YOU DECIDE: Will the economy be better in 2011?

Date posted: December 22, 2010

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

It’s the time of year that economists feel most loved. I’m not talking about good cheer from friends and family during the holiday season. I’m talking about the love we feel from people eagerly asking us to predict next year’s economy. OK, maybe I’m overstating things with love — a better sentiment might just be attention.

Seriously, I and many of my colleagues are frequently asked at the end of each year to peer into our crystal balls and see if the collective economy will be better or worse — or, in keeping with the holiday period — to see if the upcoming economy will be naughty or nice.

This is a tall order. Although there’s much about the economy and economic relationships that professional economists understand, reducing these relationships to numbers is quite difficult. One reason is that testing cause and effect in economics is much harder than for the physical sciences. Economics involves human decision-making, and consistently isolating and verifying what forces are behind humans’ economic actions is tough.

It’s for this reason that most economic “outlooks” spend much time initially talking about the economic past. Indeed, there’s an old joke about economic forecasting that says economists are good at predictions as long as they’re about the past and not the future.

Therefore, for what it’s worth, in this column I’ll give you my views on both the immediate economic past as well as the economic future here in North Carolina.

The economy in North Carolina in 2010 was better, but just barely. The job market bottomed out in September 2009, two months before the bottom in the national market. But since then job gains have been meager. One survey shows jobs in our state up by 12,500 over the past year; another survey puts the increase at 29,000. Either way, the gain is less than 1 percent and still puts us a long way from replacing the 300,000 jobs lost during the recession.

The unemployment rate did drop, by over a percentage point, but there’s less to applaud here than at first glance. Most of the rate drop was due to more than 80,000 people leaving the labor force. At least half of these are likely to be discouraged workers, jobless folks who want to work but who have stopped actively looking. These individuals are not counted in the most commonly quoted unemployment rate.

On the upside, however, employers increased the number of hours in the work week in 2010. Translated, this means existing employees are working more hours. If the work week had remained the same, 55,000 additional new jobs would have been created in the state.

Retail sales in the state in 2010 — a barometer of consumer spending — tracked fairly closely to retail sales in 2009, so they didn’t decline. However, sales were still below 2007 and 2008 levels. Existing home sales — a reading on the all important housing market — showed strong gains earlier in the year, but once the homebuyer tax credits were ended, sales have slumped.

The bottom line: The North Carolina economy, like the nation, is moving ahead, but the pace is closer to a crawl than a run. The two big head winds are a lack of strong consumer spending and mediocre home sales.

So how will our economy do in 2011? First, I don’t think it will perform any worse. I think there’s enough economic steam to prevent a double-dip recession. But unfortunately, I think the two head winds cited above will continue blowing. Job growth will improve to maybe 55,000 to 70,000 net new jobs, and the state’s unemployment rate will drop to the low 9 percent range. But this still puts us years away from reclaiming the 300,000 lost jobs and a 5 percent unemployment rate.

Furthermore, as anyone who’s lived in North Carolina long enough knows, economic conditions and trends vary tremendously across the state. The largest job gains in 2011 will be in Charlotte and the Triangle. In fact, those two metropolitan areas will account for almost two-thirds of the state’s new jobs. Also doing well, on a relative basis, will be Asheville and Wilmington.

So the immediate economic picture is still cloudy. Some say it took almost 25 years to develop the economic bubble that collapsed in 2008. If true, then it makes sense the recovery will be long and hard.

But there’s always a bright side. There are exciting business possibilities for the future in energy, technology, world trade, nutrition and health care and other areas. History shows that some of the most creative business developments have come after economic downturns.

Also, I think it’s an advantage that we’re here in North Carolina to face these economic challenges. In aggregate, our state’s economy has grown faster, has made more adjustments and is more attractive to business development than most states. Entrepreneurs and venture capitalists — that is, people who put ideas into action — will be looking for places in the country with better than average growth prospects. I think they’ll find that here. You decide if I’m right!

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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. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

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

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