Dr. Mike Walden
North Carolina Cooperative Extension
Some troubling news about North Carolina’s economy made the headlines recently. Numbers for an economic concept called gross domestic product”, or GDP, were released for 2014. While North Carolina’s GDP increased in 2014, it rose much less than in the nation. The comparison was a 1.4 percent gain for the state versus a 2.2 percent improvement for the nation. Does this mean it’s time to worry about the state’s economic rebound?
Before addressing this important question, let me explain the meaning of GDP. Economists like GDP because it comprehensively measures the size of an economy in a single number. It allows the production of farmers, factory workers, office workers, salespersons and all other workers and firms to be combined. It also takes out general price inflation, so the number won’t rise just because average prices are higher. GDP is measured in the same way for all states and for all nations, so it gives us an easy way to compare different economies.
GDP also is the main metric used to denote and measure recessions. For an official recession to occur, the rule of thumb is a decline in GDP for two consecutive three-month periods. For a depression to be designated, the decline in GDP must be 10 percent or more or last for two or more years. For both the nation and for North Carolina, the downturn from late 2007 to mid-2009 qualified as a recession but not as a depression.
While North Carolina’s GDP growth rate came up short compared to the nation in 2014, the opposite was the case for 2013. In that year North Carolina’s GDP grew 2.7 percent, and national GDP increased 1.9 percent.
What happened between the two years? In a phrase, the change was due to theimpact of a stronger dollar on manufacturing.
Let me break down this answer into its parts. First, relative to other states, North Carolina is a manufacturing state. While manufacturing certainly isn’t as dominant as it was decades ago, more than 20 percent of North Carolina’s GDP still comes from manufacturing. This is far higher than the 12 percent for the nation. Only three other states (Indiana, Oregon and Louisiana) have a higher contribution of manufacturing to their GDP. (And, in case you are wondering, manufacturing’s GDP contribution in South Carolina is 16 percent.)
Second, international trade is important in manufacturing. Almost half of U.S. manufactured products are exported. At the same time, the United States imports even more manufactured goods than it exports.
Third, the international value of the dollar against foreign currencies has big impacts on exports, imports and manufacturing. In general, a “weaker” dollar against foreign currencies makes U.S. exports cheaper in foreign countries and foreign imports more expensive in the United States, resulting in more U.S. exports, fewer foreign imports and more U.S. manufacturing. The opposite happens with a “stronger” dollar – fewer U.S. exports, more foreign imports and less U.S. manufacturing.
Merging these three points gives a plausible explanation for North Carolina’s GDP performance in 2013 and 2014. The U.S. dollar’s international value weakened through much of 2013. North Carolina manufacturing production surged 6 percent, four times more than the production from national factories. The growth in North Carolina manufacturing was a big factor behind the state’s superior GDP performance that year.
But the opposite happened in 2014. Due to several factors – among them concerns about recessions in Europe and Japan and slower growth in China — the U.S. economy was considered to be the strongest in the world. As a result, the international value of the dollar rose. While this sounds good, it did have the adverse impacts on manufacturing cited above. Manufacturing production in North Carolina stalled – with production at the same level in 2014 as in 2013.
If output from the state’s factories had increased at the same rate in 2014 as in 2013, total GDP growth in North Carolina in 2014 would have almost doubled and would have exceeded the national pace.
There are two lessons here. The first is that the state’s economy can still be moved by manufacturing; indeed, manufacturing’s role in North Carolina is greater than in 46 other states. One out of five dollars in the state directly comes from manufacturing.
The second lesson is that forces well beyond North Carolina’s control can have an impact – either positive or negative – on the state economy. In 2013 the dollar’s lower international value helped North Carolina; in 2014 the dollar’s higher value had a slowing effect on the state economy.
How we move, economically speaking, is not totally in our hands. As global ties increase – as many expect – the degree to which we can decide our economic future may lessen!
Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.