Not only has the economy in the Upstate been robust, but so has the state’s.
But, the potential for changes could have an impact on the state’s economy and GSA Business Report asked economists around the state to find out what they thought the new year had in store for the state’s economic picture.
We reached out to Frank Hefner, professor of economics at the College of Charleston and Joey Von Nessen with the Darla Moore School of Business at the University of South Carolina.
Here is what they had to say:
Q. Now that the 2016 election cycle is over, what kind of changes do you see in terms of the national economy for 2017?
Hefner: The stock market seems to have jumped the gun on the financial sector – witness the run up of stock prices for banks in anticipation of financial deregulation. However, Congress has not met and decided that. Tax reform that encourages investment in the U.S. is probably the best fiscal policy that could be enacted. Basically, the U.S. economy has been humming along nicely this past year and I see no reason for that change - except for anti-free-trade policy being enacted. However, I do see trends in place that are completely independent of the political outcome. We are confronted with a slowdown in productivity and an aging population. If immigration is slowed, then the size of our workforce cannot sustain the kind of growth we would like to see.
Von Nessen: Although the U.S. economy experienced relatively weak growth during the first half of 2016, it has rebounded in the second half of the year. The U.S. saw relatively strong GDP growth of 3.2% in the third quarter and the labor market has strengthened considerably – gaining about 200,000 jobs per month since June. With unemployment below 5% and disposable income continuing to rise, consumer spending – the biggest part of the economy – is likely to remain strong going into 2017. The likely areas of impact for the incoming president will be infrastructure spending and changes to international trade policy. Public infrastructure projects have the potential to boost employment and earnings in construction beyond the residential sector. Trade policy offers the biggest uncertainty, with both upside potential and downside risk depending on the specifics.
Q. The economy of South Carolina is unique and has been robust for some time now. What kind of impact do you see the presidential election having on the South Carolina economy in 2017?
Hefner: For South Carolina, the first major impact will be political if our governor becomes the next ambassador to the U.N. After that, the major concerns for South Carolina based on the election rhetoric are foreign trade and immigration. South Carolina depends on both exports, especially through our port, and imports as inputs to our manufacturing sector. In addition, the state has benefited tremendously from foreign direct investment in the state: think BMW, Volvo, Michelin and so on. Domestic firms that have had a large impact on the state, like Boeing, depend on foreign markets. The anti-trade rhetoric does not bode well for the state. Recall, the Smoot-Hawley Tariff of 1929 was a major factor in precipitating the Depression. South Carolina is currently enjoying a boom in construction. Many contractors are concerned about labor availability. A reduction in immigrant labor could squeeze this activity. Tax reform that benefits the entire economy will of course benefit South Carolina. Tax reform is a much needed change.
Von Nessen: The biggest impact that President-elect Trump will have on the South Carolina economy will likely come from two sources: the renegotiation or elimination of trade deals, and any changes in military and veteran spending. South Carolina’s economy relies heavily on export-oriented manufacturing. In addition, many South Carolina companies rely on suppliers located outside of the U.S. Any change in trade policy that increases the costs of these suppliers is likely to slow our state’s growth, all else being equal. By contrast, any change in trade policy that makes South Carolina more attractive for foreign direct investment is likely to have a positive impact on the state. The state is also likely to significantly benefit from any increase in military or veteran spending given the state’s large number of military facilities and the relatively high number of veterans that live in South Carolina.
Q. Looking at the different sectors of business in South Carolina, what sectors do you see thriving in the next year and why? Conversely, what sectors do you see falling off and why?
Hefner: Tourism will continue to be a bright spot for the state, especially as income increases across the country. The manufacturing sector should see growth as GDP grows. I don’t see any specific sectors that might fall off.
Von Nessen: Although growth has been fairly broad-based throughout 2016, the two leading sectors this year have been construction and advanced manufacturing. Construction was the overall industry leader for much of 2016 as the state’s housing markets have continued to recover after lackluster growth during much of the current expansion period between 2010 and 2015. The Charleston metropolitan region benefited most from these construction gains due to the region’s high employment and income growth as well as a strong second homes market. We expect to see housing markets continue to thrive in 2017 as consumers who have delayed housing purchases begin buying in additional markets across the state.
Advanced manufacturing, another leading industry in 2016, will be important to monitor closely as we move into the new year. Advanced manufacturing is largely export-oriented, but there has been virtually no growth in the volume of exports in 2016. In addition, the rate of employment growth in advanced manufacturing has slowed considerably during the second half of the year. Much of this change is due to a significant appreciation of the U.S. dollar that has made manufactured exports more expensive for foreign consumers. Nevertheless, South Carolina remains a global hotspot for advanced manufacturing – as the recent announcements of Volvo and Mercedes affirm. Thus, any reductions in the growth rate of the advanced manufacturing sector is likely to be temporary.
Q. It has been reported that the state’s economy has been in a state of growth while the national economy has tapered off slightly. Do you see that trend continuing into 2017? Why or why not?
Hefner: The third quarter GDP figures just came in at a robust 3.2%, highest growth rate in two years. The national economy may have stopped tapering and started growing again. That is good news for South Carolina also. But it would be hard for South Carolina to consistently maintain a growth rate that is higher than the national rate. So in that respect, the state will grow but closer to the national rate.
Von Nessen: South Carolina’s economic growth has tapered off in 2016 as well, even though the state’s economy has consistently outperformed the U.S. economy by many measures during this current expansion. Statewide employment growth peaked at approximately 3% in 2015 and has dropped to an average of approximately 2.5% in 2016. The coastal regions of the state – Charleston, Hilton Head and Myrtle Beach – have fared slightly better than the Midlands and Upstate. This is primarily due to the fact that these regions have benefited from strong housing demand, especially in the second homes market; and these regions are often the beneficiaries of increases in consumer spending because of their strong tourism industries.
The overall reduction in growth in 2016 is largely the result of three factors: a slowdown in global markets; an appreciation of the U.S. dollar, and uncertainty surrounding the U.S. presidential election. A slowdown in global markets and an appreciation of the U.S. dollar both lower export activity in South Carolina. Uncertainty due to the U.S. presidential election led to a marginal reduction in both consumer spending and business investment. In general, when consumers and businesses are uncertain about the future, they are less likely to spend and less likely to invest and hire. This uncertainty will likely begin to fade after President-elect Trump takes office and we learn more specifics about his policy agenda.
South Carolina’s economy is strong and stable headed into 2017. Despite the marginal slowdown in 2016, we expect continued growth in 2017 comparable to levels experienced over the past 12 months. Achieving higher levels of growth will require that one or more industries expand significantly in the coming year. Currently, we are not able to point to any specific industry that is likely to generate this level of activity.
Q. What is the biggest concern you have for the national economy in 2017? Why is that a concern and is there a way to overcome that concern?
Hefner: The biggest concern is the anti-trade rhetoric. So much of our manufacturing depends on trade that a slowdown of imports would actually hurt American industry. With wage pressure, inflation will be raising its head again. That typically mean higher interest rates. I don’t see higher rates stifling consumption or the housing market, especially if wages increase.
Von Nessen: At both the national and state levels there are growing concerns about the ability for firms to be able to fill current job vacancies. This reflects a paradigm shift in the labor market relative to earlier points in the economic expansion. A good way to highlight this difference is to compare our state’s economy when Gov. Haley took office in 2011 to our state’s economy today – shortly before she (likely) leaves office. In 2011, South Carolina was still recovering from the Great Recession and had very high levels of unemployment. Gov. Haley’s priority was to generate employment opportunities for South Carolinians. In 2017, a new governor will likely inherit a healthier economy in which unemployment is relatively low but where a skills gap is also preventing many unemployed workers from being hired for available positions.
We have seen – both nationally and locally – a rise in the number of job vacancies for a given level of unemployment, which can indicate a skills mismatch between what employers are seeking and what workers currently possess. In addition, there is a concern about the void that will be left by retiring baby boomers. This is especially true in the manufacturing sector. As the labor market continues to strengthen and unemployment continues to fall, matching qualified candidates with open jobs and providing the right types of training for available jobs will be a challenge in South Carolina and across the nation.