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North Carolina’s economy, which during the last nine months experienced its sharpest decline since the Great Depression, will recover, potentially as soon as 2021.  That’s according to John Connaughton, PhD, he Barings Professor of Financial Economics at the University of North Carolina at Charlotte, who delivered the Barings/UNC Charlotte Economic Forecast virtually Thursday.

There are two countervailing factors that make forecasting North Carolina’s economic recovery challenging, said Connaughton: how quickly a COVID-19 vaccine becomes available and the willingness of Americans to take a COVID-19 vaccine.

“At the end of the day, it is ultimately people who will decide their risk to re-engage in the economy,” Connaughton said. “That remains to be seen.”

Why forecasting the state economy is challenging

Twelve of the 15 industry sectors in North Carolina are forecast to experience Gross Domestic Product (GDP) decreases in 2020, said Connaughton, with the largest decline in the state’s hospitality and leisure services industry. It is expected to see a 33.9 percent decrease in real GDP. Only three sectors are projected to experience growth–finance, insurance, and real estate; agriculture; and mining.

For the fourth quarter, Gross State Product (GSP) is expected to increase by an annualized inflation-adjusted rate of 5.6 percent, but for all of 2020, the inflation-adjusted GSP is expected to decrease by 3.4 percent compared to the level of GSP in 2019.

Yet forecasting the North State’s economy in 2021 is still challenging, said Connaughton, because economic growth, particularly in the sectors hardest hit during the COVID-19 pandemic and resulting economic slowdowns, will largely depend on consumer confidence.

Even if consumer confidence is high, said Connaughton, the 9-12 months of consumer activity during the COVID-19 pandemic may well have reset consumer behavior and habits, especially with regard to e-commerce.  That could portend further troubles for small businesses that rely on brick and mortar locations, suggested Connaughton.

“After several months where consumer confidence has been down due to the coronavirus, we’re starting to see consumer confidence increase,” said Connaughton.   “What remains to be seen, it is really unknown to anybody right now, is how people are going to respond when we get to the point of herd immunity, which is when 60–65 percent of the population has either been vaccinated or has had the disease.”

Still, Connaughton and his team have studied the economic data, including unemployment rates and trends, sales tax revenues, and prepared a forecast for 2021 that suggests an annual GDP Growth Rate for the United States of 4.5 percent.

Unemployment trends after recession: comparison

“Ultimately, it will be consumer confidence that will decide whether we have a v-shaped recovery or a k-shaped recovery,” said Connaughton.

Digging into the data

Economists use the term “k-shaped recovery” when an economic recovery that follows a recession is different in rate, time, or magnitude for different sectors of the economy.  That’s in direct contrast to a “v-shaped recovery” which would be characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline. In this case, it is caused by the uncertainty and temporary shutdowns due to the COVID-19 pandemic in March and April of 2020.

Connaughton shared the most recent unemployment data, broken down by industry, which could portend a k-shaped economic recovery due to the slow rebound of the leisure and hospitality industry.

For that industry, in North Carolina, 269,000 jobs were lost between February 2020 and April 2020, 43 percent of the 615,800 total jobs lost during that period.

More jobs were lost in that sector, and, as of the end of October 2020, employment numbers remained at 77.8 percent of their February 2020 totals.

Compared to the other 14 industry sectors that Connaughton and his collaborator, Dr. Craig Depken, the Belk College Professor of Economics at the University of North Carolina at Charlotte, studied, the leisure and hospitality industry is lagging in the economic recovery of the state.

According to Connaughton, by the end of December 2020 compared to the start of the year, we will have lost 224,100 jobs in the state of North Carolina and the unemployment rate will have increased by 4.8 percent.

“Most of the sectors are at 90–95 percent employment,” said Connaughton, comparing current employment levels at the end of October 2020 to the corresponding levels as of the end of February 2020.  “What remains to be seen, it is really unknown to anybody right now, is how people are going to respond.”

NC job recovery by Industry

Would an economic stimulus help?

“Virtually every sector, except for leisure and hospitality, have recovered 90 percent of their lost jobs,” said Connaughton.  “Most economists agree that a targeted stimulus could speed up the recovery in 2021.”

Business executives agree, according to a recent survey conducted by the Association of International Certified Professional Accountants, as 54 percent of respondents told the organization that the lack of pandemic assistance would have an impact on their firms.

Yet more than two-thirds of the 500 businesses surveyed by AvidXchange reported that business leaders remain optimistic about the growth potential for their business in 2021 even amid the uncertainty surrounding the COVID-19 pandemic.

“Liquidity remains a primary concern as companies balance optimism about the future with the lasting effects of the pandemic,” said Dan Drees, Chief Growth Officer of AvidXchange, in a statement. “If leaders prioritize getting the right technology in place, they can tackle cash flow and hybrid workforce operations simultaneously for their finance teams, arming them with the right tools to support growth in the year ahead.”

More than 60 percent of businesses are looking to digitize all internal operations in 2021 in anticipation of continuing to operate with a dispersed workforce, the survey found.

COVID-19 in North Carolina

Connaughton and Depken will continue their research, which measures the county-level economic impact in North Carolina caused by the mandatory stay-at-home orders enacted earlier this year.

“You can have increasing numbers of cases,” said Connaughton, “but the percentage increases are what is important, and what we’re actually seeing is not a level increase in terms of numbers, but also the percentage increasing as well.”

COVID data by NC County

North Carolina ranks, as of Nov. 30, 2020, 36th in terms of the infection rate (33.74) and 31st in terms of death rate (1.46 percent), compared to the other 49 states and the District of Columbia.  “The spike is clearly here, it is ramped up, and it is really starting to generate some issues that we need to deal with,” said Connaughton.

Connaughton and Depken discussed preliminary data during the question-and-answer portion of the Economic Forecast.

Among the findings:

  • In April, the North Carolina economy was less severely impacted by the mandatory shutdowns than the average state, ranking 25th among states based on unemployment.
  • By October, North Carolina had the 29th lowest unemployment rate, indicating that the recovery from the shutdowns has not been as strong as the average state.
  • In April, North Carolina county unemployment rates ranged from 19.3% in Dare and Swain counties to 8.1% in Bertie, Chowan, and Duplin counties.

“Our future research will be trying to understand more about how counties experienced different impacts in these two important measures of economic activity during 2020,” said Depken.