.”

Despite ongoing construction of shopping centers, retail vacancy rates fell during the first half of 2004, says Brian Reece, managing partner of Karnes Research in Raleigh. The Triangle rate was 4.7% for the period, down from 5.2% the year before. Charlotte’s rate was 5.5%, down from 7.3%. Both figures could rise as new stores and shopping centers open. The biggest under construction is the 1.2-million-square-foot Northlake Mall, scheduled to open in September near Lake Norman, an affluent, fast-growing region north of Charlotte.

While upscale retailers appealed to those with money to spend on luxury and status symbols, bargain and big-box retailers continued to compete on price. Penny-pinching shoppers helped deliver a good year for Matthews-based Family Dollar Stores. The discount chain reported sales of $5.3 billion for the fiscal year that ended in August — 11.2% more than 2003. Net income was up 6.1%. Family Dollar opened 500 stores in 2004, giving it more than 5,480 in 44 states.

Mooresville-based hardware giant Lowe’s saw revenue rise 18% to $27.9 billion during the nine months ending in October. Net earnings rose 14% to $1.7 billion. Chairman and CEO Robert L. Tillman planned to retire in January and turn over the reins to President Robert Niblock. The company plans to add 150 stores this year.

Statewide, sales are expected to grow at a lower rate in 2005 — just 5%, Walden says — mainly because most of the pent-up demand from 2003 has eased.

One high-profile Tar Heel retailer hoping to rebound from a bad year is Winston-Salem-based Krispy Kreme Doughnuts. After three years of rapid growth and soaring stock values, investors pushed away from the table in 2004. And their reluctance wasn’t only a shunning of carbs. The company lost $18.7 million during the six months that ended in August and delayed filing its third quarter report while it sorted out accounting issues. By December, the combination of red ink and a formal investigation of its accounting practices by the Securities and Exchange Commission had driven down the company’s stock price more than 70% from its 2004 high of $39.74.

Things were going great in the insurance industry in 2004. Life and annuity companies were boasting about better bottom lines, thanks to strong annuity sales and rising interest rates that boosted investment income. Health insurers continued to enjoy hefty profits but not as big as in 2003, when they sparked complaints from consumer advocates and regulators. Auto insurers finally declared a truce in their long rate war with N.C. Insurance Commissioner Jim Long. And casualty companies dodged big payouts when hurricanes flooded inland rivers, causing significant damage — but not the kind covered by most policies.

Then along came Eliot Spitzer. In October, New York’s attorney general launched an investigation of bid rigging and kickbacks to agents by major insurance companies. His earlier probe of cozy trading agreements in the mutual-fund industry led to billions of dollars in fines and settlements, so his insurance offensive sent shock waves around the country. Long soon launched his own probe, asking more than 5,000 companies and brokers doing business in the state to certify that they haven’t engaged in bid rigging.

The issue revolves around a common practice called contingent commissions, paid by insurance companies to brokers for steering business their way. Spitzer’s investigation likens them to kickbacks. “The Spitzer thing hangs over the entire industry,” says John Leonard, an insurance analyst with SNL Financial in Charlottesville, Va. While the initial probe involved corporate clients of big insurers, it expanded deep into the industry across just about every line and could touch health, life, auto and casualty, he says. He expects companies to change business practices and to pay big fines and settlements.

But regulators and insurers have been battling over other issues here for a long time. Blue Cross and Blue Shield of North Carolina spent 2004 trying to defend its hefty profits. Long said he might demand that it issue rebates if they continued to surge. Blue Cross shared some of its take with members in the form of benefits such as free generic drugs. And it said it would try to slow rate increases and bring its profit margin back below 6% after having it blow past 8% in 2003. Net income dropped 16% the first nine months of 2004 to $145.5 million.

Health-maintenance-organization profits for the first nine months of 2004 were down 20% to 30% from 2003. United Healthcare of North Carolina, the state’s largest, reported net income of $30.1 million for the first nine months, down 25% from the same period a year ago. Blue Cross’ HMO made $20.5 million in the same period, down from $26.8 million in 2003.

Premiums also have been a major issue in auto insurance. Rate disputes that had dragged on in the courts for years were settled in June when the state Supreme Court ruled in Long’s favor. The North Carolina Rate Bureau, which represents insurers, promptly settled a pending case and dropped a requested rate hike for 2004. The result, Long says, is a savings of up to $1.2 billion for Tar Heel drivers, including up to $700 million in refunds to those who paid earlier rate hikes.

Life-insurance companies had a good 2004 due to higher investment income. Falling interest rates cut into those returns in 2003. But with rates inching up, profits rose. Greensboro-based Jefferson-Pilot reported improvement in its investment portfolio. Meanwhile, a new line of fixed annuities caught on, helping boost sales 66% in the third quarter. For the first nine months of 2004, the company reported net income of $400.5 million versus $375.3 million a year earlier. The 2004 total included a $16.6 million charge for a change in accounting methods.

Independent insurance agents, regained ground lost to banks that have been buying agencies. Bo Walker, president of the Independent Insurance Agents of North Carolina, estimates that his organization added 25 to 30 agencies in the past year, a sign that new ones are replacing those bought by banks. Banks, meanwhile, have backed off their buying spree, having established positions in major markets.

Executives at life-sciences companies in North Carolina have at least one thing to be thankful for: Their industry’s popularity with venture capitalists isn’t fading as fast as it has for some others. Through three quarters of 2004, they had grabbed 29% of the venture capital received by North Carolina companies, compared with 14.4% during the first nine months of 2000. Still, they got less money in 2004, about $64 million, compared with $226 million in 2000. That’s because the amount of venture capital declined sharply, from about $1.6 billion in the first three quarters of 2000 to about $220 million in 2004.

That isn’t the only problem. The U.S. Food and Drug Administration has faced increased scrutiny since September when Merck pulled its FDA-approved Vioxx pain reliever because of studies showing it can increase the risk of heart attacks. That makes life tougher for all drug companies. “They can’t get drugs through,” says Monica Doss, president of the Research Triangle Park-based Council for Entrepreneurial Development. “They can’t get things looked at. They can’t get things done quickly.”

Even before the news about Vioxx, Durham-based Inspire Pharmaceuticals had trouble leaping regulatory hurdles. It expected FDA approval for diquafosol, a treatment for dry-eye disease, by the end of 2003, but regulators asked for more testing. Additional trials began in June, and the company has said it hopes to resubmit by midyear its application to begin selling the drug.

The drought of initial public offerings in the state continued — there have been none since 2002 — despite an increase nationwide that started in late 2003. There were 216 IPOs in the United States in 2004, compared with 221 the three previous years combined, according to Renaissance Capital, a Greenwich, Conn.-based IPO research company.

A few drug companies have declared their desire to go public but haven’t followed through. Winston-Salem-based Targacept, developing drugs to treat nervous-system disorders, and Durham-based Icagen, seeking treatments for diseases such as sickle-cell anemia, both filed IPO plans with the U.S. Securities and Exchange Commission in 2004. Each aimed to raise about $86 million. Neither had issued stock by year-end. Six North Carolina companies went public in 2000, but only one, Cary-based drug researcher Inveresk Research Group, has since then. Wilmington, Mass.-based Charles River Laboratories bought it last year for $1.5 billion.

The more immediate growth in the industry should come from older companies, says Leslie Alexandre, president and CEO of the North Carolina Biotechnology Center. Employment in drug manufacturing should increase, aided by a growing work force from community-college programs training life-sciences workers.

Companies that can find venture capital likely will get it sooner — but with strings attached, Doss says. Instead of funding multiple rounds, venture capitalists will commit more money in the first round but dribble it out in stages. “They don’t give them all the money up front. It’s all benchmarked on milestones.” Knowing the money will be there if the company hits its marks keeps CEOs focused on growth rather than glad-handing potential investors, she says.

With venture capital harder to come by, expect to see more life-sciences companies looking for alternatives. They’ll go after government money as companies did before venture capital began flowing into the sector. Research Triangle Park-based AlphaVax won a $4.8 million grant from the National Institutes of Health to develop a vaccine for severe acute respiratory syndrome. CED is counseling more companies on how to get such grants, Doss says.

There also will be more partnerships between large and small drug companies as large companies try to spread research-and-development costs. Durham-based BioStratum agreed in 2004 to collaborate with Danish insulin maker Novo Nordisk to develop a cancer treatment. The deal could be worth $80 million, plus royalties. “It allows the company to build some heft,” Doss says. “It’s not going to be a huge blockbuster for a company, but it allows them to build sales and build a sales force.”

Twenty years ago, Business North Carolina published its first Economic Almanac, an issue of the magazine devoted to examining changes that affected the state economy during the past year while trying to forecast those it would face in the future. Over the years, we accomplished that by breaking the state apart and examining the pieces.

Some years we did it by industry; others, by region. Sometimes we picked a theme — the way we work, the decade ahead, the state’s rivers, its highways — as a frame to build the editorial content upon. These special issues proved popular with readers and advertisers and won the magazine national awards. But taken as a whole — comparing one year’s almanac with the next — they didn’t provide a comprehensive, coherent picture of what was transpiring over time.

So in 1994 we launched the Business Handbook. The first featured our Mover and Shaker of the Year, but the focus was on packing as much data on Tar Heel industries and places as we could get between two covers. The next year, we plucked the Mover and Shaker piece, placing it in the preceding issue, where it appears today.

By 1996, we were back to themes — concentrating on big stories that kicked off the issue and led into the lists, snapshots, charts and other data. Some could have run in any issue of BNC. Though we produced some groundbreaking journalism — which won more awards — we realized that we once again had wandered away from the issue’s purpose. The Business Handbook you hold in your hands is our effort to get back to the basics. In many ways, it resembles the 1995 version more than it does those that followed. Call it back to the future.

But don’t dare think of it as a relic we’ve dug up and dusted off. Most of what you’ll find on these pages are the things you’ve come to expect. But we’ve also realigned the industry snapshots to convey more accurately what’s happening here in the 21st century and made sure the stories cover not only the year that was but the year that will be. After all, as I’ve said on this page dozens of times during these last two decades, change is what business in North Carolina — and Business North Carolina — is all about.

BNC: Characterize 2004 and the year ahead.

Gerlach: In 2004, we saw the state with an above-average recovery in terms of adding jobs. We’ve seen the underlying strength of our service sector, not just in retail but in the business-, financial- and professional-services sectors. We expect to see that trend continue.

Smith: North Carolina is back in business. With our high proportion of manufacturing jobs, we went down ahead of the recession and then bounced back more rapidly. Now we’ve got to fix our horrible K-12 education system — our No. 1 problem — namely with a statewide voucher system.

Gerlach: I disagree on K-12. Our system is quite strong, especially in our early grades. We’re one of the nation’s leaders. Clearly, we can’t rest on our laurels because the dropout rate is a problem, and the governor is very interested in keeping young people in middle school and high school. We see a higher proportion of our high-school seniors going to college than ever before. Problem is, not enough students make it that far. That’ll be a focus of the governor’s second term.

What impact will Easley’s victory and Democrats controlling both the state Senate and House have on our economy?

Gerlach: It shows North Carolinians agree with the governor that education and economic development will create a more prosperous state. We saw that in the overwhelming vote to bring Dell here. [After the election, legislators approved a record $243 million incentives package for the Texas computer maker to build a plant in the Triad.]

Smith: Well, Dan still has his job, which was predictable. But the trick is, can they get North Carolina back on its normal post-World War II track of growing more rapidly than the national average, which has occurred in the last 12-to-14 months. In the last five years, we’ve slipped from the second- or third-largest economy, as measured by personal income, in the South to the fourth. Not a good direction.

Will we hear more about a lottery?

Gerlach: Yes. It puts us at a competitive disadvantage when everybody around us has one. We need more money for education. We’re growing so quickly we’re outstripping our facilities. It’s safe to say the governor will continue to talk about the need for a lottery.

Smith: Lotteries are for losers. It’s an immoral approach that says poor people are so dumb they willingly allow themselves to be taken to the cleaners. Lottery players are overwhelmingly poor, with low education and low language skills. They couldn’t calculate odds if they had to, and it’s rare to find a lottery that pays out more than 50% of the proceeds. In Las Vegas they pay 98%. If our good, honest Tar Heel workers want to go to Virginia or South Carolina, let them.

What do Bush’s re-election and Republican Richard Burr winning a U.S. Senate seat mean for the state?

Gerlach: It’s too early to tell. But a first step is, we need some kind of relief on the expiration of textile quotas in January. Hopefully, Senator Burr is communicating that to the president.

Smith: We’ve ripped off consumers for 30 years with those stupid quotas. I’m all for transition assistance to folks who lose their jobs, but the solution is to send them back to school and use our tax money to pay for it — not to have everybody else in the country paying more for textiles.

Gerlach: Because of globalization and manufacturing jobs lost to China, people are going to have to be better-educated. But we also need enforcement of trade laws already on the books. The governor has had to look in the eyes of 6,000 laid-off Pillowtex workers. It’s not much comfort to say you should have seen this coming.

Will the Bush administration’s record deficits hurt North Carolina?

Gerlach: Somebody’s going to have to pay for them, and most economists believe they’ll eventually affect the economy. We need to watch carefully that they don’t use this as an opportunity to shift costs down to the states.

Smith: I’d love to tell you deficits are the bane of our existence, but the top 75 studies of the last 25 years have failed to connect federal deficits — or surpluses — with interest rates, inflation, growth or employment. I’m sure they’re highly correlated with the amount of hot air from politicians.

Is offshoring a problem or a plus for North Carolina?

Smith: It’s the biggest phony-baloney issue I’ve ever heard. The Bureau of Labor Statistics in June told us it can identify 129,000 jobs nationwide offshored. But according to the federal government, one out of six of us gets his or her job from a foreign source. That’s 15 to 20 million jobs, and we’re wringing our hands over 129,000.

Gerlach: How, in the governor’s words, do we prepare ourselves for competition in the world? Look at where cars are made — Hondas are made in America, Ford is made in Mexico. The only way we’re going to succeed is to have the best-educated work force and provide the lowest possible costs. I agree with Jim — we can’t just pray to hold on to things with which we can’t compete anymore.

Would you say North Carolina is a net beneficiary of globalization?

Gerlach: No. Take textile and apparel jobs: The Carolinas are hit harder by trade policies than most states because we have more of those jobs.

Smith: I wouldn’t say we’re a huge beneficiary. But 38% of the students at Kenan-Flagler Business School are from another country. One of four patients at Duke, Wake, UNC or Presbyterian Hospital in Charlotte is a foreigner, so we’re exporting medical services. We’ve got Bank of America, one of the world’s leading banking institutions, and we export their services. We export a lot of computers and pharmaceutical products, agricultural chemicals, school buses and Freightliner trucks. We’re a magnet to the world.

Sum up Easley’s first term.

Gerlach: What we did right was we hit the budget crisis head-on. A lot of states didn’t. The governor made a lot of unpopular choices. But when the recovery came, we were in a better position than most states to capitalize on it. Secondly, the governor pushed economic development through the Job Development Investment Grant program and the One North Carolina Fund. We saw the problems and addressed them early. We didn’t try to sweep them under the rug. The things we need to work on now are getting high-schoolers to stay in school and controlling health-care costs.

Is that a major problem?

Gerlach: In the first two or three years of the administration, our health-care costs as an employer through the State Employees Health Plan and Medicaid increased 52% while everything else in state government was down. That can’t continue. Your thoughts, Dr. Smith, on the governor?

Smith: Gov. Easley was a wonderful attorney general, and I can’t imagine why on earth he wanted to be governor. We’ve got all this red ink and funding programs that are hard to get rid of. He did as well as anybody could, and I’m not going to be critical of the poor man. But until you cut spending, have a flat tax and get rid of income taxes, I can’t imagine why anyone would want the job.

How can health care be fixed?

Gerlach: It’s a huge issue. State employees are concerned because in the last four years they didn’t get a lot of wage increases. But one reason is, we’re putting a lot of their compensation into health care. We pay the entire health-care premium for employees, and our annual payment is $300-and-some million higher than when the governor took office. We’re going to have to devote more attention to people living healthier lifestyles. I say that as I put my cookie and Pepsi down.

Smith: Dan will agree with me that one of the most dreadful statistics just came out from the National Association of State Budget Officers. It was for fiscal year 2004: For the first time, the proportion of spending on Medicaid was 21.9% of state budgets, and spending on education was 21.4%. Medicare, Medicaid and Social Security are going to bankrupt the United States in a decade. There’s going to have to be some form of rationing. Health care is a luxury good. Economists know if your income goes up 1%, your health care goes up by far more than 1%.

Tar Heel doctors want a $250,000 cap on noneconomic malpractice damages.

Smith: My brother-in-law is a doctor in Texas, where they have that, and he says malpractice premiums are down and lawsuits dropped dramatically. We have a culture that says if you screw up, hire a lawyer and sue someone.

Gerlach: Sorry, but it’s more complicated than that. Part of the problem is, insurers haven’t gotten the return on investment they wanted. Noneconomic damages are something we can look at, but it’s not going to control the problem.

Are our economic incentives effective in recruiting industry?

Gerlach: Some are, some aren’t. The governor trimmed back some of the William S. Lee Act tax credits to make it harder for companies to qualify in prosperous counties, to avoid subsidizing things that would happen anyway. But reasonable people can differ when we get out to the margins, so we’ve tried to be very transparent, to do everything in the light of day. Basically, some have been very effective in attracting high-wage jobs.

Smith: The only thing you can say is ours are less horrible than some other states’. We lost Mercedes-Benz to Alabama because they paid through the nose. We lost BMW to South Carolina because they paid through the nose. We’re better off we didn’t burden the taxpayers. When you’re subsidizing competitors of the person who’s already here, that’s hard to sell. It’s a constant battle to keep the legislature from throwing money at a nonproblem. North Carolina is usually at the top of the list of places people want to move to and retire to. If we’d just get rid of the damned income tax, we’d be ahead of Florida, which has no income tax.

Gerlach: We’re not trying to outbid anybody with incentives. We’re just trying to take advantage of the natural head start we have in our educational system, including higher education and work-force training, then use enough incentives to make the deal. We’re creating the image that it’s a good state to do business in.

Smith: That may be true, but up until 1953 we had the largest economy in the Southeast. Now we’re fourth, behind Florida, Georgia and Virginia. If we could get Congress to outlaw incentives, all states would save money and economic activity wouldn’t change one dime. But unless you get Congress to do it, you have to be in the game.

The poverty rate in 2000 was 14.1% in rural areas versus 10.3% for urban areas. Can we change that discrepancy?

Gerlach: You certainly don’t want to level down. We’re trying to locate jobs in rural North Carolina that are going to stay. Not every county is going to have a textile plant. But if you’ve got a computer and a T1 connection, there’s a lot of stuff you can accomplish in rural areas.

Smith: It could make a huge difference if the federal government got rid of the ridiculous restrictions on drilling for natural gas off Cape Hatteras. They all think it’s out there. If they found it, it could be brought ashore in Eastern North Carolina, our most depressed area, and we’d have a boom in industries looking for cheap energy.

We hear a lot of complaining about our corporate income-tax rate, which is 6.9%. But isn’t that moderate compared with other states?

Gerlach: Yes, but the corporate tax rate combined with the individual rate — that’s the one that’s higher — needs to come down.

Smith: There’s no economic theory that justifies the corporate tax. It should be zero. Most small businesses are paying their personal income-tax rate on their Schedule C or Subchapter S businesses, so if you can get the personal rate down, we’ll be a mecca for small-business people. Figure it out and run everything as a flat tax on consumption, and do away with income taxes altogether.

What about sleeper industries? For example, a recent study said motor sports is worth $4 billion a year to North Carolina’s economy.

Gerlach: Motor sports is part — perhaps the biggest piece — of our automobile industry. We don’t have big players like BMW in South Carolina or Saturn in Tennessee, but we’re seeing incredible growth in parts suppliers. Beyond that, no state does the quality of research we do in biotechnology. We need to turn that into biotech manufacturing. California and Massachusetts are not places where you’re going to be able to make things. We’ve already got players like Wyeth Vaccines, which employs more than 1,000 in Sanford, and Merck pharmaceutical manufacturing in Wilson. We hope to see more biotech growth in rural areas.

Smith: One unsung thing is that people who come to North Carolina for graduate education stay to start a business. That’s happening all over the state.

Gerlach: One thing we have to do is take this explosion of research and channel it into products. We create the same number of patents as California and Massachusetts, but we’re not getting the economic activity coming out of our campuses.

Some fear we’ll lose the $10-billion-a-year military industry.

Gerlach: It’s unlikely any bases are going to be closed. Realistically, you’re not going to offshore your national defense. And deployment for the Iraq war hasn’t had the same bad effect on the economies of Jacksonville and Fayetteville as we saw in the Gulf War.

Smith: Where are you going to move an East Coast Marine training base? Plus we don’t have bases in metro areas that would have much higher value as something else. We get a lot of highly qualified MBA students who plan their military careers to finish in North Carolina so they can attend a local university. They stay here and start businesses.

Which regions of the state will prosper in 2005 and which won’t?

Gerlach: Growth will be sustained in all areas of the state.

Smith: Who’s going to grow the most? The Triangle — it usually does. Asheville just looks fabulous. I don’t see anything slowing down in Charlotte. And look at the incredible growth in Pinehurst and Southern Pines. It’s made Moore County one of our 10 highest-income counties.

Polls show that Tar Heels are optimistic. But should they be? The average weekly wage has increased less than $8 a week since 2001, and the state has 70,000 fewer jobs.

Gerlach: In 2001, the kind of manufacturing we had — durable goods, textiles, apparel — was hit hard, harder than other states. We lost most of those jobs from January 2001 until about October 2001, toward the end of the recession. In 2002 and 2003 we were gaining jobs in the service sector, but they were offset by losses in manufacturing. Now the decline in manufacturing jobs has gone, and jobs in the service sector are increasing. That’s reason to be optimistic.

Smith: In the last 100 quarters, ending with the second quarter of 2004, the U.S. economy has grown in 91 and shrunk in nine. So odds are 10-to-1 we’ll grow. We’ve gotten farther and farther behind Florida since 1953, and we’ve let those Georgians and even Virginians get ahead of us. But we should experience decent economic growth of 4% a year or better in each of the next four years — we may do better than 5% in 2005. Are we perfect? Nope. In a perfect environment, I’d have more money than Bill Gates and Warren Buffett combined. But I’m still optimistic.

After the sale of Hendersonville-based MountainBank in September 2003, its chief financial officer, Greg Gibson, lost his job — but not his ambition. Eight months later, Mountain 1st Bank & Trust opened in Hendersonville with Gibson as CEO. It reached profitability in four months — a state record for banks. “We have a great market that really is hungry for the way we do business and the services we provide,” Gibson says. “And the timing was good.”

Others thought so, too. During the first 11 months of 2004, eight state charters were granted to bank startups. Four other banks were being organized. Only two new banks opened in 2003. In 2002, none.

Newcomers will challenge older banks for business. But with many North Carolina banks ringing up record profits and unprofitable banks down from 17.4% of the total in June 2000 to 6.6% in June 2004, the market seems able to handle more. “The amount of capital available for startups is really incredible,” says Tony Plath, associate professor of finance at UNC Charlotte.

A combination of factors has fueled the resurgence in bank formation. The economy finally seems to be recovering. Mergers have created a pool of seasoned executives such as Gibson who are eager to launch banks. And investors are ponying up, having watched earlier startups pay off handsomely. “People watched friends and neighbors do well in the ’90s, and they are projecting that trend into future,” Plath says.

Deposits at federally insured banks in North Carolina have increased in each of the past two years, reaching $163.9 billion in June. “Deposits are one of the key driving engines for community banks,” says Buddy Howard, president of Raleigh-based Equity Research Services. “As a result, community banks have grown very rapidly, and stock prices have done well.”

Meanwhile, bigger banks have made lots of money, thanks to economies of scale from mergers. They also boosted income from services such as mortgage refinancing, and low interest rates have made deposits cheap.

Charlotte-based Bank of America has posted record profits despite costly missteps. In the biggest, the bank shelled out $125 million in fines and $250 million to investors to settle complaints that it gave special deals to big traders at the expense of small investors in its mutual funds.

But the bank’s cost controls combined with a growing revenue stream — up 25% to $35.1 billion — produced $10 billion in net income for the first nine months of 2004. It netted $8 billion the year before.

BofA completed its $47 billion purchase of FleetBoston Financial in April — the traditional way banks enter markets. But it is taking a different approach in Chicago, building branches instead of buying banks. That reflects some national trends. More people, more deposits and a slowly improving economy mean a favorable climate for new branches. Yet potential takeover targets are priced high. “Because of that, in some cases it is cheaper to build than to buy,” says Christopher Marinac, a banking analyst with FIG Partners in Atlanta.

Charlotte-based Wachovia used both strategies last year. It paid $14.3 billion in November for Birmingham, Ala.-based SouthTrust. It also plans to enter Texas by building rather than buying. Wachovia planned to open six branches there by the end of 2004, then add 30 to 50 a year through 2010.

North Carolina’s third-largest bank, Winston-Salem-based BB&T, struggled with its last major deal, the $3 billion purchase of First Virginia Banks in 2003. Its profit slipped, and its stock price slumped from $40 a share in late 2003 to $33 by May 2004, so it cut costs and stopped buying banks. For the first nine months of 2004, BB&T reported net income of $1.1 billion, up 50% from 2003. The stock was trading at about $42 in December.

Gibson sees good times ahead for the industry. “Historically and statistically speaking, when the economy turns, we start to get more banks starting. It tends to be a leading indicator of the recovery.”

Bob Burgin, stepping down recently after nearly 24 years as CEO of Mission Hospitals and its forerunners in Asheville, sizes up the past year in health care in a word: tumultuous. It might sum up the coming one, too. Consider cost squeezes. Unpaid hospital bills at Mission jumped from about 2.5% of revenue to about 5%, a trend reflected at many hospitals, analysts say. “We’re talking about $10 million to $12 million we’re not going to collect that we expected to.”

Swelling ranks of the uninsured got the lion’s share of blame for high health-care costs, but in the larger scheme, nearly everyone had a hand. “People smoke, eat or whatever with the assumption somebody will take care of it,” Burgin says. “Some studies show 50% of what goes wrong with us before age 60 is self-induced.”

Accommodating intemperate lifestyles is a weighty issue at Rex Healthcare in Raleigh, which spent $50,000 for floor-mounted toilets after administrators fretted that wall-mounted models no longer could stand the strain of burgeoning butts. Elsewhere in Raleigh, WakeMed spent $22,000 to replace chairs with wider ones that can accommodate 450-pound patients.

And as long as blame is being cast, it wouldn’t seem right to neglect lawyers. Tar Heel doctors and hospitals insist that malpractice premiums are being driven up by big-dollar judgments against health-care providers and are overwhelming the medical community. They’ve asked legislators for a $250,000 cap on pain-and-suffering awards, plus other tort reform. Their argument took a hit when the largest insurer in Texas, which adopted such a ceiling in 2003, asked for a 19% rate increase and conceded to regulators that capping malpractice awards has little effect on insurance costs there.

Lawyers counter that doctors and hospitals refuse to police themselves or admit mistakes, which cause hundreds of thousands of deaths and injuries a year. Nevertheless, Tar Heel doctors cite cases such as that of Bernice Redmond. The Lincoln County ob-gyn specialist said in September she would halt deliveries because she couldn’t afford coverage. “When doctors and hospitals quit delivering babies, you’ve got a problem,” says Robert Seligson, CEO of the 11,000-member North Carolina Medical Association.

Whatever their cause, fear of rising health-care costs extends well beyond the industry. In a national survey of chief financial officers, 89% said that’s their biggest concern for the next four years.

There was a glimmer of hope in 2004, says David Garbrick, president of Garbrick & Associates health-care consultants in Charlotte. But it might not last long. “Last year was the first good year in four or five years for health care. Surveys indicate only single-digit increases, in the 8% to 9% range, in 2005.” But there’s a catch. One reason increases are leveling off is that insurers raised rates excessively for 2004. Garbrick offers a warning: “Nothing else has changed. As long as there are sick people and we’re not into rationing health care, you’ll never see costs go down.”

Financially, hospitals and doctors are increasingly being forced to act as discounters. At Mission, Burgin says, Medicare and Medicaid patients, plus charity care and bad-debt patients, made up 67% of the system’s billings in 2004, up several percentage points from 2000. The Medicare discount alone — providers collect 93 cents on every dollar they spend — will cost Tar Heel hospitals $600 million this year, says Don Dalton, vice president of the 135-member North Carolina Hospital Association.

Despite the cost pressures, the health-care system is expanding. Craig Smith, assistant chief of the state agency that vets health-care projects, reports many hospitals are expanding emergency rooms to accommodate walk-in patients, many of them uninsured. Among major projects under way, planned or sought were a $60 million stroke center and $150 million heart hospital at Pitt Memorial and East Carolina University in Greenville, a $161 million, five-story addition to Forsyth Memorial in Winston-Salem, a $65 million children’s hospital at Carolinas Medical Center in Charlotte and an $80 million surgery building and other improvements at Mission Hospitals in Asheville.

For two years, commercial builders leaned heavily on publicly funded projects to survive. But an improving economy stimulated a rebound in the private sector last year. “There’s just not much bad news out there,” says Tony Plath, a UNC Charlotte banking professor and consultant to the Carolinas Associated General Contractors.

Not that there weren’t problems. Labor became scarce as projects multiplied, and a construction boom in China boosted the cost of building materials worldwide. “It was a problem for projects already bid,” says Chuck Wilson, president of Durham-based C.T. Wilson Construction. “Over an eight-month period, steel almost doubled in price.”

That meant higher costs than builders anticipated, which trimmed margins. Nevertheless, Wilson doubled revenue to $46 million in 2004, thanks to public and private projects, which included $8 million in renovations for four buildings at N.C. Central University in Durham, a $6 million arts-and-humanities building at UNC Chapel Hill and a $1.8 million conversion of two tobacco warehouses into a restaurant and office space in downtown Durham. “We’ve been awfully fortunate to have the university bond-issue work.”

Ike Grainger, vice president of business development for Charlotte-based Shelco, also saw work increase through private and public projects. Among his company’s projects in Charlotte are Piedmont Town Center — two eight-story buildings that will combine retail, office and residential space — an office building for Carolinas HealthCare System and office buildings for Piedmont Natural Gas. “We’re coming out of the recession, and the overbuilt market is tightening up a bit.”

Andrew Jenkins, managing partner of Karnes Research, which tracks commercial construction in Charlotte and the Triangle, says both markets have recovered in different ways. Most of the development in Charlotte follows Interstate 485, the loop being built around the city. The Bissell Cos. is developing speculative office buildings in its Ballantyne Corporate Park in south Charlotte. Most manufacturing development is in southwest Charlotte.

There has been little office, retail or flexible space built downtown since the first quarter of 2003. This year might be busier. The city is building a $265 million basketball arena, which should be completed this fall, and Charlotte-based Wachovia is planning a 34-story, 750,000-square-foot office building downtown that would be developed by Atlanta-based Childress Klein Properties.

There was more activity in other downtowns. In Durham, about 480,000 square feet of tobacco warehouses were redeveloped by Wilson and others into homes, stores and offices during the second quarter. In Raleigh, Progress Energy’s new headquarters, which has office space for other companies, was finished in the third quarter. In both cases, developers lined up tenants before starting construction the year before. “2003 was a very cautious year for new development,” Jenkins says.

Plath thinks commercial construction will remain strong in 2005. But not all parts of the state will prosper equally. Cities and suburbs are growing, especially around main roads, but there’s little construction under way in the rural parts of the state. “Once you get east of I-95, it just dies.”

Companies should have an easier time managing costs in 2005. The rate of construction in China is slowing, he says, so there shouldn’t be as much competition for materials. And labor costs shouldn’t be a big issue. “As the textile industry implodes, it’s keeping construction wages down by ameliorating labor shortages,” Plath says.

Residential construction also is thriving. Bernard Helm, president of Rocky Mount-based Market Opportunity Research Enterprises, which tracks residential construction, says employment gains through the second quarter of 2004, continued low interest rates and a competitive marketplace have fueled growth.

A rise in interest rates could curb demand for some homes. But otherwise, Helm says, the industry will stay strong. “As long as there is job creation, we are going to have a relatively strong market.”

Oops! They did it again. US Airways emerged from Chapter 11 bankruptcy in March 2003 but filed for it again in September 2004. The high price of fuel, increased competition from discount airlines and high labor costs were too much for the Arlington, Va.-based carrier. Others such as Delta and United are suffering, too, but they don’t match US Airways’ presence in North Carolina.

It is Charlotte/Douglas International Airport’s biggest tenant, making up about 90% of its flights. The airline also is a major presence — and employer — at other airports around the state. Liquidation would mean losing thousands of Tar Heel jobs. Airport Director Jerry Orr says the number of daily flights in and out of the Queen City would plummet. It also would take some of the wind out of smaller airports such as those in Fayetteville and Wilmington.

If it can stay aloft, US Airway plans to make itself more like low-fare carriers such as Dallas-based Southwest Airlines — already a major player at Raleigh-Durham International Airport with 25 daily departures — or Dulles, Va.-based Independence Air, which moved into airports serving Raleigh, Greensboro and Charlotte in 2004. Analysts say discount airlines, which operate in 30% of the domestic market, could expand to 70% by 2010.

Despite the turmoil, more passengers were using North Carolina airports last year than in 2003. At the three busiest airports in the state — Charlotte/Douglas, Raleigh-Durham and Piedmont Triad International — passenger boardings were up 4% to 9% through October. Regional airports saw growth in passenger traffic, too. Fayetteville Regional Airport reported a 33% increase during the period. Wilmington International set its record for the most passengers in a month in July — breaking the record it set in June. At Asheville Regional Airport, boardings through October were up nearly 20%.

Orr attributes increases in passenger traffic to fares kept low by a glut of planes and carriers. Travelers also seem to have put aside fears of terrorist attacks, which hobbled the industry after Sept. 11, 2001. North Carolina’s second-tier airports have added flights, and Asheville Regional Airport Director David Edwards has headed an effort to convince airlines that they can add service there and still make a profit. Results: a nonstop Continental Airlines flight to Houston and nonstop Northwest Airlines flights to Detroit and Minneapolis. Using similar tactics, Wilmington International attracted three nonstop US Airways flights to New York’s LaGuardia Airport between August 2003 and August 2004.

Big construction projects are under way at the state’s three largest airports. The $500 million FedEx package-handling hub, to be completed in 2009 at Piedmont Triad International, is one of the largest airport construction projects in the nation. Work totaling nearly $1 billion is planned or under way at Raleigh-Durham and Charlotte/Douglas. A third runway should be finished at Charlotte/Douglas in two years, saving airlines more than $30 million a year by lessening delays. Raleigh-Durham is spending $350 million to double the size of a terminal by 2009.

Ship transportation will be aided by the deepening of the river channel between the Atlantic Ocean and Wilmington from 38 to 42 feet. Begun in 2000 and finished in 2004, it could increase container shipments to the Wilmington port 15% a year by luring larger ships. Overall, the state’s two ports reported a 24.5% increase in cargo during the fiscal year that ended in June. Both recorded more military traffic than in previous years by moving troops, equipment and machinery for the war in Iraq.

Despite higher prices for fuel and insurance, trucking companies thrived in 2004. Thomasville-based Old Dominion Freight Line, for example, reported a 34% increase in third-quarter net income. For the nine months that ended Sept. 30, the increase was nearly 43%. Revenue was up 22% to $600 million. The industry’s outlook is good for 2005, too. In fact, the biggest problem is finding drivers. “Most members tell me they are turning away business,” says Charles Diehl, president of the North Carolina Trucking Association. “This is becoming increasingly critical as shipping volumes increase. Trucking companies are looking for people to hire.”

Those who drive to work in Charlotte or Raleigh — but would rather not — soon will have other options. A $400 million project will bring light-rail service to Charlotte’s south side in 2006 and to its north side in 2010. The first part of the Triangle’s Regional Rail Transit System between Durham and Raleigh will open by 2008.