by John Hood, John Locke Foundation and NC SPIN panelist, June 15, 2015.
North Carolina’s economy grew slower in 2014 than in 2013, according to data released last week by the U.S. Bureau of Economic Analysis.
BEA is the federal agency that tracks the gross domestic product (GDP), a count of all the goods and services produced for sale. North Carolina’s real (inflation-adjusted) GDP grew last year by 1.4 percent, down from 2.7 percent growth in 2013. That’s a pretty big difference. In 2013, North Carolina’s real GDP grew faster than the national and regional averages. In 2014, our growth rate fell below these averages.
What’s going on? N.C. State University economist Mike Walden points to the effects of international exchange rates. When the dollar surged last year, North Carolina’s exporters either lost sales or had to discount their products overseas. “I don’t think this is anything the state did wrong,” Walden told WRAL-TV. “It’s simply that our economy is more susceptible to ups and downs in the manufacturing sector,” which makes up a far higher share of North Carolina’s economy than in the average state.
Another very real possibility is that the new GDP estimates for North Carolina and other states are inaccurate. BEA calls them “advance statistics” based on “source data that are incomplete or subject to further revision by the source agency.” They’ll be revised next year and, if history is any guide, some of the revisions will be substantial.
In any event, it’s premature to punch the panic button. One way to think about it is that North Carolina’s overperformance in 2013 was larger than its underperformance in 2014. Over the two years, our average annual growth rate was 2.1 percent, compared to the Southeastern average of 1.6 percent. Among our neighbors, only Georgia kept pace with North Carolina’s growth rate.
Another consideration is that GDP isn’t the only relevant measure. When it comes to employment growth, North Carolina’s economy did far better in 2014 (+2.7 percent) than in 2013 (+1.9 percent). Using the federal government’s broadest measure of unemployment, which includes people who’ve dropped out of the labor force, North Carolina has also had one of the nation’s largest labor-market improvements over the last two years.
Still, the advance GDP statistics for 2014 do suggest two lessons for North Carolina politicians and policy analysts to keep in mind. First, public policy at the state and local level clearly influences economic growth rates, but the effect isn’t large enough to offset larger national and international trends. You can’t wall your local economy off from what’s happening everywhere else. And you can’t draw firm conclusions about the efficacy of state and local policies simply by eyeballing the data. You have to adjust for those national and international forces.
Second, to the extent state and local policies matter, their primary effects are over the long run, not the short run. Better schools, better roads, safer neighborhoods, and lighter tax and regulatory burdens affect the willingness of entrepreneurs to start new businesses, existing firms to relocate or expand, investors to adjust their portfolios, and workers to supply more of their labor to the market. These decisions take a while to manifest themselves.
Don’t think of the economy as a machine that state or local politicians can easily manipulate with levers and dials. Think of it as a garden that rewards patience, diligence, and vision — and that will to some extent thrive during good weather and suffer during bad weather regardless of how skillful the gardener is.
There’s always a next and consequential election, so there’s no point pretending that these observations about conflicting data and public policy will convince politicians to temper their claims. You can expect Democrats to cite the new GDP estimates as evidence that Gov. Pat McCrory and the GOP-led legislature are taking the state in the wrong direction. You can expect the Republicans to emphasize the job numbers and observe that the state’s economy took a nosedive during previous Democratic majorities.
I don’t know which argument will prevail with North Carolina voters next year. I think I’ll wait for the next round of economic measurements.