Overview

North Carolina's economy grew more rapidly than did all but eight other states during the 1990s. This growth was partially a result of the state's strength in two areas, manufacturing and high-technology businesses, two activities which accounted for nearly one quarter of the state's total employment in 1999. However, the state's impressive economic expansion came to an end in early 2001. Global, national and local forces combined to create an economic crises in technology and manufacturing which triggered the recession of 2001. The worsening economy did not stop the flow of migrants into the state (see the Population chapter), population growth outstripped the ability of the economy to create jobs. North Carolina added 360,797 people to its population from 2000 to 2003 but lost 7,661 jobs during the same period. The imbalance of population and job growth has resulted in increased unemployment rates, stagnant wages and reduced tax revenues - resulting in a statewide fiscal crises. (see the Politics & Government chapter).

Figure 1 shows that non-farm employment in North Carolina grew faster than did the nation's in 1997 through 1999. However, the situation reversed after that and the state  lost jobs at a faster rate through 2003. It was not until the 2003 through May, 2004 period that the state's growth rate matched that of the nation as a whole.

However, as of May, 2004, employment in the state was still 3.3% less than its peak of 4,006,167 in June, 2001. Although net job declines ended in February, 2003, the state remained 13,000 jobs short of its pre-recessionary peak as of May 2004. The net effect of job losses, combined with population growth, can be seen in changes in the statewide unemployment rate (Figure 2). For the first time since 1975, in July, 2001,North Carolina's unemployment rate climbed above the national average and remained above it until March, 2004. Unemployment data suggest that the recession of 2001 impacted North Carolina more severely than the nation as a whole. The disproportionate impact of the recent recession on North Carolina can be explained by the particular economic structure of the state.

Downtown Winston Salem	Changes in Economic Structure The Geography of North Carolina's Economic Change Employment Foreign-owned Businesses Income The Cost of Living Encouraging Economic Growth Outside the State's Urban Core The Future of the North Carolina Economy
Jefferson Pilot Building
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Changes in Economic Structure

North Carolina has long been dependent upon low-wage manufacturing employment. The labor-intensive textile, apparel, and furniture industries were the first major industrial employers in the state and they continued to add jobs into the 1980s. While the state's manufacturing sector has substantially diversified since the 1980s, production jobs continue to be dominated by labor-intensive, low-wage activities - jobs that are most vulnerable to offshore relocation (See the Manufacturing Chapter for information on recent factory closings). Two external events had dramatic local impacts on low-wage manufacturing industries. First, the Asian fiscal crises of the late 1990s reduced the relative cost of foreign labor, which accelerated the   erosion of low-wage manufacturing jobs in the state. Textile, apparel, and furniture production jobs in the Piedmont counties were most severely affected. Second, the domestic economic boom of the 1990s resulted in a torrent of investment flowing to firms. This cheap corporate capital encouraged firms to build inventories and production capacity at a rate greater than the market's ability to absorb it. As the domestic economy cooled, investment capital was rapidly withdrawn from these companies which forced them to dump their inventories, often below cost. This situation was particularly problematic in the telecommunications sector. Research and production facilities in the Research Triangle, Hickory and Concord areas faced substantial job losses as a result. While the current economic malaise is frequently blamed on external factors, the state's firms share some of the blame for job loss. Complacent management and the associated inability of local firms to innovate are frequently cited as major causes of firm closure (for example see the Charlotte Observer's four part series "The Leaders who Lost Pillowtex" 7/17/2004)

A detailed examination of employment change (Figure 3 and Table 1) confirms that employment declines during the recession of 2001were concentrated in the manufacturing and the allied trade, transportation and utilities sectors. Contrasting with job losses in production occupations were dramatic increases in the educational and health services, leisure and hospitality and professional and business services industries. However, in absolute terms, job growth in these sectors (185,000 jobs) did not counteract the loss of 214,000 jobs in manufacturing from 1997 to 2004. This employment shift away from production and towards knowledge related occupations is typical of a maturing economy. North Carolina's deindustrialization process makes it one of the last regions in the US to undergo this transition.

The transition from manufacturing to services is also clearly evident in measures of economic output. Table 2 shows the total output of the principal sectors of the state's economy. While Manufacturing continues to produce more than all other sectors, its total output has remained essentially stagnant since 1997. However, given the employment declines in manufacturing, the stagnant output figures represent increasing productivity in that sector. Conversely, the output of financial firms increased by 55% since 1997 making it the state's second largest generator of revenue and placing that sector on an equal footing with manufacturing by 2001.

Wage data presents a darker view of recent changes in the state's economy (Table 3). While job losses were largely confined to two sectors, wages experienced relative declines (e.g. grew more slowly than statewide averages) in four sectors: Construction, Trade, Transportation and Utilities, Leisure and Hospitality and Education and Health Services. The sector with the slowest growth in wages (Education and Health Services) is particularly troubling given the sector's recent expansion and its importance to the state's regional economic development policy. Notable in Table 3 is strong wage growth in manufacturing. These data confirm that manufacturing job losses are concentrated at the low-wage end of the industry, while the remaining jobs are characterized by higher levels of productivity. Also notable was the strong wage growth in the state's knowledge sector occupations. Workers in professional and business services and the financial industry significantly increased their wages during the recession, a trend suggestive of increasing worker productivity in these sectors.

The changes detailed above all suggest that the state's economy has continued to undergo structural change - this change is characterized by the long-term erosion of production jobs (particularly low-wage jobs) concurrent with a rapidly growing knowledge sector (see Manufacturing chapter). This transition was late to arrive to North Carolina since this wage-driven deindustrialization process began in the , northeastern and Midwestern US in the 1970s and was largely complete by the early 1990s. Given the developmental history of North Carolina's economy (the rail transportation network forced manufacturing firms to concentrate in the Piedmont), deindustrialization is likely to have profound effects in Piedmont counties and less impact in Coastal and Mountain counties. The location preference of the state's knowledge firms will also add a geographic dimension to economic change. Modern economic growth appears to favor metropolitan areas.   Thus, because of the contrasting location characteristics of manufacturing and knowledge firms, the current structural change in employment patterns is likely to create a radically new economic geography within the state.

The Geography of the North Carolina's Economic Change

The state's four land sub-regions (Tidewater, Coastal Plain, Piedmont, and Mountains- see page 11 in the published North Carolina Atlas for a map of these sub-regions)) are characterized by distinctive employment patterns. While the state's transition away from low-wage manufacturing is indicative of healthy economic growth, at the local level these job losses can be devastating, particularly within the small towns that the state's mass production firms historically preferred. The local impacts of manufacturing job loss are further exaggerated by the bubble in employment and wages which developed during the 1990s economic boom due to the increased demand for manufactured goods (particularly goods related to the telecommunications industry).   As the technology bubble burst in 2001, factories which had added employees throughout the 1990s closed with little warning. Conversely, employment in the Mountains and Tidewater regions is dominated by tourism-related services. North Carolina's tourism industry fared well during the recession due to the post-9/11 reluctance of Americans to travel overseas, coupled with increases in disposable incomes produced by a mortgage refinancing boom. Finally, the state's Coastal Plain is dominated by commercial agriculture, particularly hogs and tobacco. These industries have been buffeted by volatile commodity prices, increasingly restrictive environmental regulation as well as significant flood damage from Hurricane Floyd in 1999.

Employment

The net change in total employment at the county level since 1997 is shown in Figure 4. Employment change since 1997 indicates that portions of the metropolitan Piedmont (notably the Charlotte and Raleigh metropolitan areas) continued to thrive while other metropolitan areas simply maintained their employment levels (Greensboro / Winston-Salem) or lost as much as 10% of their jobs (Hickory-Morgantown). This uneven growth in the metropolitan areas on the Piedmont is largely a reflection of the intensity of manufacturing in these areas. The Greensboro and Hickory areas are both highly dependent upon textiles, apparel, furniture and, technology-oriented products such as semiconductors and fiber optics. The consumer products suffered from low-wage competition offshore while the technology goods production was curtailed as a result of overproduction during the "dot com" boom of the late 1990s. Contrasting with the state's manufacturing belt from Greensboro to Morgantown were the metropolitan Piedmont's healthy bookends in Charlotte and Raleigh. Employment in these metropolitan areas' core counties was characterized by rapidly growing information industries such as banking, health care and state government. In addition, these areas were successful in attracting modern and high-wage forms of manufacturing such as aerospace, gas turbines and pharmaceutical production. In short, these two cities created highly-diversified and highly productive economic systems.

However, the economic change currently sweeping the Piedmont is more complicated than the geography of change suggests. The skills possessed by manufacturing workers are not easily transferable to the knowledge economy. While worker retraining is a frequently discussed solution to the localized employment crisis, the skills gap is growing and cultural biases against education in many of these former company towns limits the effectiveness of retraining programs. It has been suggested that the skill level of the manufacturing labor force may be "the 'Achilles Heel' of future economic development efforts by the state" (Stuart, 2004).  

Beyond the metropolitan Piedmont, rapid employment growth was seen in nearly all of the state's coastal and mountain counties. Job growth in these counties continues to tied to service industries in retirement and vacation communities (see the Travel and Tourism section). While these jobs certainly represent a net benefit to their communities, Table 3 confirms that they are associated with relatively low wages. Compounding the problems associated with low wages is the inability of these jobs to provide significant opportunities for worker advancement, and the development of worker skill sets that are not easily transferable to more productive knowledge-sector jobs. Finally, consumer services jobs such as these generate few significant economic spillovers. The future of tourism related growth is fragile, affluent travelers are increasingly attracted to pristine environments, as the number of tourists increases the region may lose its allure. It should be acknowledged that the dramatic job growth in both the Mountains and Tidewater shown in Figure 4 may be illusory, a small number of new jobs in these counties will result in a disproportionately high percentage impact in these small counties.

In terms of absolute job growth the state added a total of 121,469 jobs from January, 1997 to May, 2004 (Figure 5). Wake and Mecklenburg counties together accounted for 74% of the state's total jobs growth, leaving only 31,880 jobs for all of the remaining 98 counties to share. It appears that these two urban areas benefited from the late 1990s boom and did not suffer greatly from the recession. Compounding this concentration of employment was the growth of jobs in the surrounding suburban counties, seven of which were among the top 10 counties in terms of the absolute number of jobs added. This concentration of growth is best explained by the location needs of knowledge-based firms since labor and information, the raw materials of knowledge production, are most easily obtained in large cities. When evaluated in an historical context, this metropolitan concentration of employment has accelerated since the mid-1990s. For example, Mecklenburg and Wake counties combined to account for just 30% of the state's total jobs growth from 1990 to 1997. This concentration of job growth in two of the state's largest cities is a dramatic shift from the dispersed urbanization that historically characterized the state's development.

The relationship between population and employment change is revealed by county-level unemployment rates. April, 2004 unemployment rates (Figure 6) show that the largest imbalance between workers and jobs is in the northern coastal plain (dominated by agricultural and low-wage manufacturing industries), the central Piedmont (dominated by the textiles-apparel / food processing economies east of Charlotte and south of Greensboro), and the western Piedmont area around the Hickory / Shelby (textile, furniture and telecommunications) manufacturing belt. These concentrations of high unemployment adjacent to the healthiest economies in the state suggest two causes: First, workers appear to be relatively immobile, understandably reluctant to leave their homes for the greater job opportunities of Charlotte and Raleigh. Second, they reinforce the previously discussed issue of skill transferability: factory workers in Hickory and Greensboro possess few skills that are demanded by the knowledge industries in Charlotte and Raleigh. The lowest unemployment rates are found in the northeastern counties, the Raleigh metro area, the mountain counties surrounding Asheville, and in Watauga County, site of Appalachian State University and a number of affluent retirement communities.

The relatively high unemployment rates on the central and western Piedmont are a stark contrast to the economic boom of the 1990s. Historically, manufacturing firms have been drawn to the region by the low labor costs and the relative accessibility of the area. The recent structural changes of the economy, particularly the reduced transportation costs and trade barriers which have encouraged the globalization of manufacturing, have made the region less attractive for manufacturing firms. The recent changes in unemployment rates are shown in Figure 7. These rates confirm the disproportionate impact of the recession on the textile, apparel, and furniture industries of the western Piedmont portions of the state. In contrast, employment conditions in the mountain and coastal plain counties generally improved.

Foreign-owned Businesses

While the globalization of the economy has cost North Carolina tens of thousands of low-wage jobs, it has also brought some very positive results. For example, the U.S. Bureau of Economic Analysis reports that, as of 2001, direct foreign investment in the state totaled over $23 billon in plant and equipment.   These foreign-owned businesses employed almost 238,000 North Carolinians, about 7.4% of all private sector jobs in that year. The North Carolina Department of Commerce reports that there were 725 of them located in the state in 2003. However, this was a decline from a few years earlier as such firms apparently were strongly affected by the recent slump in economic activity. As reported in The North Carolina Atlas , for example, there were 738 foreign-owned businesses in the state in 1998.

There is a very strong urban aspect to the distribution of these firms (Figure 8). For example, over 79 percent of the 2003 total were found within the three largest Combined Statistical Areas (CSAs) and 388 (54 percent of the total) were located in just three of their central counties- Guilford, Mecklenburg, and Wake. (See the Population chapter for the newly defined Combined Statistical Areas, Metropolitan Statistical Areas, and Micropolitan Areas ). In contrast, the 73 counties that are not included in the three largest CSAs contained just 149 foreign-owned businesses (21 percent of the total) and the bulk of them were located in smaller metro areas. For example, there were seven other counties outside the three large CSAs that had at least seven or more foreign-owned businesses: Alamance, Buncombe, Burke, Catawba, Lee, New Hanover, and Wilson. All of them are components of either   Metropolitan Statistical Areas (MSAs) or Micropolitan Areas. The few remaining companies that are more dispersed throughout the state tend to be manufacturing facilities, while those in urban areas, in addition to factories, contain the US headquarters of firms, sales and service offices or other non-manufacturing businesses. Thus, it seems that most of the benefits of foreign investment in the state have focused on metro areas, especially the larger ones, while the negative impacts of globalization have been experienced more heavily in rural areas.

Another important aspect of the state's involvement in the global economy and the overall performance of its economy is the amount of goods that are exported to foreign markets. In 2000, total exports from North Carolina reached a record of over $17.9 billion but this has fallen since then, reaching just over $14.7 billion in 2002. Data for total exports in 2003 are not yet available but they are for the state's 10 leading exporting industries. In 2000, the machinery, electrical machinery, tobacco products and optics/medical instruments industry groups recorded exports of over $1 billion apiece, out of the top-ten total of $12.3 billion. In 2003, not one single industry group exported at least $1 billion and the top-10 group total fell by over 80%, to just $2.4 billion. Thus, it is apparent that the decline in export markets was a significant aspect of the loss of jobs during the recent recession, especially in manufacturing.

Historically, both the levels of Direct Foreign Investment and exports have tended to follow national business cycles. Thus, it is likely that both will also pick up again as the economy continues to recover from the most recent recession.

Income

While income in Southern states has always lagged behind the national average, incomes in North Carolina have been converging towards the national average for many decades (Figure 9). However, while per capita incomes peaked at 92.7% of the national mean in 1997, they have fallen steadily since then, to 89.9% in 2002, the most recent year for which such data are available. The relatively low incomes within the state are indicative of two primary factors. First, the low wages reflect the state's low cost of living. Second, the productivity of North Carolina's workers is only 92% of the national average (Table 4). The only sector with higher productivity than the US average is finance, insurance and real estate - an industry that is highly concentrated in Charlotte and unlikely to disperse its high-wage employees beyond the city.

Geographic variations in per capita income as of 2002 are shown in Figure 10. As expected, the highest average incomes are concentrated in the metropolitan areas on the Piedmont - areas that are dominated by knowledge industries such as banking and research and development. Diffusions of high wages can be seen in the Piedmont counties of Chatham (an emerging bedroom community of the research triangle area) and Moore (retirement driven growth around the Southern Pines area) as well as developed Coastal counties and retirement centers in the Mountains (Henderson and Polk).

More interesting is the change that has occurred in per capita incomes since 1997 (Figure 11). Only one quarter of the state's counties managed to increase per capita incomes at a greater rate that the state average. These increases confirm the process of economic concentration discussed earlier. The Raleigh and Charlotte metro areas experienced the greatest income growth while incomes also increased in retirement and resort communities in the Mountains, Tidewater and Piedmont (Moore county). Significant growth was also seen in areas dominated by military bases (Cumberland and Onslow Counties), as well as the Northeastern counties surrounding the Norfolk area.

The Cost of Living

Lower incomes in North Carolina are often thought to be offset by lower costs of living and there is some merit to this idea. The American Chambers of Commerce Researchers Association (ACCRA) conducts the nation's most comprehensive survey of the cost of living, covering over 300, mostly urban, areas. The resulting index includes groceries, housing , utilities, transportation, health care and miscellaneous goods & services. The national index value of 100 derives from data for 309 places in the second quarter of 2004. Values for individual places are reported in terms of this national mean. For example, a value of 98 means that a place has overall costs of living that are 98% of the national mean or 2% below it.

The ACCRA survey includes 12 sites in North Carolina (Figure 12). The simple average for the state's 12 places is 95.9. These places include most of the state's larger urban areas, plus Marion/McDowell County and Dare County. The composite index for most of these urban areas is less than the national average, including the largest cities, Charlotte and Raleigh. On the other hand, the most expensive places are those that are major recreational/retirement communities: Asheville, Dare County, and Wilmington. The primary reason for the high levels in Dare County and Asheville is the cost of housing, with index values for housing costs of 140 in Dare and 117 in Asheville. Their other costs are at or below the national mean.

Encouraging Economic Growth Outside the State's Urban Core

The economic problems of rural areas have been a major concern for the state for many years. Major emphases have been placed on using financial incentives to induce companies to locate in these areas. The magnitude of these incentives are highest for companies that locate in counties that are designated as distressed, least for the prosperous urban areas. Despite this, however, the great majority of incentives have been paid to new and expanded facilities that located in urban areas. A recent study by the North Carolina Budget & Tax Center ( http://www.ncjustice.org/btc/2004pubs/BTC03-17004EDev.pdf ) found that only a small share of economic incentives have gone to the most economically distressed counties. For purposes of allocating these incentives, counties are categorized into five levels, with Tier 1 designating the most distressed and rural and Tier 5 for the most affluent urban areas. The state provides incentives under several programs: the William S. Lee Act, the Jobs Development Investment Grants Program (JDIG), the One North Carolina Fund, and the Industrial Development Fund (IDF). For the most part, these programs provide tax reductions for companies locating in North Carolina, with the greatest amounts going to companies that locate in Tier 1 areas. Despite this advantage, between 1996 and 2001, only 8.9% of credits under the Lee Act were allocated to Tier 1 counties while 78.4% went to Tier 4 and 5 areas, the state's most prosperous. The other funds showed a similar distribution that favored the most affluent urban counties.

For example, in 2003 and so far in 2004, the BTC report states that nine grants have been approved under the JDIG program. These grants totaled $44.3 million, with eight of the grants being made to companies locating in the Charlotte, Greensboro, Raleigh and Wilmington areas. Only one, representing less than 4% of the dollar total, was made to a Tier 2 county, none in Tier 1. It appears that by and large these programs have failed in their primary objective of inducing economic development in the state's most economically distressed areas. Further, another study cited in the Budget & Tax Center report estimates that only 4% of the jobs claimed to be created under the Lee Act actually were induced by it. Future state tax expenditure liability under the Lee Act credits may total as much as $947 million from credits awarded through 2001. Thus, these programs, while well intended, have been expensive and apparently have failed to achieve substantial benefits.     

The Future of the North Carolina Economy

Even the most casual observers can see the dramatic structural changes occurring in the North Carolina economy. Perhaps this process is most visible along I-85 between Cabarrus and Mecklenburg counties, a 30 mile stretch of highway that passes through communities such as Kannapolis, a town which lost the majority of its jobs to mill closures, and downtown Charlotte, one of the largest and most successful financial centers in the nation and one of the ten fastest growing metropolitan areas in the nation. Distance is not the only factor separating these communities: Kannapolis was a town built by industrialists, where mill owners sought to create an isolated community focused on a single occupation - textiles. This focus leaves the town's workers struggling to find a new source of income in the post-industrial era.   Charlotte developed as a economically diversified urban area where businesses were successful only if they could interact with businesses and customers elsewhere. This diversification lead to steady economic growth, the attraction of a skilled and educated workforce and the accumulation of specialized knowledge that allows the current financial firms to be successful.   

Globalization has ended the state's position as a low-wage manufacturing location.. While the loss of these jobs is certainly tragic from the perspective of the workers, the shift to other forms of employment is a necessary step for the continued economic development of the state. Since the millennium, the total number of workers in the information, professional and business services and the educational and health services sectors of the economy have outnumbered manufacturing workers within North Carolina. Unfortunately, the geography of knowledge industries is very different from the geography of manufacturing. The small and isolated towns which were attractive to manufacturing firms are not feasible locations for knowledge-industry firms. Incentives offered to encourage new manufacturing firms to locate in the state's small towns appear to be the only solution to the Piedmont's economic problems. However, given the globally-driven structural changes in manufacturing (and Midwestern examples of deindustrialization), continued reliance on low-wage manufacturing as an economic development strategy seems futile. As the state's growth becomes increasingly concentrated in its metropolitan core (particularly the Raleigh and Charlotte metropolitan areas), migration out of small towns into these metropolitan areas will likely accelerate and the culture and politics of the state will likely shift away from its rural roots. The state's greatest challenge will be stimulating economic growth in places outside the metropolitan spheres of influence, or outside the state's resort areas. The economic transition which has become starkly visible since 1997 is about more than just the location of employment - the unique characteristics of the state, particularly its dispersed, small town population, are likely to change as well.

Further insight into the future of economic change is offered in a   study released by the Policom Corporation, an economic research firm based in Palm City, FL. It provides rankings of the economic strength of 361 Metropolitan Statistical Areas (MSAs) and 573 Micropolitan Statistical Areas (McrSAs) throughout the US. (Definitions of MSAs and the new McrSAs are available in the Population chapter and the Policom study is available at http://www.policom.com).

A host of statistics were used by Policom to create these rankings. One group measured the overall growth and quality of each economy. Quality was a matter of what people earned. A second set of variables measured how the economy was behaving. A third set was comprised of negative factors, such as welfare payments and per capita Medicaid assistance.. The consistency of recent economic growth was considered to be crucial in developing these rankings.

As suggested by the previous analysis, North Carolina's largest metro areas ranked high among the nation's 361 MSAs. In fact, the Charlotte-Gastonia-Concord MSA is ranked as having the strongest economy in the entire United States.   Raleigh-Cary was ranked ninth and the Durham MSA placed 34th. This gave the state three of the 50 top-ranked MSA economies in the country! The Va. Beach-Norfolk- Newport News VA-NC MSA ranked 59th, Wilmington is 69th and the Asheville MSA ranked 108th.   The Triad areas ranked lower, with the Greensboro-High Point MSA placing 124th and Winston-Salem coming in at 153rd. The rest of the state's MSAs, mostly smaller ones, fared less well, ranging from Burlington's 173rd place, down to   Jacksonville, which placed last among the state's 15 MSAs at 316th.

North Carolina's 27 Micropolitan Areas is the third highest total among all of the states. Interestingly, six of the state's McrSAs are included in the nation's top 50, led by the Southern Pines-Pinehurst area (4), Kill Devil Hills (12), and Boone (16).   Significantly, all are among the state's major recreational-retirement areas. Others also ranked in the top 50 include Morehead City (21), Statesville-Mooresville (22), and Sanford (48).   Three other ranked between 50th and 100th place: Elizabeth City (66), Dunn (97), and New Bern (98).   On the other hand, three areas ranked below 400th place: Washington (431), Laurinburg (455), and Roanoke Rapids (469). No North Carolina McrSAs were ranked in the bottom 500 nationally.

The Charlotte Observer recently noted that another study reinforces the high national standing of North Carolina's larger urban areas. "Expansion Magazine," a monthly business publication, surveyed more than 80 site selection location consultants to find out which cities their clients considered the most attractive for a business location. As reported in the magazine's January, 2005 issue, Charlotte ranked 4th nationally and Raleigh placed 17th nationally. The high ranked cities all ". . have logistical advantages, a high quality of life, available work force, and a favorable tax and political climate," according to the magazine's editor.

Overall, these rankings tend to confirm the previously reported economic strength and population growth of the Research Triangle and Charlotte areas, plus that of a host of smaller but relatively affluent recreational-retirement areas. Their high national rankings bode well for the future of the state's economy but they also suggest that the previously cited tendency for growth to focus increasingly on the state's two largest metro areas is likely to continue, along with a number of smaller recreational-retirement areas. This further suggests that the historical tendency for both economic activity and population to be widely dispersed throughout the state will be less pronounced in the future. In short, North Carolina's future is increasingly an urban future, most notably in and around the Charlotte and Raleigh-Durham areas.