More of the same?
The economy will continue to disappoint.
That’s the conclusion drawn by a N.C. Bankers Association economist in a new study that looks at the banking sector, as well as housing, the financial markets, manufacturing, unemployment and other segments of the economy.
In the NCBA’s second quarter business barometer report, Harry Davis, also a professor of finance at Appalachian State University, notes that gross domestic product, or GDP, growth has inched along at about 2 percent since the end of the Great Recession in 2009.
In the 50 years preceding the recession, the economy grew at an average quarterly rate of 3.5 percent, Davis said.
“The sequester certainly has had something to do with the slow growth this year,” he said of the automatic federal spending cuts that went into effect in March. “The economy added about 160,000 jobs in July, but a large percentage were low-paying hospitality and tourism jobs, many of which are part time. So, we’re not adding the kind of professional jobs needed to drive incomes and consumer spending, which drives the recovery.”
North Carolina still has the fifth-highest unemployment rate in the nation, at 9.3 percent. High Point’s jobless rate is 9.6 percent. Nationally, the rate remains at 7.4 percent.
Growth for high-paying professional jobs continues to lag, Davis said. Nowhere is this more evident than in the manufacturing sector.
North Carolina has about 440,000 workers in manufacturing jobs. The total statewide manufacturing work force is down about 38 percent from 2001. Traditional industries, such as furniture and textiles, have moved most of their production offshore to take advantage of cheaper labor costs and to counteract a flood of cheap imported goods. Davis said the sector is suffering from slow economic growth in China and the rest of Asia.
“The problem is, just regular old manufacturing-type jobs and middle-management professional jobs are just not being added,” Davis said. “The new manufacturing jobs are high-tech. So many people who lost manufacturing jobs had very little skill, and they have not been retrained.”
Large, multinational corporations are posting record profits in some sectors, but aren’t adding workers and have generated much of their positive cash flow by continuing to cut costs, Davis said.
Much of Europe remains in recession which, coupled with the slowdown in China, tamps down demand for American products and causes companies to put off hiring.
Davis predicts that the overall growth rate will not be sufficient to lower the unemployment rate below 7 percent nationally within the next two years. He described GDP growth of 2 to 2.5 percent as “the new normal” for the foreseeable future.
Despite this assessment, there are economic bright spots in Davis’ report.
The housing sector continues to improve, with new and existing home sales on the rise.
Inventories of unsold homes have dropped to record-low levels and are leading to double-digit increases in home prices. Sales also are feeding a rise in home construction activity.
The energy sector is booming, thanks to the proliferation of hydraulic fracturing, or fracking, which is a type of drilling for natural gas and oil. North Carolina, however, has not seen energy-sector job growth on the scale of other states because of its ban on fracking.
Davis said auto sales are running at their highest rate since 2007, which also is a positive for the economy.
Consumer confidence, critical for growth, reached a five-year high in July.
But Davis pointed out that it remains “in the doldrums” by historical standards because of “anemic” salary and wage increases, as well as the fact that median family income is actually lower today than when the recovery started in 2009.
“The lack of job and income growth, along with rising gas prices, is cutting consumers’ ability to spend,” he said.
When it comes to the banking sector, Davis said profitability continues to improve, but further progress will depend on economic growth. Banks have cut costs by cleaning up many of the toxic loans on the their books stemming from the recession. Davis said banks’ capital requirements will continue to increase, making it more difficult to provide returns to shareholders.
That’s also bad news for credit markets, as individuals and businesses looking to take out loans likely will continue to have difficulty convincing lenders to underwrite their pursuits.