Jul 20, 2022 - News

How ready is Charlotte for a recession?

Illustration: Allie Carl/Axios

North Carolina Gov. Roy Cooper signed a new budget into law last week that transferred $1 billion into a new inflationary reserve in case of a recession.

This got our newsroom thinking: Is the city of Charlotte ready for a possible recession?

The short answer: Charlotte, and most financially stable cities, should be in a good spot — at least from a fiscal perspective. Their largest revenue streams are consistent property taxes, whereas the state heavily relies on sales and income taxes. Those figures can be uneven when large numbers of North Carolinians are out of work and cutting back on spending.

  • Sales tax represents $129.7 million of the city of Charlotte’s $784.8-million general fund revenues. Property taxes make up more than half, $424 million, according to the budget.
  • Councilman Ed Driggs, chair of Charlotte’s budget and governance committee, said he’s served on council during harsh economic times, including early 2020, and believes the local government should fare well through what’s to come.

Of note: Even though Americans may not feel good about the economy because inflation is so high, the labor market remains robust. Unemployment is low and wages are rising nationally.

  • A recession is defined as two consecutive quarters of negative GDP growth.

Zoom out: Before the pandemic, the U.S. economy was “unusually stable,” president and CEO of the Federal Reserve Bank of Richmond Tom Barkin told the Rotary Club of Charlotte last week.

  • Between 2010 and 2020, the GDP continued to grow, jobs were created each month and inflation remained in the 1% to 2% range, Barkin said.

Then the pandemic hit.

  • And the U.S. government pumped out $6 trillion in COVID-19 funding.

Perspective: During the Great Recession, the federal government doled out less than a trillion dollars of stimulus, UNC Charlotte economics professor John Connaughton said in a recent interview.

“We are out of balance today because stimulus supported excess demand (and) overwhelmed supply that was constrained by the pandemic and by global commodity shocks,” Barkin said.

  • Barkin compared what’s happening now to the aftermath of a war. After both world wars, inflation went up more than 20% in the U.S., he said.
  • In June, inflation soared to 9.1%, the highest it’s been since 1981.

What they’re doing: The Federal Reserve is hiking interest rates to ease consumer demand, with the goal of returning to a 2% inflation rate. The economy, however, could fall into recession in the process.

  • Recession came after eight of the Fed’s last 11 “tightening cycles,” Barkin said.
  • “The Fed is basically sitting back and saying, ‘Yeah, well, we probably made a mistake there'” by accommodating the stimulus, Connaughton said.

During past times of economic downturn, the city has taken to belt-tightening measures, skipped out on annual raises for staff or left vacant positions unfilled.

  • “We’ve weathered the storm in the past quite well,” Driggs said. “We’ve maintained a AAA-bond rating through a couple of recessions, including the Great Recession.”

It is unlikely city leaders would raise property taxes during a recession, Driggs added.

  • This fiscal year, property tax revenue is projected to grow by 2.6% from new construction and renovations, according to the city budget.
  • In case of emergencies, the city maintains 16% of its operating expenses in the fund balance.
  • Also, “most state and local governments are flush with cash” from pandemic relief money and surplus sales tax dollars, said Laura Ullrich a senior regional economist with the Richmond Fed’s Charlotte branch.

Inflation posed the challenge this year as the city constructed its budget. The recently adopted 2023 budget mentioned the term a dozen times.

  • Council adopted a range of pay increases in part to shelter employees from rising prices in their everyday lives.

Yes, but: In the future officials could face the difficult decision between granting raises or saving money during a financial strain.

Overall, Charlotte has a few advantages over other places if a recession hits.

For one, the anticipated recession would more so impact interest-rate sensitive consumer production, such as car plants and their suppliers, than consumer service economies like Charlotte’s, Connaughton said.

Also a plus: Charlotte is growing, and so is its workforce.

  • People are increasingly moving to the Carolinas, joining the workforce and bolstering the economy.
  • Last week, North Carolina ranked No. 1 in CNBC’s annual Top States for Business. It was the state’s first time at the top.

The bottom line: If there is a recession, it won’t be nearly as bad as what many remember from the late 2000s. The city government should hold out, and overall Charlotte is in a more favorable position than other places because of its industries and strengthening workforce.

  • “If the Federal Reserve remains hawkish on inflation, we will probably slide into recession by the end of this year at the latest, and we may already be there,” Connaughton said. “Historically, Charlotte has fared very well in most recessions in the second half of the 20th century.”

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