“North Carolina has more reason to be optimistic than the rest of the country,” Gus Faucher, chief economist for PNC Financial Services Group Inc., said at a luncheon at Charlotte’s Quail Hollow Club last week.
Faucher cited strong consumer confidence, low unemployment and low interest rates in as positive indicators for the near-term. He expects the current expansion to continue into the middle of next year or beyond.
“Our domestic fundamentals look pretty good,” he says, saying he doesn’t see any imbalances in the current economy that may lead to a recession. He predicts the economy will slow from its current pace, but will continue to grow at a 1.7% pace next year.
Faucher says there’s been a significant softness in the industrial economy, which is a concern for Charlotte and North Carolina. While employment has been positive year over year, there have been small declines in manufacturing employment. “If we’re not experiencing a contraction in manufacturing, it’s at least flat,” he says.
Faucher says a tight labor market is the biggest reason for optimism. The low unemployment rate has contributed to a 2% to 3% increase in after-tax income during the expansion. That has translated to a 2% to 3% increase in consumer spending, which makes up 70% of the nation’s economy. Consumers have also been paying off their high debt loads, with financial obligations making up 15% of consumer income, down from 18% during the recession.
“Consumers are in excellent shape,” he says. “Debt burdens are very low right now, near record levels.” Faucher predicts there will be continued growth in consumer spending and increases to consumer income.
He noted that the quit rate, the rate at which workers are leaving jobs in search of work elsewhere, has risen to 2.4%, meaning businesses have to respond by raising pay to retain their talent. He says this has translated to wage growth of 3%, outpacing current inflation of 1.5%. “When the unemployment rate is so low that businesses continue to compete for jobs, that is going to drive strong wage gains in the near future,” he says.
Faucher says that North Carolina’s population growth, which is higher than the national average, will continue to boost economic growth.
“It becomes a chicken and egg thing where you have strong job growth that leads to strong population growth and that in turn encourages further job growth,” he says. “So as long as the area continues to see population growth it is well above the national average. The area will continue to see economic growth that is well above the national average.”
He noted that Charlotte in particular was hit harder during the recession than the rest of the state and nation, due to the large financial industry in the area, but has since outperformed North Carolina and the United States during the recovery. According to the Philadelphia Federal Reserve’s leading index, which forecasts economic conditions six months in the future, Charlotte is 20% above its pre-recession peak, compared with 11% and 12% for the nation and North Carolina, respectively.
North Carolina small- and medium-sized businesses also have positive outlooks for the near term. Nearly 70% of small and mid-sized business leaders say a recession is unlikely this year, and 55% believe one is unlikely in 2020. More than 44% of business leaders expect their company’s sales to increase, and about 43% are highly optimistic about the national economy, according to PNC’s survey of North Carolina small and mid-sized business owners and executives.
Faucher also predicts that the fiscal policy boost from the 2017 Republican tax cuts will fade next year. “Those reduced corporate income taxes gave businesses higher after tax corporate profitability. They also were to a lesser extent reduced personal income taxes. So that gave consumers bigger paychecks and that just supported economic growth,” he says. “But that tax cut took effect at the beginning of 2018 and the positive impact is fading. And I expect by next year it will be a neutral for economic growth.”
“It’s safe to say the risks to the outlook are weighed to the downside right now,” Faucher says, “The conditions are likely to be not as good as I’m telling you, they’re likely to be better.”