HomeMy WebLinkAboutAgenda 11-04-2021; 12-5 - Information Item - Financial Report - First Quarter FY 2021-22 1
ORANGE COUNTY
NORTH CAROLINA
FINANCE and ADMINISTRATIVE SERVICES
Gary Donaldson,CTP,Chief Financial Officer I gdonaldson@orangecountync.gov I PO Box 8181, Hillsborough, NC 27278 1 919.245.2453
MEMORANDUM
To: Board of County Commissioners
From: Gary Donaldson, Chief Financial Officer
Date: November 4, 2021
Re: Financial Report- First Quarter FY 2021-22
This FY 2021-22 First Quarter Financial report provides Budget versus Actual comparisons to the prior fiscal year
and includes Coronavirus Aid, Relief and Economic Support (CARES) summary of spending, and an economic
update from Dr. Michael Walden NC State University's Economic Outlook Report as part of this update. The
General Fund is projected to end the fiscal year in a breakeven position.
FY 2022 FY 2021 FYS 2022 vs 2021
GENERAL FUND Original Budget Revised Budget YTD Actual* Percentage YTDActual* Percentage YTD %Variance'
Property Tax $177,661,825 $177,661,825 $30,851,025 17.37% $27,769,949 16.56% $3,081,076 0.81%0 1
Sales&Use Tax $26,702,047 $26,702,047 $0 0.00% $0 0.001y. $0 0.00%
Licenses and Permits $274,550 $274,550 $1,715 0.62% $1,945 0.71% -$230 -0.08%
Charges for Services $12,478,132 $12,662,171 $3,016,320 23.82% $2,196,872 17.37% $819,448 6.45%0 2
Intergovernmental $18,226,773 $18,938,949 $2,130,348 11.25% $5,702,405 25.33% -$3,572,057 -14.08%0 3
Transfers In $74,504 $95,337 $0 0.00% $0 0.00% $0 0.00%
Miscellaneous $3,376,346 $3,707,929 $118,793 3.20% $216,956 6.80% -$98,163 -3.60%
Appropriated Fund Balance $1,968,184 $1,968,184 $0 0.00% $0 0.00° $0 0.00%
Total $240,762,361 $242,010,992 $36,118,201 14.92% $35,888,127 14.71% $230,074 0.21
Community Services $13,621,295 $14,055,726 $2,743,247 19.52% $3,296,522 22.90% -$553,275 -3.38%9 4
General Government $10,277,361 $10,298,194 $2,814,706 27.33% $2,428,703 22.66% $386,003 4.68%
Public Safety $28,528,552 $28,605,416 $5,716,905 19.99% $6,134,466 21.80% -$417,561 -1.81%
Human Services $40,547,146 $41,082,555 $8,036,650 19.56% $8,198,164 19.33% -$161,514 0.23%
Education $93,834,876 $93,834,876 $22,452,220 23.93% $22,452,704 24.03% -$484 -0.10%
Support Services $12,881,850 $12,881,850 $4,305,848 33.43% $6,169,382 40.79% -$1,863,534 -7.37%0 5
Debt Service $40,027,279 $40,208,373 $23,697,025 58.94% $18,197,238 54.46% $5,499,787 4.47%0 6
Transfers Out $1,044,002 $1,044,002 $0 0.00%l $0 0.004 $0 0.00%
Total $240,762,361 $242,010,992 $69,766,601 28.83%1 $66,877,179 27.42%1 $2,889,422 1.41
Notes:
*-Actual amounts include Encumbrances.
+-Based on percentage.
1-Increases in property tax are attributed to 3 cent tax rate increase.
2-Fee collections at Register of Deeds,Health Department,Planning and Inspections,Sheriff,and Emergency Services from prior year pandemic revenue losses.
3-Prior FY reflected CARES revenues.
4-Timing variance for DEAPR payments to Carrboro,Chapel Hill and Mebane.
5-Prior year reflected CARES expenditures.
6-Based on increased Debt Service payments for County(primarily Northern Campus)and Various School Projects.
1
2
General Fund Revenues
General Fund revenues are 14.9% of budgeted revenues compared to 14.7%the prior fiscal year. Note the
prior fiscal year included CARES Round 2 revenues and expenditures under the Intergovernmental revenue
category. The reason there is no first quarter revenue variance is due to the increased property tax required to
meet the County's debt service obligations which increased by $5.5 million through the first quarter of FY 2021-
22.
• Property Tax collections are 17.3% of the total Property tax budget compared to 16.5% the prior fiscal
year; this represents an improved economic environment. Real and personal taxes are due September 1
with peak tax collections occurring in December prior to the assessment of penalties and interest.
Assessed Values for FY 2021-22 by statute are as of January 1, 2021. The property tax category includes
real, personal, and motor vehicle taxes. As part of the financial planning, staff factored in a .5%
reduction in the collection rate to account for impacts from the property revaluation.
• Motor vehicles are 31.6% of the Motor Vehicle budget as compared to 29% in the prior fiscal year.
COVID related State legislation allowed taxpayers to delay renewing their registrations and tax payments
in the prior fiscal year. The FY 2021-22 positive variance is another indication of improved economic
environment for a significant contingent of taxpayers.
• Motor vehicle taxes are payable on the vehicle renewal date and the tax is based on market value of the
vehicle. The State remits this tax to the County on a monthly basis.
• Sales Tax has a three-month revenue lag from the NC Department of Revenue (NCDOR) with the first
month of July collections to be received by local governments, including Orange County, in October. The
flowchart below illustrates the three-month lag.
Sequencing of Local Sales Tax Collections & Receipt
July = Sale Aug. = Vendor Sept. = DoR Oct. 15 = County
submits report reconciles receives $
The Finance Office has forecasted a 12% annual growth rate for FY 2021-22 reflecting a rebound from the
recession impacts. The positive growth factors in strong Federal Stimulus, continued Online Sales and the
2
3
easing of COVID public health at eating and drinking businesses, athletic and entertainment events and
hospitality and leisure sector. As stated in NC State University enclosed report: [The massive federal financial
assistance provided during the pandemic pushed statewide personal income and retail sales above pre-pandemic
levels].
• Charges for services are 23.8% of the budget as compared to 17.4% lower the prior fiscal year. The
increase is attributed to easing of COVID-19 public health measures throughout the County. This
category has rebounded primarily for Register of Deeds Excise Stamps paid on home sales and
Emergency Medical Charges for ambulance service. This category will be monitored closely for any
further impact from the Delta variant.
• Miscellaneous revenue variance of 3.2% of budgeted revenues as compared to 6.8% the prior fiscal year
is due to lowering interest earnings assumptions; $10,000 in investment earnings is budgeted for FY
2021-22 as there continues to be limited yield opportunities in the securities market. The Finance Office
exercises fiscal prudence by prioritizing 1) Safety II) Liquidity and III) Yield in that order.
The miscellaneous category includes Asset Management lease rental revenues as well. The County
continues to explore options to dispose the Builders First Source property which accounts for $294,000
in FY 2021-22 revenues; however, this sale is not expected to close this fiscal year. The County Long-
Term Forecast omits the Builders First Source revenue after FY 2021-22.
General Fund Expenditures
General Fund expenditures are 28.8% of budgeted expenditures as compared to 27.4% the prior fiscal year.
The variance is due to an increase in debt service payments as the County funds the County and Schools bonds.
• First quarter debt service represents 58.9% of total debt service as compared to 54.5% the prior fiscal
year. The increase reflects recent debt financings as per the Approved Capital Investment Plan.
• The County has bonds paid on October 1 but the bond covenants requires that payments be transferred
to the bank trustee five days prior or by September 25.
• Community Services represented 19.5% of total community services as compared to 22.9% the prior
fiscal year. This is attributed to a timing variance in annual DEAPR contributions to the Towns of
Carrboro, Chapel Hill, and City of Mebane.
3
4
• General Government represented 27.3% of total general government as compared to 22.6% the prior
fiscal year. This is attributed to an unanticipated increase in cyber liability insurance. The remaining
variance represents a timing variance with half of the budgeted premiums for cyber liability, property
casualty, and workers compensation paid in the first quarter as compared with the prior fiscal year.
• Support Services represented 33.4% of total support service as compared to 40.8%the prior fiscal year.
The prior fiscal year reflects $1.3 million in Round 2 CARES funds one-time payments from a Non-
Departmental to the towns. Retiree Health fund post-employment benefits are paid from this category
as well.
• The remaining Functional Leadership teams are consistent with historical spending rates and compliant
with the County's proactive measures in response to the COVID related economic crisis.
• Education appropriations are 23.9% of its budget as compared with 24% the prior fiscal year. School
appropriations are paid to both School systems by the 15th of each month. The remaining Education
budget includes School Health and Safety Contracts, Deferred Maintenance, Durham Tech Current
Expense and Recurring Capital.
CARES- Round 1 Funds
The CARES Act requires that both Round 1 and 2 funds be spent or encumbered by December 31, 2021. The
$2.6 million Round 1 allocation has been spent. Eighty percent of Round 1 funds supported Non-Congregate
Housing, Landlord Incentives, Rent and Utility assistance for residents faced with eviction and other Human
Services including Medical Supplies, COVID Testing, Contact Tracing, Food Distribution and Re-
entry/Reemployment. The remaining 20% supported Facilities Re-engineering, Air Ionization, Personal
Protective Equipment, IT/Telework equipment, and 800 Hot Spots for Orange County Schools.
CARES- Round 2 Funds
The CARES Round 2 spending is $2.7 million of the total $2.8 million total allocation with the remaining amount
to be spent or encumbered by December 31, 2021. Eighty percent of Round 2 funds continued Housing
Stabilization initiatives, Reemployment Services, Child Care, and Food Distribution. The remaining 20%
continues Telework equipment requirements for remote work, Zoom services, Lucas CPR devices, and
promoting Economic Development promotions to support recovery in the Hospitality/Leisure sectors which was
significantly impacted by the COVID recession.
4
5
Summary of Other Funds
FY 2022 FY 2021 FYs 2022 vs 2021
OTHER FUNDS Original Budget Revised Budget YTDActual* Percentage YTDActual* Percentage YTD %Variance'
33-Housing Fund $4,501,584 $4,628,077 $1,222,221 26.41% $1,067,893 23.33% $154,328 3.08%
35-Emergency Telephone Fund $759,757 $759,757 $126,626 16.67% $125,912 16.67% $714 0.00%
37-Visitor's Bureau Fund $1,432,667 $1,445,786 $360,887 24.96% $195,292 11.15% $165,595 13.81%() 7
38-Spay/Neuter Fund $71,350 $71,350 $7,606 10.66% $11,312 13.74% -$3,706 -3.08%
50-Solid Waste Enterprise Fund $11,690,750 $11,690,750 $1,992,182 17.04% $1,906,537 15.77% $85,645 1.27%
53-Sportsplex Fund $3,690,656 $3,690,656 $797,440 21.61% $431,000 11.35% $366,440 10.26%C) B
70-Employee Health&Dental Fund $12,336,336 $12,336,336 $2,490,709 20.19% $2,643,732 18.77% -$153,023 1.42%
33-Housing Fund $4,501,584 $4,628,077 $1,168,194 25.24% $1,033,899 22.59% $134,295 2.66%
35-Emergency Telephone Fund $759,757 $759,757 $127,164 16.74% $397,153 52.S7% -$269,989 -35.83%C) 9
37-Visitor's Bureau Fund $1,432,667 $1,445,786 $538,202 37.23% $605,721 34.59% -$67,519 2.63%
38-Spay/Neuter Fund $71,350 $71,350 $10,399 14.57% $7,646 9.28% $2,753 5.29%
50-Solid Waste Enterprise Fund $11,690,750 $11,690,750 $3,348,539 28.64% $3,821,549 31.60% -$473,010 -2.96%
53-Sportsplex Fund $3,690,656 $3,690,656 $655,984 17.77% $516,309 13.60% $139,675 4.18%
70-Employee Health&Dental Fund $12,336,336 $12,336,336 $2,957,759 23.98% $3,051,981 21.67% -$94,222 2.31%
Notes:
*-Actual amounts include Encumbrances.
+-Based on percentage.
7-Occupancy Tax revenues Increased revenue due to easing of COVID public health restrictions.
8-Sportsplex User Fees due to Increased revenue due to easing of COVID public health
9-E911 FY 2020-21 Expenditures included One-Time Capital Outlay Non-Recurring in FY 2021-22
Sportsplex Fund
Sportsplex revenues are 21.6% of budget as compared to 11.4% the prior fiscal year due to the public health
restrictions. The user fee revenue stream is returning to pre-pandemic strength which had first quarter revenue
of 23% in FY 2019-20. Sportsplex expenditures are 17.7% of budget as compared to 13.6% the prior fiscal year.
FY 2021-22 revenues are $797,440 and expenditures are $655,984 for the first quarter. Pandemic: FY 2020-21
revenues were $430,999 and expenditures were $516,308 for the first quarter. Pre-Pandemic for Nine-Months:
FY 2019-20 revenues were $928,467 and expenditures were $901,830 for the first quarter. This three-year
trend indicates that the Sportsplex Fund is returning to a breakeven financial position as customers return to
the Sportsplex following the easing of public health restrictions. Note: FY 2020-21 included County funding of
$790,000 to maintain a positive net position. The FY 2020-21 financial audit is in progress of being completed.
Visitors Bureau Fund
Visitors Bureau revenues are 24.9% of budget as compared to 11.1% the prior fiscal year due to the easing
public health restrictions. Visitors Bureau expenditures are 37.2% of budget as compared to 34.5% the prior
fiscal year. FY 2021-22 revenues are $360,887 and expenditures are $655,984 for the first quarter. Pandemic: FY
2020-21 revenues are $195,292 and expenditures are $605,721 for the first quarter. Pre-PondemicforNine-
Months: FY 2019-20 revenues were $421,962 and expenditures were $511,596 for the first quarter. This three-
year trend indicates that the Visitors Bureau Fund will need continued Finance monitoring to achieve breakeven
5
6
financial position. Note: FY 2020-21 included County funding of$560,000 to maintain a positive fund balance.
As noted previously, the FY 2020-21 financial audit is in progress of being completed.
Solid Waste Fund
Solid Waste revenues are 17% of the total revenues as compared to 15.7%the prior fiscal year. The solid waste
program fee of$142 is billed as a line item on the Property Tax bill, therefore the collection performance
discussed under the property tax section is the same rationale for this positive variance. As noted previously,
peak collections occur by the end of December therefore the first quarter revenues of$1.9 million versus
expenditures of$3.3 million is not a financial concern, cash reserves fund the first quarter imbalance. Solid
waste expenditures are 28.6% of total expenditures as compared to 31.6%the prior fiscal year.
Functional Leadership Teams by Department
Community Services -Animal Services, NC Cooperative Extension, DEAPR, Economic Development, Orange
Public Transportation, Planning and Inspections.
General Government- Board of Elections, Clerk to the Board, County Attorney, County Manager, Register of
Deeds and Tax Administration
Public Safety—Courts, Emergency Services, Criminal Justice Resource Department, and Sheriff's Office
Human Services— Department on Aging, Child Support, Housing, Human Rights, and Community Development,
Library, Public Health and Social Services
Support Services-Asset Management Services, Community Relations, Finance, Human Resources, and
Information Technology
Thanks to the Budget Office for their support in the preparation of this quarterly report.
cc: Bonnie Hammersley, County Manager
Travis Myren, Deputy County Manager
Department Directors
Enclosures
6
7
1CM
NORTH CAROLINA ECONOMIC CONDITION AND OUTLOOK, 3rd QUARTER 2021
Prepared by Dr. Michael L. Walden, William Neal Reynolds Distinguished Professor Emeritus,
Department of Agricultural and Resource Economics,North Carolina State University. Released
September 8, 2021.
Contact Methods: phone: 919-219-8923; e-mail: michael walden(a)ncsu.edu
RECESSION AND RECOVERY DURING THE PANDEMIC
Summary
1. The North Carolina economy continues to recover from the Covid-19 recession.
The worst of the recession was during Spring, 2020. When data become
available, aggregate production (GDP)will have returned to pre-pandemic levels
in Summer, 2021.
2. Among North Carolina's major economic sectors, the recession was most severe
in farming, hospitality/leisure, transportation/warehousing, and personal
services.
3. As of the first quarter of 2021, aggregate production had exceeded pre-recession
levels in farming, construction, manufacturing, trade, and professional services.
4. Using the percentage loss in total employment as the measure, the Covid-19
recession was most severe in Rural North Carolina, and in the Asheville,
Greensboro-High Point, Hickory, and Wilmington metropolitan areas.
5. As of July 2021, aggregate employment reached 99% or more of pre-pandemic
employment in the Burlington, Durham-Chapel Hill, Greenville, Hickory,
Jacksonville, and Raleigh metropolitan areas.
6. Although the state unemployment rate has fallen from close to 14% during the
recession to almost 4% in Summer, 2021, the state's labor force participation
rate is still well below its pre-pandemic levels.
1
8
7. The massive federal financial assistance provided during the pandemic pushed
statewide personal income and retail sales above pre-pandemic levels.
8. Three big issues emerging during the economic recovery are inflation,
government debt, and labor market changes. The inflation rate has recently
trended higher; the question is for how long? While the national debt has risen
substantially, low interest rates keep servicing the debt affordable, for now. The
pandemic has already generated large changes in the labor market. The
challenge will be for adequate training and re-training programs to
accommodate these changes.
9. North Carolina's economy is forecasted to expand in 2022 and 2023. However,
the strength of the growth will depend on the path of the Covid-19 virus. If the
virus soon becomes completely controlled, North Carolina's aggregate
production (GDP) will be 10% higher in 2023 than prior to the pandemic. But if
Covid-19 variants persist, the growth rate will be cut in half to 5%.
10. The long run economic prospects for North Carolina are very positive. North
Carolina has been among the few states with low per capita rates of both Covid-
19 deaths and job losses during the pandemic. This means North Carolina will
be viewed as a relatively "safe state." During the expected national geographic
re-sorting of households and businesses after the pandemic, North Carolina
should be in a position to attract both new households and new businesses. The
expected expansion of high-speed-internet to underserved areas and the greater
use of the internet to access work, services, and health care will also increase
economic growth and prosperity in North Carolina's small towns and rural
regions.
2
9
THE UNEVEN RECOVERY CONTINUES
After the tremendous drop in the economy during the second quarter of 2020, the
economy recovered strongly in the third quarter of that year(Figure 1). By the end of the first
quarter of 2021 (latest data available), the value of aggregate national economic production
(Gross Domestic Product, or GDP)had surpassed its pre-Covid-19 level. North Carolina's GDP
likely reached its pre-pandemic level in the second quarter of 2021.
Figure 1. Paths of US and North Carolina GDP.
DOWNSOF • •
(QUARTERLYD• AS PERCENT OF D•
102
100
96
94
92
.,
2019,IV 2020,1 2020,11 2020,111 2020,IV 2021,1
Source:US Bureau of Economic Analysis.Based on inflation-adjusted values.
But all sectors of the economy did not fluctuate during the recession and recovery in the
same way. Figure 2 shows GDP in the second quarter of 2020 (the depth of the recession) and
the first quarter of 2021 as a percentage of GDP in the pre-pandemic 2019 fourth quarter for the
major sectors of the economy in both the US and North Carolina.
Looking at the nation first, the hardest hit sectors in 2020 II were
transportation/warehousing (75% of 2019 IV), hospitality/leisure (47% of 2019 IV), and personal
services (77% of 2019 IV).
In North Carolina, the same three sectors also suffered significant declines, with
transportation/warehousing at 79% of 2019 IV, hospitality/leisure at 60% of 2019 IV, and
personal services at 79% of 2019 IV. But,unlike the nation, the North Carolina sector with the
largest decline was farming,with GDP in 2020 II at only 58% of its pre-pandemic 2019 IV level.
3
10
Figure 2. Sector GDP as a Percentage of 2019 IV Level, US and NC.
SECTORSBUT ALL RATE
OF
us
NC
202011 022021 1
FARMING 95% 04% 58% 111%
CONSTRUCTION 93% 103% 94% 104%
MANUFACTURING 88% 102% 89% 101%
TRADE 90%
TRANSP/WAREHOUSING
PROFESSIONAL SERVICES 96% 104%
•
HOSPITALITY/LEISUREHEALTH CARE 83% 97% 84% 97%
.0
PERSONAL
Source: US Bureau of Labor Statistics.
The two columns in Figure 2 labelled"20211" show the strength of the recovery in the
sectors. For the US, several sectors—farming, construction, manufacturing, trade, and
professional services—actually exceeded their level of production of 2019 IV. Education and
health care were not far behind. The sectors lagging the most were the same sectors that had the
deepest declines—transportation/warehousing, hospitality/leisure, and personal services. The
same pattern occurred in North Carolina. Interestingly, the North Carolina sector that
experienced the deepest decline—farming—also had the strongest economic rebound.
The depth of the Covid-19 recession and the strength of the recovery also varied
geographically within North Carolina. Figure 3 uses total employment data instead of
unavailable local GDP data to measure these differences. Total employment in April 2020, at
the height of the pandemic, and in July 2021, the latest month available, are shown as a
percentage of pre-pandemic total employment in February 2020 for the nation, state, and the
state's major regions.
North Carolina had a slightly lower relative loss of jobs during the pandemic, with 88%
of the state's jobs remaining in April 2020 from the pre-pandemic level compared to 85% for the
nation. However, several regions in North Carolina were below the 85%national rate, including
Asheville, Wilmington, and Rural NC. Asheville and Wilmington are very dependent on
tourism, and tourist activity was hard-hit during the pandemic. Jobs in Rural NC were likely
adversely impacted by the large contraction in the state's farming sector.
By July 2021,North Carolina's total employment had recovered to 99% of the pre-
pandemic February 2020 level, compared to recovery of 96% for the nation (Figure 3).
4
11
Figure 3. Employment in North Carolina Regions as a Percentage of Employment in February
2020.
RECOVERYDECLINE AND • VARIED WITHING NORTHCAROLINA
TOTAL • OF • 020
020 July 2021 APRIL 2020 JULY 2021
ASHEVILLE 82% 94% HICKORY
..•
CHARLOTTEBURLINGTON 87% 99% JACKSONVILLE 88% 102%
•0•
DURHAM-CH 91% 99% RALEIGH 87% ...
FAYETTEVILLE 89% .;. ROCKY MOUNT
GREENSBORO-HPGOLDSBORO 92% 97% WILMINGTON 83% 98%
• •:•
GREENVILLE .0.
NORTH •• ; .•.
Source: US Bureau of Labor Statistics.
The highest recovery rates in the state were Jacksonville (102%), Raleigh, Durham-Chapel Hill,
Greenville, Burlington, and Hickory (all at 99%), and Charlotte, Fayetteville, Wilmington, and
Winston-Salem (all at 98%). The lowest employment recovery rates were in Rural NC (93%)
and Asheville (94%).
SURPRISES IN THE LABOR MARKET
After major deterioration during the Covid-19 recession, the labor market has bounced
back,but not without questions. The graph on the left side of Figure 4 gives the unemployment
rates in the nation and North Carolina since the beginning of the pandemic. Unemployment rates
surged in April 2020,but have declined since then. North Carolina's jobless rate has generally
been lower than the national rate.
The graph on the right side of Figure 4 shows labor force participation rates (LFPR) in
the nation and North Carolina since the start of the pandemic. The LFPR is the percentage of the
civilian population 16 years and older who are either working or actively looking for work.
There was an expected deep drop in the LFPR in both the nation and in North Carolina during
the Covid-19 recession, then followed by a recovery. However, in both regions the increase in
LFPR is still well below the pre-pandemic levels. The softness in LFPR is consistent with the
difficulty many employers have experienced in hiring workers during the economic recovery.
5
12
Figure 4. Unemployment and Labor Force Participation Rates in the US and North Carolina.
LABORTWO PICTURES OF THE LABOR MARKET
UNEMPLOYMENT RATE,% FORCE PARTICIPATION
6 64
4 63
12
10 61
60
8 59
6 58
4 57
2 56
e 55
•
Source: U.S.Bureau of Labor Statistics.
The underlying question is why LFPR has not fully recovered. Several answers have
been offered, including fear of looking for work while the Covid-19 virus persists, financial
support of jobless individuals from stimulus checks and supplemental unemployment
compensation, a decline in real (inflation-adjusted)wage rates, gains in the stock market
motivating retirements, and the "up-skilling" of laid-off workers.
Each of these factors likely has had an impact on hiring difficulties. It is logical that
some unemployed workers may not feel safe visiting potential employers while the virus is still
active. The federal government has provided substantial financial help to households during the
pandemic, especially those who are unemployed. Wage rates have recently fallen relative to
inflation, resulting in a drop in the financial benefit from working. For individuals working at or
near the minimum wage, the financial value of federal and state unemployment benefits could
easily exceed earnings from working, thereby decreasing the incentive to look for work. Several
studies have confirmed such as impact) However, this impact is likely short-lived as federal
supplemental jobless benefits ended in early September, 2021. For older workers near
retirement, the fact that the stock market is one-third higher than prior to the pandemic could
certainly reduce their motivation to work.
But it's the last factor—the up-skilling of laid-off workers—that could be the most
significant for the labor market. Surveys show that a large percentage of workers—especially
young workers—have expressed a goal of changing their career track as a result of the
1 Scott Sumner, "Unemployment Insurance Reduces Employment," https://www.econlib.org/unemployment-
insurance-reduces-employment/.
6
13
pandemic.2 They have used the financial support provided by governments during the pandemic
to take time to improve their skills and put themselves in a position to pursue better-paying jobs
with more long-term advancement possibilities. Sectors like technology, health care, and some
professional fields would be targets of these individuals.
Obviously, individuals who improve their skill set and earnings contribute to a larger and
more productive economy. But how will those firms and sectors they left cope with the lack of
labor? There are two options. One is for the firms to significantly increase wage rates and
benefits to enable them to better compete for workers. But there are limits to this response,
especially if it results in higher prices for their products and services. Alternatively, the firms can
implement greater use of labor-saving technology and automation. Examples already being used
include robots delivering meals to tables in restaurants and kiosks for ordering at fast-food
outlets. Ironically,prior to the pandemic many economists worried technology and automation
would create higher unemployment for workers in the sectors. Now, the technology and
automation may be necessary to replace vanishing labor.
FEDERAL BACK-UP FOR HOUSEHOLDS
The federal government provided an unprecedented amount of financial support to the
economy during the pandemic. Once all the funds are deployed, the federal aid will total $6
trillion. North Carolina is on pace to receive $80 billion.
The purpose of the support was twofold. First was to help households, businesses, and
institutions survive the pandemic and continue functioning. Particularly for households, no one
wanted to see destitute conditions overcome millions—likely tens of millions—of people. The
second goal was to prevent the economy from collapsing and plunging the country into a deep
and long recession.
The data suggest these objectives were met. Although there was a deep recession in the
second quarter of 2020, it was the shortest recession on record and was followed by an equally
sharp rebound in the third quarter of 2020.
Figure 5 shows the path of two key measures of the North Carolina economy, personal
income and retail sales. Personal income (left side of graph) dipped in early 2020, but then
stabilized and grew sharply at the end of 2020 and into early 2021. Retail sales (right side of
graph) show monthly trends in retail sales for 2019, 2020, and early 2021. Comparing 2019 and
2020, retail sales in 2020 closely tracked the same sales in 2019 in the first half of each year.
But in the second half of the years, retail sales in 2020 trended significantly higher than sales in
2019. There is a similar finding for 2021 and 2020. For the first five months of the year, retail
sales were noticeably higher in 2021. The federal aid therefore appeared to provide significant
support for the North Carolina economy.
Z Heather Long and Scott Clement, "Nearly a Third of Workers Under 40 Considered Changing Careers During the
Pandemic," The Washington Post,August 16, 2021.
7
14
Figure 5. North Carolina Personal Income and Retail Sales.
(PERSONALNORTH CAROLINA PERSONAL INCOME AND RETAIL SALES
•ME-BILLIONS OF . • OF
610 18
590 17
570 16
15
530 12
510
10
490 2019,12019,11 2019, 2019, 2020,12020,11 2020, 2020, 202 1,1 Jon Feb Mar April May Jun Jul Aug Sep Oct Nov Dec
2020 -2021
Source: US Bureau of Economic Analysis;NC Dept.of Revenue. Personal income are inflation-adjusted dollars.
Retail sales are nominal dollars.
WORRIES ABOUT BIG ISSUES
As the economy moves beyond the pandemic, there are three big issues attracting
concern: rising national debt, faster inflation, and adaptability in the labor market.
With all $6 trillion of the federal pandemic assistance borrowed, the national debt now
exceeds national annual income (GDP) for the first time since World War II. This has sparked
renewed worries about the ability of the nation to carry the debt and implications for long-run
financial viability.
At this point, those worries appear to be overstated. The ability to carry debt—whether
the debt is owed by a person, company, or government—is based on three factors; the size of the
debt, the interest rate charged on the debt, and the borrower's income. While the national debt is
very large, fortunately interest rates are very low. Also, national income is high enough so that
the ratio of the interest payments on the debt as a percent of national income is relatively low, at
about the same level as during the 1950s to 1970s and half the level as in the 1980s and early
1990s.
Of course, there are "opportunity costs"to the additional $6 trillion debt, meaning the $6
trillion could have been used in other ways that would have created benefits. But if the $6 trillion
had not been borrowed to prop up the economy during the pandemic, there's a real chance a
8
ISSUE: INFLATION (% change)
6
5
4
1,•L
3 }
r
1 -
0
2014 2015 2016 2017 2018 2019 2020 2021
total ••••core — trimmed
MONETARY BASE($ MILLIONS)
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0
Al Al Al Al 01 Al p1 Al p1 Al 01 Al Al p1 p1 Al 01 01 p1 p1 p1 p1 0` o` p1 p1 p1 p1 01 0` A`
53, 0 p� 59 ,1 p1 p'6 oh o� 59 �` p1 (s) 5 o� cQ � 6" 0`6, pD, 6V oq � o` a" Ah' o�
01b 01b 01b 011 01'� 011 01'� 011 01'� 010 010 010 010 010 010 01G 019 019 019 011 011 OHO OHO OHO OHO OHO OHO O�\'Off'` Off\ Off\
ti ry ti ti ti ry ti ti ti ry ti ti ti ti ti ti � ry ti ti ti ti ti ti ti ti ti ti ti ti ti
—Base
16
devastating collapse in the economy along with tremendous misery and loss would have
occurred. If allowed to happen, it could have taken the economy years to recover.
Inflation is another worry about the post-pandemic economy. Figure 6 shows three
alternative measures of inflation. The "total" inflation rate is the official rate. It is based on
tracking prices of thousands of commonly purchased consumer products and services. Each price
is weighted by the importance of its product or service in the typical household budget before
combining all the price changes into a total inflation rate. The "core" inflation rate is the rate
after excluding volatile food and energy prices. The "trimmed" inflation rate is the rate after
excluding the 8% of products and services with the highest price increases and the 8% of
products and services with the lowest price increases.
In recent years the official inflation rate was no higher than 3% and stayed below 2% for
most of the period. The "core" and "trimmed" rates hovered around 2%. But since 2020, all
three measures have trended higher, with the official rate rising above 5% (annualized) in early
2021.
There are two explanations and two forecasts for inflation. One says the higher recent
inflation rate is temporary because it is based on supply-side disruptions caused by the pandemic
that have not yet been repaired. Once these disruptions are fixed,the inflation rate will subside
to its recent I%to 2% annual rate range. At most, the higher inflation rate will last until early
2022.
The second explanation doesn't deny supply-side disruptions, but puts more focus on the
demand side. As already shown, the $6 trillion federal financial aid program has put tremendous
financial resources in the hands of households and businesses. As the pandemic hopefully
recedes and people act on their"pent-up demand" (desired spending that was delayed during the
pandemic), it is expected spending will surge. Even with a repaired supply chain, desired
spending will exceed the supply of products and services. The result is a faster rise in prices.
This explanation sees the elevated inflation rate persisting well into 2022, with the peak rate
possibly reaching at least 6%.
Before turning to the third worry, it should be noted the Federal Reserve (Fed) has a role
in both the debt and inflation worries. The Fed has supported both the financial aid provided by
the federal government as well as the recovery in the private sector in two way. One is by
purchasing the new federal debt by increasing the money supply (Figure 7). Second is by
keeping the key interest rate the Fed controls very low. Both efforts could be considered as
inflationary.
At some point the Fed will reverse course and sell some of its federal debt and increase
its key interest rate. While these actions could help contain inflation, higher interest rates would
elevate federal debt payments and potentially slow the economic recovery.
The third worry is about the labor market. The recovery from the 2008-2009 recession
was termed the "jobless recovery" due to the slow increase in jobs and the lingering high
10
17
unemployment rate. The recovery from the Covid-19 recession could be called the "workerless
recovery"based on the relatively large numbers of jobs that have gone unfilled.
Potential reasons for the workerless recovery were presented earlier. Some of the reasons
are temporary, meaning when they are no longer valid—such as the federal supplemental
unemployment compensation—more jobless workers will seek jobs. But there's a longer run
concern about the post-pandemic economy creating disruptions in job markets that will require
on-going re-training for a significant number of workers. Ironically, the workerless recovery
may accelerate this needed re-training as a result of businesses turning to technology and
automation when they can't find workers. The more businesses that adopt technology and
automation to substitute for labor will likely motivate other businesses to do the same. Hence,
within a few years, the workerless recovery could turn into the jobless recovery.
FORECASTS
This section presents forecasts for North Carolina's aggregate production (GDP) and the
state's unemployment rate. For each measure, two alternative forecasts are presented. One
assumes the Covid-19 delta variant is controlled before the end of 2021, thereby allowing the
economy to expand free of concerns about the virus. The second forecast is based on the
pessimistic assumption that the delta variant continues, or is followed by another variant. Under
this assumption economic progress is slower.
Figure 8 shows the forecasts for North Carolina GDP. Under the optimistic assumption of
the delta variant being controlled in 2021, GDP increases strongly in late 2021 and into 2022,
setting new records for the size of the state economy. Growth continues in 2023 with GDP
reaching $556 billion, 10%higher than prior to the pandemic in 2019.
Using the pessimistic assumption of continuing struggles with the Covid-19 virus, state
GDP does expand in the next two years, but GDP in 2023 will only be 5%higher than in the pre-
pandemic years of 2019.
Similar patterns and differences are seen for the state unemployment rate forecast in
Figure 9. Compared to the 4.4%jobless rate in the summer of 2021, the optimistic forecast
projects an employment rate of 4%in 2022 and 3.8% in 2023, still higher than the pre-pandemic
rate of 3.5% in late 2019. Even with the pandemic under control, shifts in the types of jobs
needed by employers will require substantial re-training, thereby keeping the jobless rate higher
until the supply of skills meets the demand for skills. The pessimistic scenario has the jobless
rate effectively flat for the next two years, rising slightly in 2022 and falling slightly in 2023.
The shifts in occupational demand will be similar under both assumptions. Advances in
the abilities of technology and automation to perform tasks will mean slow or negative growth in
in low-skilled, physical jobs, especially those requiring minimal analysis and evaluation of the
tasks. In contrast, the fastest growth will be in high-skilled, cognitive jobs in technology, health
care, logistical, and professional jobs. Growth will also be strong in support jobs in these fields
that require less training.
11
FORECASTED PATH OF NORTH CAROLINA'S REAL GDP
( : without new variants; : with new variants)
570
556
550
542
530
522*
515
512 510
509
510 - 4 505
490
470
467
450
2019,IV 2020,1 2020,II 2020.111 2020,IV 2.,<.I "G,1, 2021.111 2021,IV 2022 2023
NORTH CAROLINA'S FORECASTED PATH OF THE UNEMPLOYMENT RATE
( : without new variants; : with new variants)
14
12
10
8
6 /
4
2
C
2019.IV 2020,1 2020.11 2020,111 2020,IV 2021,1 2021,11 2021,111 2021.IV 2022 2023
19
LONG-RUN PROSPECTS FOR NORTH CAROLINA
Eventually the pandemic will be over, and therefore it is useful to look ahead to the
economy in the long run.
Like all states,North Carolina has suffered major human and monetary losses from the
Covid-19 virus. However, on a comparative basis to other states,North Carolina's losses have
been relatively low. Covid-19 deaths per capita and job losses per capita during the recession
have both been low in North Carolina compared to other states.3
This means North Carolina will be considered to be a relatively"safe" state for dealing
with any future pandemics. If—as many futurists expect—there will be a"geographic re-
sorting" of businesses and population in the post-pandemic economy, then North Carolina should
be the recipient of more people and more businesses moving to the state. Rather than expecting
a state population of 14 million in 2050,4 the result could easily be higher at somewhere between
15 and 16 million.
The state could also be re-shaped by forces growing out of the pandemic. Universal
high-speed internet is now widely recognized as a necessity in the modern world, and should be
accomplished by 2030. This will allow more households and businesses to take advantage of
"remote activities" - like remote work, remote access to services, and remote delivery of
products—that were widely used during the pandemic. And while metropolitan areas in the state
will continue to be fast-growing, the greater use of remote-access will allow more small-town
and rural areas to attract households and businesses and take part in economic expansion. The
urban-rural divide could finally be narrowed.
s https://hamiltonplacestrategies.com/50-states-50-pandemic-responses-an-analysis-of-jobs-lost-and-lives-lost/.
4 https://files.nc.gov/ncosbm/demog/countygrowth_2050.html.
13