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YOU DECIDE: Is North Carolina in a recession?

November 28, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Most economists now have come to the conclusion the nation's economy is in a recession.

The recession likely began in late 2007 or early 2008 and may last until mid or late 2009. If it does, it will be one of the longest since World War II.

What exactly is a recession?

A recession means the economy is getting smaller, that is, receding. Recessions are part of the longstanding "business cycle," in which our economy grows for a while, then recedes, then grows again, then again recedes and so on. Each combination of a growth period and recession period constitutes one business cycle.

There have been 12 such cycles since the 1940s. Fortunately, the growth periods have tended to be much longer than the recessionary periods, so the economy does make progress over time.

What causes recessions?

That's one of the all-time big questions in economics, a question that many brilliant minds have tried to answer (including Ben Bernanke, current Federal Reserve chair, while teaching economics at Princeton). Some candidates are a major increase in the price of a key economic input, like oil, a sharp decline in the amount of money in circulation accompanied by a large jump in interest rates and the bursting of a boom in a prominent sector of the economy.

It's that last reason that seems to have sparked today's recession.

The sector that boomed was residential housing. Prompted by ample credit, low interest rates and favorable tax laws, investment in residential housing surged in the early 2000s, and the surge sent house prices to previously unseen levels. But once interest rates rose, house prices fell, and loans based on the earlier high prices became "toxic."

And since the residential housing market and the financial firms that back it are such a large part of the economy, the fall of housing eventually pulled the rest of the economy into a recession. So we're now seeing declining employment, rising unemployment and reduced spending in the national economy.

But what about North Carolina?

Unfortunately, a national recession means just that - a national recession - and most states are involved. North Carolina is no exception.

This year, we are losing jobs at an annual rate of almost 2 percent, and the unemployment rate in 2008 will average more than 6 percent, almost 1.5 percentage points higher than in 2007. The volume of retail sales is off more than 8 percent, and after taking out inflation, wages are dropping by more than 3 percent.

The Tar Heel state is feeling the housing slump, too. Existing home sales are on track to be down almost 25 percent for the year.

But it could be worse. Compared to the last recession, in 2001, North Carolina has lost a smaller percentage of jobs. Importantly, manufacturing jobs are down at half the rate in 2008 as they were in 2001.

Why the improvement?

The short answer: North Carolina's great economic transformation of the last three decades - during which the state's leading industries shifted from tobacco, textiles and furniture to technology, health care, banking and machinery and food manufacturing - has largely run its course. During the 2001 recession, North Carolina was still losing tens of thousands of traditional manufacturing jobs. These jobs are still being lost, but at a much slower pace, thus today's recession is relatively less severe, at least so far!

So how long will the recession in North Carolina last?

I'm sorry to say I think it will continue for another six to nine months, and even after that, economic growth will be mild. The state's unemployment rate will rise to above 8 percent in 2009 and perhaps hit 10 percent in early 2010. Government, from the statehouse to the court houses, will find their revenues down, even as calls for help rise. Our elected officials will face tough decisions.

But the recession will eventually end, as they always do. At some point investors and entrepreneurs will see bargains they can't pass up, and their increased spending will lead the economy out of the doldrums.

But until then, we'll all have to decide how to cope with challenging economic times.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at November 28, 2008 09:53 AM