Economist: There's good, bad news as economy starts steep climb back
By Steve Herring
Published in News on August 2, 2009 2:00 AM
There might be signs that the recession is receding, a state economic expert told Wayne County business leaders this past week, but don't expect too much, too soon.
"What it means for North Carolina and eastern North Caro-lina is that to grow faster, we are going to have to more diligent at looking attractive to outside businesses," economist Dr. Mike Walden told local industrial and business leaders at a luncheon at the Goldsboro Country Club.
"What (Wayne County Devel-opment Alliance existing industry specialist) Mike (Haney) and others do in economic development and selling eastern North Carolina and Goldsboro is going to be even more important in the future because there is not going to be as much development as say there had been in the '90s."
It will be even more important to promote Goldsboro and the county as "great places to do business and live," he said.
One way that the county is preparing for the hoped-for recovery is through its WorkKeys job profiling and testing program, said Mount Olive Mayor Ray McDonald Sr., alliance chairman.
McDonald said he had spoken with Walden prior to the program about the WorkKeys program.
"He had not heard about us having gotten that and he said, 'that is one of the greatest things that you can do its to get your people ready because when it turns around you are going to be asked do you have this kind of talent, can you do this,'" McDonald said. "He said because when an industry comes to the county they are going to want to know what kind of program you have in place. This is the kind of program we have got to have in place to attract industry to our area. They have to know that the labor force is here."
The WorkKeys program that is being coordinated through Wayne Community College is going to "be the thing that really helps this county," McDonald said.
McDonald said that he thought most of Walden's comments on the economy were "on target."
"The only things I don't understand a lot about are the numbers they throw out," he said. "I do know this, that when the housing bubble burst, it did create a big problem for us. You stop and think about it, and he didn't allude to it, how many industries the housing industry touches, how many people. That is where all of the jobs went away.
"When those jobs started going away it affected plumber, carpenters, lumber people. Just think about it. We have to prop that back up. Whether you like what the president is doing or not, the fact that he is trying to do something is impressive to me. I don't agree with everything he is doing, but he is trying to do something. He has got it on the table and we are talking about it and that is really important."
Haney added that Walden's comments, "pretty much underscore what we are seeing in Wayne County as far as the unemployment, manufacturing."
More manufacturers are investing in technology to improve their production and profitability. That could lead to more jobs in Wayne County in the coming year.
"We have heard a lot of comments that this (recession) has bottomed out," Haney said. "Who knows? But we are seeing that some of our manufacturers are recalling people they had laid off. They also are working more shifts. The ones that had cut back hours are now filling up working 40 hours a week, some of them of working overtime so you know we are seeing some good signs. Are we out of this yet? I mean who knows?"
The recession, Walden said, has been "an absolute shock" to households that had been on a buying streak. Households had built up debt since they felt their assets were rising, he said.
"Households are not buying like they used to," he said. "We think that will carry through after the recession is through."
That, he said, is what will make the recovery moderate.
Walden, a Williams Neal Reynolds Distinguished Professor and extension economist in the Department of Agriculture and Resource Economics at N.C. State University prefaced his comments by saying there is "good news and bad news."
"The bad news is that we are still in a recession, and it is becoming increasing evident, as if people didn't know, that this has been the worst recession in at least 70 years," he said. "In fact economists are already putting a label on this and are calling it the Great Recession."
There have been few places to hide, he said. Even areas thought to be recession-proof, like the Triangle, have suffered.
"In the past, households could count on money being safe that was money invested in their homes," he said. "That is no longer the case. Housing values are, by one measure, down by 30 percent.
"The reason this recession has been so bad is that it has imperiled a part of our economy that economists argue is absolutely essential to having a functioning economy -- and that is the financial sector. Whenever you get the financial sector in trouble like in the 1930s you have serious situation on your hands."
The country was dangerously close to that dire trouble last fall, he said.
People need to be aware of the back story of why such extraordinary measures were taken by the federal government, whether they agree with them or not, he said.
The recession of 2001 was tied to the "dotcom burst," he said.
"This recession was sparked by a retreat in a part of our economy that has never been know for boom or burst -- residential real estate, residential housing," he said. "We had a tremendous and unprecedented buildup in investment in that kind of housing."
Two key factors play into that, he said.
The first was a change in the tax code in the late 1990s. Prior to the change people could escape capital gains tax if they bought a house of equal or greater value within 18 months. Congress eliminated that provision. People just had to live in the house as principal residence for two years to avoid the tax.
"It changed the mentality of how people looked at residential housing," he said. "It became more of being considered a tax investment than a tax shelter."
The second was the rapid appreciation of residential property fueled by low interest rates and "loose" money, he said.
"Translated that means the Federal Reserve pushed interest rates to very low levels, kept them there for a long time and provided a plenty of credit for the economy," Walden said. "For whatever reason, they kept the policy which meant that home buying became very easy because the money was there and the interest rates were low."
Walden said, in is opinion, around 2005 the Fed was worried that the housing market was growing too fast and growing into an investment bubble, so it began raising interest rates.
The problem was that people with adjustable mortgages saw their payment scale go up. The Fed lacked data on the number of adjustable rates and subprime loans since they were handled by lenders not overseen or directly regulated by the Fed.
"What happened as interest rates went up the housing market became more and more troubled," he said. "We saw a rise in defaults, a rise in foreclosures. Housing appreciation got as high as 12 percent compared to the typical of 2 to 3 percent."
It started falling but did not stop at zero, he said.
"That is the key to this recession," he said. "What caused this economic calamity is that housing prices fell. No one expected that. We had never seen that. Pockets around the country, but in terms of a major nationwide decline in housing projects, it never happened not even during the 1930s.
"Once the housing market collapsed and housing values went down lenders, bankers and others had loans where the loan value on a house was now higher than the value of the house. Those became toxic loans and the financial sector got in trouble."
The good news is that some economists think the recession is beginning to wane, he said. It doesn't mean it is over, it's still declining, but slower, he said,
Despite the perceived improvement, unemployment will continue to grow possibly topping 13 percent.
Business want to be sure economy is back before they go back hiring, he said.
It also is time to look at post-recession issues, he said.
"The economy has been stimulated and now we have to worry about destimulating the economy," he said. "That is to say the Fed has done an extraordinary amount of intervention in the economy to blunt the recession. Interest rates were pushed extremely low, and it increased the basic money supply by 125 percent in last six months."
That is causing some to worry about negative affect such as higher inflation.
The Fed, he said, is aware of it and will pull money back, and nudge interest rates up.
Another concern is that the federal government in fighting the recession has spent more money -- borrowed money so the national debt has been ratcheted up.
"In the future more federal resources will go to service debt, a need to borrow more money and perhaps higher taxes," he said.