Posted Jan. 6, 2017 at 10:00 a.m.

Guest opinion: How do we solve our economic growth mystery?

Published: 2017-01-06 10:00:00
Updated: 2017-01-06 10:00:00

Mike Walden North Carolina State University economist Mike Walden.

Like many academics, I find pleasure in endeavors most would call boring. So when I pour over numbers on government websites or dusty statistical volumes, my wife gleefully says “get a life”!

Recently in one of my statistical journeys, I discovered a mystery about North Carolina’s economy. Like the nation and most states, North Carolina’s economy has made progress since the end of the Great Recession. However, compared to recent recoveries from recessions, the pace of North Carolina’s current economic progress has been relatively slow.

Now this actually isn’t the mystery. The speed of the current economic recovery at the national level has also been slow by historical standards.

What is surprising and mysterious – at least to a numbers-person like me – is that our state’s economic progress has been even slower than the nation’s progress. Even more, this has not been our tradition. Usually North Carolina’s economic recoveries are stronger than the national recoveries.

Let me provide some numbers to demonstrate my point (you knew I would have to work some numbers into the article!). By this point in the economic recovery after the 1990-91 recession, North Carolina’s real gross domestic product (GDP) – the value of everything (goods and services) produced in the state - was 43 percent higher than at the bottom of the recession. After the 2001 recession, our state’s real GDP was 20 percent higher compared to the bottom of the recession.   
But in the current economic recovery, North Carolina’s real GDP is only 10 percent higher than it was at the low point of the Great Recession.

Unfortunately, there’s more concerning news. In both of the recoveries from the 1990-91 and 2001 recessions, North Carolina’s rebound was stronger. But it’s not the case this time. As of 2016, North Carolina’s recovery in real GDP is 4 percent under the national recovery in real GDP.

So the mystery is - what happened? How did North Carolina go from a state that had faster economic bounces from recessions to a state that now is having a slower bounce?

To answer this question, in the best tradition of Sherlock Holmes and the Hardy Boys, I put on my economic sleuth hat and looked at more data. Economies grow slower for three reasons – they are expanding in industries with relatively low productivity, they are not expanding in industries with high productivity or a combination of the two. Productivity refers to output compared to inputs, or in investment terms, rate of return.

After hours of comparing and calculating numbers (fun for me; the height of boredom for many others!), I think I cracked the case. Compared to the nation, North Carolina has had less expansion in high productivity industries and more expansion in low productivity industries during the current economic recovery.  

Here are the specifics. Compared to the nation, North Carolina has seen slower expansions in high productivity industries like agriculture, utilities, manufacturing (especially non-durable manufacturing) and finance, while at the same time having faster expansions in lower productivity sectors such as administrative services, leisure and hospitality and personal services.  

Does this mean the state has done something wrong in its economic development strategy? Not necessarily. North Carolina is still being impacted by the dramatic changes occurring in the economy resulting from two big forces – globalization and technology.   These forces have been occurring for decades and I – for one – don’t see their influences on our economy receding. In short, our state continues to go through an economic transformation.

But the results of my sleuthing do point to how we want to proceed to improve North Carolina’s economic performance.

First we should seek to increase our development in high productivity industries. Here there are possibilities in a number of areas. For example, our state has a very active and significant agriculture and agribusiness industry where expansion to serve growing international markets is certainly feasible. We also have a long and prominent tradition in manufacturing, and today there is new and exciting research offering the potential for growth in 21st century production techniques and products.   

And, although it was hit hard during the Great Recession, North Carolina has one of the highest concentrations of financial services in the country. Our relative advantage in the sector can serve as a springboard for new applications in personal, commercial and international financial applications.

Second, if we can upgrade the skill and talent levels of more of our workforce, they will serve as a magnet for attracting more high productivity and high paying industries to the state.

Improvement in any area begins with an assessment of where you’ve been and where you want to go. Solving the mystery of North Carolina’s recent economic performance has revealed both problems and promise. You decide if the case is closed!

Note: Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic development and public policy.

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