How worried should Charlotte be about a recession? Local economists weigh in.
There was the 2008 recession, when Charlotte lost thousands of jobs and a hometown bank. Then there was the short-lived downturn of 2020, as restaurants, offices, gyms and schools shut down in the two months following the initial COVID outbreak.
Now, local economic and finance experts are watching for signs of the next recession in Charlotte.
That might seem iffy: jobs are plentiful here and elsewhere, local business is booming and cranes still dot the skyline.
But at the national level, the Federal Reserve is tightening monetary policy with an increase in interest rates.
The move could cool the economy and rein in rapidly rising prices. Or, depending on how quickly the Fed moves, it could turn out to be an overly aggressive strategy that tips the economy into a downturn.
“It’s certainly dominating a lot of conversations,” said Nathan Stovall, a Charlotte-based banking analyst with S&P Global. “Whenever the Fed is intervening, (the financial sector) can be very, very fearful of that prospect.”
It could ultimately contribute to a reversal of fortune in a city that hasn’t seen a prolonged economic contraction in nearly 13 years.
“I’m not absolutely predicting a recession,” said Michael Walden, a Raleigh economist and professor emeritus at N.C. State. “But there’s probably 1 in 3 odds right now.”
Where’s the recession risk coming from?
The risk of the next recession connects back to those high prices you’ve probably noticed everywhere, from the the gas pump to the grocery store.
During the pandemic, trillions of dollars in federal aid flowed into the economy, Walden said. He called it an “unprecedented infusion” of cash, and it kept Americans spending during the outbreak.
On the other side of the economic equation, supply chain issues and other challenges — like the war in Ukraine or continued COVID shutdowns in China — constrained the amount of goods and commodities available.
High demand, limited supply: it’s the classic combination for rising prices, Walden said. The Consumer Price Index, which measures inflation, increased 8.3% year over year in April, close to 40-year highs.
The Federal Reserve responded to those cost increases this spring by increasing the federal funds rate, working to slow borrowing and trying to cool down the economy.
But raising rates comes with a risk.
It’s like landing a plane, Walden said. Right now, the U.S. economy is “flying high and fast.” The Fed is looking to slow it down and land it safely on the runway.
“That’s very hard to do,” he said. “History has lots of examples where the Federal Reserve was not able to land the plane without crashing.”
In fact, successful “soft landings” are very rare, one report from investment bank Piper Sandler stated. The Fed has triggered a recession eight times since 1961 while trying to reign in inflation with higher interest rates.
“I have a lot of people ask me… ‘Don’t they know exactly how much to raise rates?’ ” Walden said. “My answer is, no, they don’t, because we’re not dealing with a physical science.”
Investors, analysts and others in the financial sector are aware of those risks, said Stovall, and will be watching the Fed closely for signs of an overly aggressive slowdown.
“There has long been fear on the street that when the Fed tightens monetary policy, they will overdo it, slowing the economy down to such a point that it pushes us into a recession,” Stovall said.
Different times, different recessions
Longtime Charlotte residents may shudder at the thought of the last prolonged recession in the city: the 2008 financial crisis, which spurred an 18-month economic contraction and left a much longer-lasting impact on the local banking industry. All told, Mecklenburg County lost more than 31,500 jobs from 2007 to 2010.
But it’s unlikely that the next downturn will look much like the Great Recession, experts said.
“The risk of that repeating itself is next to none,” Stovall said
The 2008 crisis was born out of the housing market, Walden said. “I don’t see that much now.”
And Stovall said he hasn’t seen signs of current widespread mortgage defaults or delinquencies that preceded the 2008 housing market crash.
“When you see a recession looming, you start to see cracks,” he said. He’s not seeing those yet.
If another recession does occur, “the banks won’t have their backs against the wall” the way the did in those months of the crisis, Stovall said.
The 2008 recession had a singular impact on Charlotte because of its role as a financial center and home to Bank of America and, previously, Wachovia.
But after that crisis, there was a “lot of rethinking on the reliance of that industry” said Chuck McShane, director of market analytics at the CoStar Group, a commercial real estate research firm, in Charlotte.
A possible downturn this or next year, however, would be a more “typical, run-of-the mill recession” triggered by tight monetary policy, Walden said.
A better comparison than 2007-2008 might be the recession of July 1981 to November 1982. Beginning with The Great Inflation of the 1970s — when gas lines snaked down highways and sitcom characters resorted to meatless spaghetti — it resulted in a two-year economic downturn.
How would Charlotte fare in a recession today?
In the event of a downturn, the Charlotte region would likely fare better than others.
“We have the benefit of being in a growing state,” said Walden. In one ranking from the National Bureau of Economic Research he said, North Carolina ranked 13th out of 50 states for its economic resilience during COVID slowdowns.
And Charlotte now has a much more diversified economy than it did in 2008, McShane said, when about a fifth of the city’s paychecks were coming from the banks.
That focus on a diverse economic base was important in the aftermath of the Great Recession and remains so today, he said.
That doesn’t mean Charlotte would be completely spared, McShane said. Cutbacks are already taking shape in the financial sector: for example, he wouldn’t be surprised if the city saw bank layoffs this year as rising mortgage rates cut into the home loan business.
Stovall thinks a recession is probably on the horizon. “But it seems unlikely in the near term,” he said.
Even so, Walden said both businesses and families would be wise to prepare for the possibility of economic pain— if not a recession, then in continually increasing prices if the Fed fails to get a hold of them.
“People should not view this as the sky falling,” he said, emphasizing that his own prediction still means there’s a 66% chance the country doesn’t see a downturn soon. “Take a step back and have a plan.”
This story was originally published May 19, 2022 at 6:00 AM.
