Economic Impact of COVID-19 in Charlotte

The nation’s economic downturn from COVID-19 has been all-encompassing, impacting all sectors of the economy at a pace not yet seen in American history. 

To make sense of this proverbial roller coaster of economic change is John Connaughton, Director of the Barings/UNC Charlotte Economic Forecast, and the Barings Professor of Financial Economics at UNC Charlotte.

Transcript

I’m Jeffrey Jones, Director of Executive Education and Professional Development at UNC Charlotte, and this is Charlotte Business Buzz. 

Connecting the Queen City’s business community … From the Belk College of Business at UNC Charlotte.... This is Charlotte Business Buzz

The nation’s economic downturn from COVID-19 has been all-encompassing, impacting all sectors of the economy at a pace not yet seen in American history. Unemployment growth, GDP declines and shuttered businesses paint a startling picture of the nation’s economic status - halting years of economic additions. 

Amidst that bleak backdrop, the Charlotte region has fared better than average according to the latest Barings/UNC Charlotte Economic Forecast.

In a recent episode, we spoke with University City Partners Executive Director Darlene Heater about what lies ahead for this growing area of Charlotte. 

Since that interview, insurance giant Centene Corporation has announced that it has selected Charlotte’s University City for the company’s East Coast headquarters, bringing 3,200 jobs, a $1 billion investment. According to media reports, Charlotte had stiff competition from other regions and cities. 

Joining us today to talk to us about this proverbial roller coaster of economic change is John Connaughton, Director of the Barings/UNC Charlotte economic forecast, and the Barings professor of financial economics at UNC Charlotte. 

John, welcome to the program.  

Good to be here. 

First, can you give us a very broad overview of where the economy was headed before the pandemic hit the United States? 

Well actually you know the first quarter is kind of an interesting uh interesting information came out of that. It seemed to be slowing down just a little bit - i noticed that the national bureau of economic research which are the keepers of the business cycle information -  and so when the recession begins when the recession ends and they have it all the way back to 1854 there were 33 expansion cycles up until this last change and they are now saying that we entered recession in February which would shock a lot of people because, really the virus didn't get here and we didn't start having mandatory shutdowns - stay at home orders - until March so if that's the case either one or two things it was happening. One, is that the virus actually was starting to affect economic activity in February because we saw the unemployment rate tick up just a little bit but i think we may have also had you know slowing in the economy probably wouldn't have lasted but it probably was slowing compared to how hot it was in the third and fourth quarters in 2019 so it's kind of an interesting situation in terms of you know where we were when this started the economy was moving along but fairly slowly and then of course everything hit the fan - we know what's happened since then we've all lived through it. What makes this recession a whole lot different than any other recession that we've had in any of our lifetimes and in fact going all the way back to the recessions of you know the great depression and and the in the 29 and 30s and even further back than that the panic of 1807 - a couple of our faculty members do remember that - but all joking aside, this recession is different because in every other recession unemployment was a lagging indicator so it had a drop in economic activity and six to nine months later you see that manifest itself in rising rates of unemployment. This is different. What we're seeing now is contemporaneous unemployment. People get laid off they're told to go home whatever the reason is and the economy drops so they're happening at the same time. That's probably not going to be the case in the recovery we talk about that later but this makes this recession so much different we're into it right now for what - six months? Now we're actually starting to in the normal recession we're starting to see unemployment rates rise at this point in time. They’ve been creeping up a little bit before this but we saw unemployment rates just skyrocket in April which is really the first month of the true downturn if you will -  the first month where we were reeling from the mandatory shutdowns. 

How have these changes evolved, 4-6 months into the health crisis? 

Okay, so i had the mandatory shutdowns in the middle of - for most states - in the middle of March and that resulted in a spike in unemployment that was reflected in the April unemployment numbers. There's a little quirk in the way we collect unemployment data, and so even though a lot of people got sent home in March they got sent home after the March survey was done so there was a little rise in unemployment in March but it wasn't the big number the big number came in April when everybody who's been sent home in March and in early April was picked up in the survey uh which is done typically the second week of the month. So that was really the first big spike and you know everybody's talking about the deep V recession that we have this environment where we would shut the economy down for two months we'd see an unemployment spike maybe as high as 20 percent but then we’d kick the virus and we begin to open back up again probably in May, we'd see a reflection of that in June and so on, and just as we had a dramatic decline in um GDP and rise in unemployment when this thing all began, we had the same kind of response coming out of it. Economy would just kicked back in fundamentals, there's no financial problems, there was no you know overhang in terms of investment or any of these other things so there was nothing that generated this recession other than hey everybody go home for a couple of months - that hasn't happened. It's not as bad as it could have been, but we we haven't seen the dramatic rise or increase. 

Where does Charlotte sit in this economic turmoil? 

Probably not hit nearly as bad as a lot of the other parts of the country. So, the last month where we have really local data available for unemployment was June. In June the US rate was 11.1 percent. But here's the interesting thing  - 11.1 percent is the US rate, but the 50 states plus DC range from 4.3 percent - what recession in Kentucky - to 17.4 - oh my god still in Massachusetts  - and then it's pretty densely filled everywhere from there. North Carolina's rate in June was 7.9, so we're on the low end of this. We were a full three plus points lower than the US rate and you know we were the 12th lowest unemployment rate of the 50 states plus DC. So, overall the state has not fared nearly as badly as the average state in the United States and certainly not as bad as the really hard hit ones like New York, New Jersey, Massachusetts, etc. and within that context cities like Charlotte have been affected even less because our industry makeup is such that more a higher percentage of our industry can effectively work from home because we're really a service economy - finance, information, etc. You know, most of those folks can work from home just as effectively as they can work in the office - or almost as effectively - so they're not losing their jobs and their businesses are going on. So the big metro areas are being a little bit less impacted than some of the smaller areas. This is quite a bit different than where North Carolina has historically been in recessions. In most recessions we get hit a little bit harder than the average in the economy. We're in the bottom third of states in terms of our unemployment increase typically in a recession and this one's been different for us. So, that's the good news. As bad as it's been and as onerous as it’s been on people both from a health standpoint and also just from a lifestyle standpoint - things in this state and in Charlotte have really not been economically that bad compared to a lot of the rest of the country.

How does the recent announcement from Centene affect the region’s economic outlook?

Well again, we're talking about industries and businesses that aren't terribly affected by COVID and so we see industries continuing to expand, industries relocating. Industries like that are able to basically carry on business - not normally - but much less disrupted than say a local restaurant. So, what we're seeing is a continuation of where we were in 2019 in terms of Charlotte being able to attract finance, insurance, information, industries you can call those higher tech certainly higher skill requirements for the average employee in those industries and that's a good thing and it's good to see that while it's slowed during COVID it hasn't gone away.

From your research, what could be the ripple effect of high profile job announcements like this? 

 Very simple. You either have your mojo or you don't. And so people stop coming um you lose the mojo and and you lose the bright shining light if you will. When people are continuing to say - yeah this is the place we want to move our company for a variety of reasons - quality of life reasons, cost of business reasons, our ability to hire - get people to move here - these are all positive things that apparently still exist in Charlotte and when that stops being the case you'll start to see these things. And you know we've got to be very careful about that. I mean that is something that is within the realm of public policy that we can maintain this as a good business destination. We certainly and certainly we've got a lot of a lot of competition in this state uh but also with outside this state. I  mean certainly Raleigh MSA - the Durham, Chapel Hill MSA - both of those offer incredibly attractive relocation sites for lots of companies. But again it's got to do with quality of life, cost of doing business, availability of talent, and the ability to attract talent and don't overlook that ability - it's good it's good to have homegrown talent but it's also important to be able to - yeah i'll move to Charlotte - you know that that kind of thing so people don't have to bid and essentially pay a premium to get workers to move here.

Charlotte recently placed as the number 1 metro for STEM job growth index. Is this a sign that Charlotte’s economy is evolving?

You know, if we have this question fifteen years ago, this was a banking town. Period, end of discussion. The 2007-8 great recession and actually 9 it's slid into the early part of 2009 - it was 18 months long and the trauma that that caused with Wachovia and Wells taking over - I mean certainly there's still virtually as many people in the banking industry industry employed today in Charlotte as there were pre great recession back in 2007, but it did kind of highlight the risk that you have when you rely so much on one industry and so I think the the economic development recruitment organizations have worked very, very hard to try to change and focus on trying to diversify the economy in in a way that makes us less susceptible to any one industry type recession and so that's a good thing. 

When we come back on Charlotte Business Buzz… we’ll delve into the broader scope of the region and nation’s economy, where we go from here, and how to make sense of it all. 

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Welcome Back to Charlotte Business Buzz. It was recently reported that the US GDP sank by a record 33% in the second quarter of 2020. How does this affect the country’s economic outlook?

This is one of these statistics that is incredibly misleading. We report our quarterly GDP progress at annualized levels and annualized rates of growth. Normally that doesn't present a problem, and it gives you a sense of - if this quarter were to continue on for three more quarters i.e a year this would be the growth rate you'd expect, and that's where we get this idea - if you remember back in the 2016 primaries republican candidates talking about trying to restore the four percent GDP growth - well you know the three to four percent GDP growth which is annually which is what we're looking for versus the two two and a half percent that we've been experiencing for the past decade - it's nice to be able to say in a particular quarter that yes the economy grew at two and a half or grew at three percent at an annualized rate because that makes it easier for us to understand - are we on target? If the economy grew at two and a half percent, the quarterly rate would be a little less than a quarter of that because there's a compounding thing that goes on converting it to an annualized rate and you say well i grew it you know six tenths of a percent you go like oh geez that wasn't very good. So we've historically reported these things at annualized rates, which never does present much of a problem. However when you send everybody home for two months - all of a sudden that annualized rate looks incredibly scary. So that 32.9 decline in GDP in the second quarter is really saying if this were to continue on for the next three months for a whole year the economy would have contracted by one-third. However the actual quarterly decline - how much GDP went down from the first to second quarter - was only nine and a half percent so that's one thing to keep in mind. Second thing to keep in mind is interestingly enough the European Union does exactly the opposite they report their quarterly GDP numbers at quarterly levels and quarterly rates. So during the same period of time second quarter of 2020 Eurozone GDP which is - you know pretty much the size of the US - maybe a little bit smaller for just the eurozone as opposed to the euro area which has some of the eastern countries, eastern european countries -  the Eurozone GDP declined by over 12 percent in that same period and because they were hit earlier in the first quarter they had a pretty hefty five and a half percent decline in the first quarter compared to our what would be effectively a one and a half percent decline. Add it all up, over the first half of the year the u.s economy declined 10.75. That's the exact number of the decline over the first half of the year. Europe in comparison during the first half of the year their economy declined by 18 - that's a pretty significant difference in terms of how the two economies have performed during the COVID experience all right. Now it remains to be seen what's going to happen in the third quarter because europe has not returned in the summer as we had although they're starting to get their second wave as we as we speak right now they're starting to see some incredible increases um and particularly in France uh just today uk has instituted quarantines for people coming from France 14-day quarantines for people visiting Britain from France um so they're they're on the same list we are if you want to go to the UK so they're starting to see it return - and again different timing than we had. But my point being- one, that 33 number is misleading, two in terms of you know first world economies US versus Eurozone, we did not fare nearly as badly as Europe did in terms of its response to COVID.

There’s been a great deal of uncertainty through the whole pandemic. Is anything certain right now of how this might evolve or end? 

No, not at all. So i went on youtube and i was watching a Jerry Seinfeld stand up and uh he was talking about COVID - this that and the other - and basically Jerry said you know COVID is going to do what COVID does and I put my money on COVID in this. We're not in control here - we have to understand this. This is - a I am I’m not a virologist, not a medical doctor - but my experience tells me that this thing pretty much beats its own drum and decides where it's going to go and how it's going to act. Certainly people have an impact on that, but at the end of the day the virus spreads the way the virus is going to spread and we don't have nearly as much control over it as we would like to have. So, going forward this uncertainty is going to remain with us - quite frankly it's going to remain with us until a vaccine, or 18 months from now we've developed herd immunity. Until that, we do not know what's going to happen now that we're starting to see kids both at universities in K-12 go back to school. Even in limited hybrid models - we do not know what that's going to we do not know what that's going to produce. We don't know if we're going to have a - you know we we saw the summer spread in June and July as a result of getting off of everybody staying at home and people getting out going like ah you know uh. We seem to be getting that somewhat under control with the you know the mask wearing and people starting to behave a little bit more responsibly, but now we're starting another phase we're starting to open the economy up in areas that have been basically closed since March and I don't know what's going to happen and neither does anyone else and we're not going to know for a couple of weeks when we start seeing infection rates on campuses and and public schools and see how they - what happens there - and that could create a whole other environment that we're not prepared for. 

What sectors that are generally weathering this crisis better than others?

All the sectors where people can work online. So your utility providers, your finance, insurance, real estate uh they're all working just fine - everybody can work online. I mean interesting thing about real estate is you know I've seen that change dramatically in the last dozen years or so, where you get virtual tours of homes - this is before COVID. You didn't have to go out in a realtor's car and looking at you know 15-20 homes. Do your selections and get get down to two or three that you you liked based on the virtual tours that you could get and so these these industries have been virtually unaffected by COVID. The industries that have been affected tremendously are three-fold i would say. Early on but not now manufacturing and construction were hit. So they were hit in March and in early April because a lot of large-scale manufacturing was shut down, but once they were able to change their manufacturing processes and work to make sure people were not in close contact on the manufacturing lines, those opened up pretty quickly in in late April and early may. Same thing with construction - they were shut down early but then they opened up pretty quickly after that. The one that has been shut down and stays shut down is in the service industry - it's hospitality and leisure services. So what you're looking at are restaurants, but really hammered. Movie theaters -really hammered. Hospitality - hotels motels, etc particularly convention sites - really hammered and they continue to remain that way. One other one that's been affected it's transportation and specifically airlines they've been also hurt tremendously and those aren't going to come back anytime soon. For one thing, in terms of restaurants, there are some data that suggests that as many as half of the restaurants in some cities are permanently closed. And you know restaurants have high going out of business rates - in and out in large numbers on a regular basis, independent of COVID. A lot of them are just borderline financed, and you shut them down as they’ve been shut down for as long a period of time - they're upside down and they're only all their only course is to go out of business. Now how quickly those entrepreneurs will dive back in with their their new take on what people are going to want in the post-COVID environment for restaurant dining - we'll see. The ones that have remained in business are the ones that have been able to adapt - to have available outside seating when we opened them back up in May but also have been able to adapt for curbside pickup and do a lot of online ordering.

Is there something positive you see coming out of this economic downturn? 

Actually, no. This has not been - there's not been some kind of well you know on the bright side of things we've got this going on. Let me ramble a little bit here. At first we thought that working at home seemed to be working pretty darn well, and lots of companies were even early on were convinced that you know what we probably don't need as much physical space to house our employees. We can have less physical space, we can have them work from home two, three, four days a week - we don't have to provide 100 something square feet of office space for everyone that works for us, and this is certainly true in the more high tech. But as time has gone on this you know  -you can continue doing the routine tasks in an isolation environment on your computer at home - no problem. But innovation - that really gets hurt and that's what they're finding. They're finding a couple of things one is that developing new ways of doing things - new products etc. do require person-to-person contact brainstorming. It's just not as effective even in a virtual meeting environment. Number two they found that integrating new employees is really hard in a virtual world. At first we thought well you know this is going to change the way we work in a lot of industries, actually not so. I mean there are going to be some that are going to find that it works it works very well so a lot of folks that are strictly IT, they work from home just fine, but in a lot of other occupations where we use the computer frequently and a lot of our work is done on computer - there are other parts of our work that are requiring human interaction - that's been a you know a change in this. I will say this however - we have been seeing a slow erosion of brick and mortar stores over the last say five to ten years as Amazon and Walmart, Target and everybody else ramps up their online presence. This has probably accelerated that more people got pushed into online ordering for for retail purchases and become more comfortable with it so the rate of movement there has been going up kind of gradually and slowly  - we've had a jump and that jump is probably going to remain it's not it'll go back a little but it's not going to go back much even when people can go back to stores again. 

Thanks so much for your time today, John. 

My pleasure. 

Dr. Connaughton joined the UNC Charlotte faculty in 1978 and has served as director of the quarterly Barings/UNC Charlotte Economic Forecast since 1981. Dr. Connaughton also covers national and international economic issues including employment, energy, trade and government spending. His next forecast presentation will be on September 23rd, and will be delivered online. Learn more about the event and sign up for the Forecast’s mailing list at belkcollege.uncc.edu/forecast. 

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This is Charlotte Business Buzz, connecting Charlotte business through one-on-one interviews with UNC Charlotte faculty, staff, alumni and industry partners, and is presented by the Belk College of Business, the Office of Industry and Government Partnerships and produced in association with University Communications.