By Mike Walden
Although all the final numbers aren’t in, it appears North Carolina experienced a very good economy in 2021. The rebound from the COVID-19 recession continued and put up strong numbers for the state economy. The big question is, will the good news continue in 2022?
Let’s first look at 2021. Aggregate production of goods and services increased at an annual rate of 4.5 percent (through the third quarter, the latest available). This was better than the national rate of 3.8 percent and was greater than the 2.6 percent rate in the state during the pre-pandemic year of 2019. Sectors adding the most production were leisure/hospitality, health care, finance and technology. The North Carolina economy is now three percent larger than its pre-pandemic level.
There were also impressive gains in the North Carolina labor market in 2021. Through November the state added a record 119,000 net new jobs. The leading job gains were in leisure/hospitality, professional services, manufacturing and construction. The average hourly wage rate also increased 6.8 percent. However, after subtracting inflation, the gain was only one-half percent.
Despite this progress in the labor market, there are lingering issues. Total statewide jobs are still 72,000 less than their pre-pandemic level. And although the unemployment rate slipped under four percent in November and is not far from its level before COVID, a smaller percentage of individuals who are of working age either have jobs or are looking for jobs than two years ago. If labor force participation was the same as two years ago, 85,000 more people would be in the labor force.
North Carolina ended the year on an upbeat note with the announcement of the multi-billion Toyota plant in the Triad that will produce electric batteries for vehicles. This prize capped a year with $10 billion of new business investments announced for the state.
North Carolina has the momentum to have another good economic year in 2022. In 2021 the state was 4th fastest in total population growth and was also a leader for in-migration of households from other states. North Carolina continues to have advantages in total cost of living, cost of doing business, the cost of higher education, natural amenities and climate.
Hence, economic improvement in 2022 should be good, although somewhat less robust than in 2021. Aggregate production should increase 3.5 percent, 100,000 net new jobs will be created, and the unemployment will end the year at near 3.6 percent. The fastest growing sectors for jobs will be hospitality and leisure services, professional and business services and technology.
Economic gains should also spread to more geographical regions in the state. As the economy grows and prime sites in large metropolitan areas become relatively more expensive, there’s a natural incentive for investors to look for less costly locations. Counties in large metro areas but farther from the core city will benefit from this trend, such as Chatham, Franklin and Lee in the Triangle, Cabarrus, Gaston, and Stanly near Charlotte, and Alamance, Davidson and Randolph in the Triad.
Yet if the geographic availability of high-speed internet significantly expands in 2022, less-populated regions could also share in faster growth. This is already happening in Greenville and Hickory. With internet availability – now considered a necessity in the modern economy – even smaller communities could share in business and population expansion.
While this economic outlook for North Carolina is positive, it is important to realize the state’s future is still subject to forces beyond its control. One obvious force that fits this category is the COVID-19 virus and its variants, which have dominated the world during the past two years.
Medical experts say variants may continue to emerge, as the Omicron variant did at the end of 2021. While such variants may cause some curtailments of public events and increased efforts for more vaccinations, I don’t expect them to result in the business shutdowns and stay-at-home orders of Spring, 2020. Instead, I foresee us developing greater means and methods for coping with COVID, while at the same time allowing most of life to continue. But, of course, this optimistic outlook will be proven wrong if a deadlier and more unpredictable variant emerges.
Possibly a greater source of uncertainty is the future policy actions of the central bank of the country, the Federal Reserve (the “Fed”). The inflation rate in the prices of products and services surged to forty-year highs in 2021. While there is debate over the causes, one contributing factor is likely the “easy money” policy of the Fed during the pandemic. In order to help the country cope with and then recover from the virus, the Fed kept its interest rates at historic lows and created money to support the federal government’s stimulus programs. Both of these actions can be inflationary, and many economists think they were.
Now the Fed is signaling it will reverse course in 2022 and raise interest rates and moderate money creation. The question is how hard will the Fed push on the brakes. Optimally the Fed would move cautiously and slowly reduce the inflation rate without disrupting economic growth. But as we saw forty years ago when the Fed took the same action, this is a “difficult needle to thread”. My viewpoint is the Fed will have to move boldly in order to make any progress against fast-rising prices. If large interest rate increases are paired with slow – or no – growth in the money supply, then economic growth in the second half of the year – even in booming North Carolina – could be on the chopping block.
In my forty-plus years of trying, I’ve learned to be very, very modest about my ability to predict the economic future. At the end of 2022 you can decide how I did this year!
Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.