Round Table: Economic Forecast

 In February 2021

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Forecasting is a tricky business, whether it’s tomorrow’s weather or the coming year’s economy. A year ago, no one foresaw the disruption that COVID-19 was about to unleash on the world. The ensuing pandemic affected every sector of North Carolina’s economy, closing some businesses and changing others’ operations, eliminating jobs, and pushing many workers and students into a virtual world of videoconferencing. On top of all that, a new administration was voted into the White House, one-third of a complete political-party change in Washington, D.C. While a COVID vaccine means there’s hope on the horizon, businesses are still struggling to see what’s ahead. Business North Carolina assembled leaders from several industries to offer some direction. Each shared their view of the state’s economy, where it’s at and where it could go over the next 12 months.

 



••• SPONSORED SECTION •••

The discussion was sponsored by Bernard Robinson & Co., First Bank, North Carolina Military Business Center, Piedmont Triad Partnership, Campbell University and North Carolina Railroad Co.

Business North Carolina Publisher Ben Kinney moderated the discussion.
The transcript was edited for brevity and clarity.



From your perspective, how was 2020? What are you expecting this year?

STECKBECK: A year ago, I believed North Carolina was poised for a great 2020. But an economy is a complex system with many variables. Even if everyone received a COVID vaccination within the next six months, we’d still have a long way to go to return to where we were prior to the pandemic. North Carolina is in a good place relative to other states and the world when it comes to COVID exposure. About 35% of North Carolina workers have jobs that bring a high risk of exposure. That actually makes it one of the country’s safest. Most of those people work directly with customers in retail, hospitality, service, health care and similar sectors. The state took some hits, but things overall weren’t as bad as most people thought they would be 10 months ago. The state’s gross domestic product was about $602 billion at the start of 2020, but it was down 34% in early January from February 2020. It has rebounded quite a bit, reaching $594 billion annualized in early January. So, while it’s still down, continued growth — about 5% — is expected this year. Different indices are looking good for new manufacturing orders. We had an induced unemployment cycle. The unemployment rate was 6.1% in early January, down from 6.2%, which is relatively good. That put the state about 19th in the country. It’s expected to fall to about 5% by the end of this year. Nonfarm jobs are at about 4.4 million, up from about 4 million in October but still down about 222,000 for the year. Many of the ones lost are in the service and restaurant industries. Those are expected to come back, though how many is tied to the response of diners. They may not feel protected enough from COVID to eat at restaurants, for example, once they fully reopen. Initial unemployment claims were about 8,700 for the week ending Dec. 26, down from about 9,400 the week prior. That’s still above the normal weekly amount, 3,000 to 4,000. But remember, they peaked at about 140,000 in April. People also are spending less time unemployed. The coincident index, which offers a broader measure of nonfarm payroll, shows hours of work, manufacturing and wages are up. It went from 138 in January 2020 to 125 in February 2020, but it was back up to 135 last month. North Carolina real estate is doing well. Price Waterhouse Cooper ranked Raleigh the country’s No. 1 real estate market for 2021. Residential building permits are up about 12% over the previous year. We saw greater demand relative to supply in the third quarter. But it’s catching up. That will be good because home prices will probably still rise, too. United Van Lines ranked Wilmington as its customers’ No. 1 destination. While that’s a limited data set, people are moving to North Carolina. It’s one of the better places to be right now. So, things are looking up for the coming year, though it will depend on COVID vaccinations, which we have done a poor job with so far — only about 1.3% of the population was vaccinated by early January.

CURRIE: As an industry, we expected massive credit losses and a liquidity crisis. But the credit losses, at least for us, have been minimal so far. We’ve been dealing with low interest rates for a long time, so most financials are swimming in liquidity, as are some individuals from stimulus payments. Many bankers seem to have PTSD from PPP. And here comes round two of the Paycheck Protection Program. We’re figuring out how to distribute it. The recession has been referred to as the Great Dispersion. There are people and businesses that are struggling, and we see and feel that. Other industries are thriving. Working in North Carolina is very helpful. Few states are performing as well or have been as big of a beneficiary from the pandemic as North Carolina. Success, right now, is industry specific, location specific and group specific. You can’t be a good enough operator to have it in some industries. And you can’t be bad enough not to have it in others. It’ll be that way for a while.

MINTZ: A manufacturer’s success during this time is directly tied to what it makes. North Carolina was one of the few states that deemed manufacturing essential at the pandemic’s start. There was a brief time when companies closed, figuring out what was happening. But factories quickly restarted, providing products for their customers. So, manufacturing never ground to a halt, as was the case elsewhere. We helped manufacturers gear up to meet the large demand for personal protective equipment. Many manufacturers survived, at least temporarily, by pivoting to PPE production. However, some were distraught about not getting as much of that business as they thought they would. In the meantime, companies were deciding how to keep operating and their workers safe. We’re helping the struggling companies, those selling into depressed markets such as hospitality, entertainment and travel. We don’t know when those will rebound, so we’ve been doing a lot to help them weather the storm. We’re helping many diversify until their core business returns. It’s simple things. One business, for example, makes snacks and nuts served on cruise ships. It was a multistate company, but it consolidated here because of the pandemic. There’s a lot of optimism about the COVID vaccine and how it may change things later this year. The pandemic has been a boon for some manufacturers, including those making home-improvement products. My neighbors were working on their homes all summer. Home Depot, Lowe’s and similar retailers were busy. It’s an interesting mix. We’re fortunate that all of those things are in play in some form in North Carolina. There are manufacturers selling into all those booming markets, and we’re getting great business from them.

COKER: Construction was deemed an essential business from the start of the pandemic, and the number of building permits is up in many markets. Multifamily housing and commercial construction are going strong. So, overall, construction is doing quite well. Many general contractors are doing great. But some in specialty markets or services are having some difficulty. I have one client whose largest customer develops shopping and strip malls. It and many others in the brick-and-mortar retail sector aren’t doing well. So, what can they do differently? How can they adapt to new markets? It’s about thinking outside the box, finding ways to adapt or provide new services so you can keep making money.

DORNEY: Your situation and outlook depend on what you make. But they also have a lot to do with your customers. Our name may be North Carolina Military Business Center, but we help businesses identify opportunities, compete for contracts, and sell goods and services across the federal government. The Department of Defense has a $66 billion impact on our economy — the second-largest sector. About 12% of the state’s GDP is connected to military and defense contracting. I call it a ‘supermarket.’ It includes many industries. General Motors subsidiary GM Defense, for example, was selected to build infantry squad vehicles for the Army late last year. They’ll be built in Concord through a partnership with Hendrick Motorsports. Last year was a boom year for the sector. While others were down, defense contracting set state records. DOD contracts executed in North Carolina were more than $6 billion for fiscal year 2020, though final numbers won’t be available until next month. Include all federal agencies, and that number is at $9.5 billion. That’s a $2.4 billion increase from 2019, which was $1 billion more than 2018. The pandemic had a significant impact on federal contracting. It accelerated production of medical-surgical products, pharmaceuticals. Demand was up at the DOD, Department of Health and Human Services, and Veterans Affairs, which has large medical centers in Asheville, Durham, Fayetteville and Salisbury. Concerns among businesses in this market during the pandemic include maintaining their workforce and supply chain. Looking forward to this year, businesses are focused on sustaining their contracting pace. But we don’t see any slowdown. Construction is about 35% of defense contracting in the state. It was a boon to last year, mostly with the Navy, which awarded about $1.7 billion for recovery construction at Camp Lejeune and Marine Corps Air Station Cherry Point after Hurricane Florence. That work will take place over the next two to three years and represents subcontracting opportunities for trades, specialty contractors, designers and construction suppliers statewide. I never thought I’d say that a hurricane had a positive impact, but this one did, in the form of tremendous new construction opportunities. Even with a new administration in Washington, D.C., we predict DOD spending will remain steady this year. COVID responses will dominate the content of federal contracts. The federal government has gone further online, like the rest of us, so information technology and artificial intelligence will be big, too. Cybersecurity, especially in the wake of the recent SolarWinds hack, which targeted federal government networks, is growing in importance, and that means more opportunities for North Carolina businesses. The DOD has enacted cybersecurity standards that all contractors must meet. Prime contractors are requiring compliance from the small businesses that they work with. We’re working through the North Carolina Interagency Cybersecurity Coordinating Committee to make sure our small businesses are informed about them. There are many resources available to help them become compliant. There will be many large service-related contracts, including construction and IT, this year. We have to focus the state’s small businesses on these large opportunities, either on their own or as part of a team. The biggest challenge remains the unknowns. When will COVID be resolved? What will be its effect on federal purchasing? Will it impact recruiting businesses that can compete in the federal market to North Carolina?

KELLY: I’m encouraged and optimistic with each passing quarter. Things will only get better and better. Businesses in our region have announced about 4,500 jobs in the past six months. That’s a good number in this environment. They’re positioning for the economy to return to a place that we’d deem normal. We’ll enjoy a tailwind as we work our way through the next several quarters. But progress won’t be linear. It will look more like a hockey stick — straight with a quick upward turn at the end — as we make our way from the fourth quarter of 2020 through this year’s fourth quarter, when some sectors, including service, accelerate.

Finding skilled workers is always a challenge. How has the pandemic affected the search?

COKER: The trade-labor shortage, which has been an ongoing issue, remains. You would think rising unemployment numbers, such as during the pandemic, should have solved that problem. But they didn’t. Trade schools and high schools are working to train more people for our industry. I talk to my clients about three things — diversification, adaptation and cross-training. You can’t run a business when a handful or more employees are out sick. So, we look at ways to cross-train employees, so business isn’t interrupted by absences. Many employers worry about how many people are hesitant to return to work out of fear of contracting COVID. Most laborers are fine; they’re working outside and in open spaces. But people working in an office or other enclosed spaces, who are responsible for accounting, administration and other tasks, are worried or, worse, getting sick.

STECKBECK: Many of the jobs lost during the pandemic won’t return once COVID is under control. While retail sales are up, most are happening online. Brick-and-mortar retail is down. People who worked at those stores will need to find new skills and jobs. That’s a big deal, but a bigger one is how women have been hit hardest. Many left their jobs to stay home, caring for children who were remote learning. But when they’re ready to get back to work, some won’t have jobs to return to. Workers are part of the supply chain. But in terms of human labor, human capital, people will have to adapt, find new skill sets to work these new jobs.

What has been the pandemic’s effect on the supply chain? How will it respond this year?

STECKBECK: Supply chain management is one reason COVID makes any prediction for the new year tentative. Chicken producers, for example, had chickens slated for sale to restaurants when the pandemic started. But when they closed, producers were able to pivot and sell those chickens to grocery store shoppers. As restaurants reopen, that part of the supply chain will return. So, that’s a supply chain reforming. The entertainment industry faced disruption, too. I have a longtime friend who travels the world playing music. He and most of his fellow professional musicians have been out of work since early last year. But when we’ve got everything back closer to what we would call normal, coordination problems are going to hinder a smooth transition. Performers with big followings will be stuck playing small venues, and those with smaller followings will be stuck playing larger venues until we get some continuity within this supply chain. These are only two examples. It’s an issue whether you’re talking about chemicals and plastics from Fayetteville, especially when they’re part of international trade, or agricultural products such as livestock, which are about 65% of that industry in North Carolina. They all will take time to get back in order. Even once we get all the vaccinations administered and COVID settled, it could take an additional 12 or 18 months.

COKER: Construction’s supply chain has seen some interruptions, including availability of appliances, cabinets and other materials. But that will bounce back. Obviously, there are still unknowns. Lumber prices, for example, spiked significantly prior to the end of last year.

KELLY: Everyone probably underappreciated how important supply chains are to our economy and how much they could be disrupted. Economies that are historically manufacturing heavy have faced challenges. But supply chains can play to our favor as we come out on the other side of the pandemic. They are being regionalized. We see it. Companies are putting first-cousin manufacturing enablers close to their headquarters, so they have more control. We see significant increases in distribution, from industrial site and job growth perspectives. Some of that comes from our — Carolina Core and North Carolina — location at the crossroads of major roads, rails and air.

•••

MINTZ: The pandemic highlighted some persistent underlying challenges. Trade disputes, for example, had been bubbling up when it hit. We couldn’t recharge some supply chains that stretched to foreign countries. That was a big disruption for some large multinational manufacturers. Many of those needed items had not been made domestically. Medical masks and semiconductors are prime examples. Now they’re made overseas, and we buy them almost exclusively. The pandemic has created an urgency to reshore more manufacturing. Companies want to relocate here, move factories stateside. They’re working on that. But it isn’t always easy. Will we be able to support ourselves if more manufacturing is done domestically? Will we always depend on importing some components and raw materials? Those questions will take time to answer.

WARREN: There’s a lot of discussion about supply chains. I’ve heard it firsthand, in my current role, which started in August, and prior, when I was working at CSX. When I left CSX, the pandemic had just begun, and I was already witnessing impacts on the commodities it moved. Once people started losing confidence in the economy, car sales, for example, fell. So, the railroad wasn’t moving as many finished vehicles. Then steel mills were affected because vehicle production was slowing. That meant less steel for the railroad to move. And less steel meant less raw materials were needed, further reducing the railroad’s shipments. The effects keep going, through the supply chain’s entire length. And as a transportation provider, you have to figure out how to scale back from plans built on 2020 being a big year. You no longer need the crews and assets that you thought you would. Add to that international issues such as factories closing and opening in China. That impacts the movement of shipping containers, for example, which need to be in the right place at the right time. There are activity spikes, but resources have been reduced, so prices rise. Everyone feels that. The friend of a reliable supply chain is an environment where demand is predictable. But we’ll only return to a state of predictable demand when the pandemic is put to bed with a solid base of vaccinations. I’m not a public-health expert, but it seems intuitive that more stability comes when COVID is under control.

What financial concerns or trends do you expect in the new year?

COKER: Interest rates are low, so the residential real-estate market is booming. Many houses are on the market for only a week. People are building, and people are buying.

CURRIE: The 10-year U.S. Treasury yield went back over 1% in January, the first time since last March. So, the long end of the yield curve is pushing up a bit. That’s quite a sea change from where we’ve been and predictive of more stimulus dollars and bigger deficits. It’s probably too early to tell how that’ll affect inflation. Our industry would welcome higher interest rates. Be we also worry about more regulation. That’s a concern in everything that we do. It’s important that we return more manufacturing stateside, for example, but that’s difficult to do in an environment with more regulation.

STECKBECK: One of the things we see is people adding more to savings because of the stimulus payments. We’ll see how that plays out in terms of investment.

What’s the outlook for economic-development projects?

KELLY: Project activity has been robust in the Piedmont Triad region and statewide. Reshoring efforts are growing in volume. We’re seeing that in our region, too. We’ve received a number of calls from companies in the Northeast over the past three months. They want to move south, and North Carolina is getting a look at many of those projects. Put those in the mix with a growing population, and we’re an attractive place for industries that enable what’s happening in our households. And we do a lot of that in North Carolina, from fabrics to furniture.

WARREN: North Carolina is fortunate. And at the North Carolina Railroad Co., we haven’t seen a drop in the number of projects in our pipeline or enthusiasm dampen for pursuing long-term projects. Our economic-development folks are busy. Economic-development projects in which businesses are relocating include modifications and investments in their supply chain. I see that as especially encouraging because our space works in the long term.

What other challenges will North Carolina businesses face this year?

DORNEY: We’ll have some real challenges in the defense and federal market. But those challenges equal opportunity for businesses that haven’t historically been in it. Regulations continue to be a challenge. Cybersecurity, for example, is important to everyone. But meeting those requirements for federal work is challenging. There are more regulation challenges, for example, that come with PPE production. Many businesses can make it, but making it so FDA standards are met and inspections passed is a different story. There are many regulatory obstacles that need to be cleared before you can be successful in the federal and defense market. The construction market, for example, will see issues with support industries such as lodging and hospitality. Will COVID restrictions allow them to accommodate the contractors and workers needed for the almost $2 billion of awarded work? But the biggest hurdle to growing the federal and defense market is businesses thinking it’s too much for them to handle. It isn’t if they take advantage of available resources. There are programs that help small businesses land the 23% of prime contracting that’s earmarked for them or participate as a subcontractor on larger projects. When construction slowed between 2008 and 2011 elsewhere, everybody wanted to be in North Carolina, where a $7 billion construction boom was underway. Finding workers, subcontractors or materials weren’t issues. Now there is demand, and materials are short.

KELLY: Technology — especially its effect on how we work — will present challenges and opportunities. The pandemic has spurred remote working and videoconferencing. That has many implications going forward, including how office space is used and how much employees travel. It affects the hospitality industry, too, and the cultural dynamic of working independently at home rather than as part of a team in an office. Companies will be challenged to sort through these changes, which will be with us forever. There will be good things coming from them. I’m on the board of a private company that has struggled with finding North Carolina-based talent. So, during the pandemic, it started hiring people who live and work out of state. Where you work and live is decoupling. That’s a sea change.

MINTZ: People are deciding that not getting together is a long-term strategy. They’ll use technology, including videoconferencing, to save money and protect workers.

STECKBECK: Restaurants make up about 11% of employment, and they’ve been hit hard by the pandemic. According to National Restaurant Association, about 110,000 U.S. restaurants — about 17% — have closed permanently since the spring. That’s huge. Even when life gets closer to normal, will people dine in, continue to use takeout or stay at home? It will be a challenge for existing and new restaurants, all of which already operate on a very thin margin.

CURRIE: It will be interesting to see which changes to work life will remain after the pandemic. I believe people still want to conduct business face to face with people who they know. Does that mean that they’ll keep getting on a plane to see a client in California every other week? Maybe not. But as COVID-induced restrictions are lifted, it will be interesting to see how quickly those types of meetings return and to what extent.

How will recent changes in Washington, D.C., affect North Carolina businesses?

COKER: I work with many small to medium sized family-owned businesses, and the amount of taxes that they have to pay drives a significant number of their decisions, such as what kind of equipment they’ll buy and when. And with one political party controlling the White House, Senate and House of Representatives, how will that change the business environment in regards to taxes, laws and regulations? We have to recognize that is a big unknown at the start of this year. Some business owners may be reluctant to make decisions or investments because of the unknown.

WARREN: There are two aspects to the changes in Washington that the transportation sector must take into account. First is from the regulatory point of view. How will changes in regulations affect site development? Will companies and developers receive timely permissions, such as those made by the Army Corps of Engineers that direct land use, or will those definitions change? The other aspect concerns transportation. Will the policy shifts make it better for shippers and tougher for railroads? We’ll see. On the positive side, there will be more investment in transportation infrastructure, especially given the interest in good environmental policy. That could bode well for partnering on development projects that involve railroads, which can move more goods with less energy and impact on the environment. It’s like anything. There are some good things, and there are some not so good things. Then there are the things in the middle. Change is good for business. And I’m confident we are prepared to react and make the best out of whatever comes our way.

DORNEY: We expect more emphasis on sustainable energy and anything climate related. Medical, environmental and construction will remain strong. Federal contract awards may not match 2020 levels, but the market will remain strong and execution of already awarded contracts will be ongoing. There will be many opportunities for small businesses.

MINTZ: The problem all along has been when does the pandemic end? We know it’ll be better one day. But how far out do we have to look? And that’s what everybody is struggling with right now. ■

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