For decades, the South was the place to be for business – a haven from high taxes, labor unions, and stifling regulation. Indeed, the South – and I am talking more specifically about the Southeast — was booming largely because of its pro-business climate and aggressive economic developers who were willing to play harder.
I liken economic development in the South to SEC football – hard and fast – with the Midwest and Northeast slow and even complacent by comparison. In the South, the overall mindset of economic development is “what will it take to make this deal happen?”
Whereas in the North, it’s been more process driven – “Fill out this 35-page incentive application and we’ll get back to you in two weeks to see if you might qualify.” The West often falls into this same camp or mentality as well.
Now these are generalizations, oversimplifications which are always unfair because there are always exceptions to such blanket statements. Certainly, there are communities nationwide that will go to great lengths to incentivize a project that brings the prospect of future job growth.
But now it would appear the worm has turned. Or at least something has happened. The South, which entered the recession with the lowest unemployment rate in the nation, is now struggling with some of the highest rates, according to recent data from the Bureau of Labor Statistics.
Indeed, unemployment in the South (9 percent) is now higher than it is in the Northeast (8.1 percent) and the Midwest (8.5 percent), which include Rust Belt states that were struggling even before the recession. According to latest statistics released by the BLS on Nov. 22, of the states with the 10 highest unemployment rates, five are in the Southeast. My initial reaction: Whaddup with that?
Mississippi’s October unemployment rate was 10.6. For South Carolina, it was 10.5 and for North Carolina, it was 10.4. For Florida, the jobless rate was 10.3 and for Georgia, it was 10.2. Now from experience, I can tell you that all these states, with the possible exception of Florida (and that’s changing now) have had very pro-business climates with aggressive state and local economic development organizations well versed in the art of the deal.
So what has happened to my Sweet Sunny South? (Which is the name of a traditional song that dates back to the 1850s.) And that begs another question: Are we seeing a megatrend, some sort of reordering of the nation’s economic fortunes? Will the Great Lakes region, for example, make a comeback while the South revert into a region where growth stagnates?
Well, I am no economist nor do I play one on TV, but I will offer up some ideas for you to chew on.
A recent Brookings analysis found that many auto-producing metropolitan areas in the Great Lakes states are seeing modest gains in manufacturing, while Sun Belt and Western states are still suffering with sharp drops in home values. And therein may provide us with some answers.
We know this much — when factories in the North began shutting down and relocating to non-union states in the South, many people followed. That in-migration of people, and along with the resulting residential and commercial development, characterized economic growth in the South.
Georgia is a prime example of what went wrong fast. Georgia’s pro-business environment coupled with a great climate and aggressive economic development initiatives led many businesses to relocate there. The resultant housing boom propelled Atlanta into the top tiers of national growth.
Many new homes built and sold to first-time buyers, the riskiest group of borrowers. But as the recession kicked in, many of these homes began to lose value, and the first-time buyers, who were carrying higher debt loads and often employed in occupations more exposed to wage cuts and layoffs, found themselves way over the heads. And that’s when the good-times bubble done got popped.
The steady flow of people moving to the South is now sputtering, a sobering experience for those states that counted on more people moving in than out. For it is now becoming increasingly clear that a bad economy tends to keep people in place.
Net population gains from Americans moving to Arizona, Nevada and Florida from other states have been largely wiped out, according to migration data from the IRS. Mobility rates, as high as 20 percent in the 1960s and hovering around 18 percent in the ’80s, have been on a downward slide, hitting a low of 11.8 percent in 2008.
So it would appear that the South has to some degree been a victim of its own success. Will the South rise again? (I’m sorry, I could not resist.) Well, it has to. It has too many things in its favor not to rebound and resume a leadership role in the nation’s economy, despite occasional boneheaded moves by state legislatures that reinforce perceptions of intolerance and racial persecution. Yes, Alabama, I’m referring to you. (See Oct. 30 Barberbiz blog “Let Reason Prevail.”
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But I cannot stress enough how the housing crisis in this country has dampened or thwarted an economic recovery for the nation as a whole.
As housing prices continue to fall, more American borrowers fall into an negative equity position; that is, they owe more on their mortgages than their homes are worth. That negative equity is the single greatest problem facing the housing market today, because it not only creates or causes foreclosures, but it also stymies consumer spending and traps potential home buyers and sellers in place.
Negative equity rose to 28.6 percent of single-family homes with mortgages in the third quarter of this year, according to Zillow. That’s up from 26.8 percent in the second quarter. In real terms, that’s 14.6 million borrowers.
But 14.6 million might be a low number. That’s because it doesn’t factor in “effective” negative equity, which is borrowers who have so little equity in their homes that they cannot afford to move.
Mortgage analyst Mark Hanson contends that over 50 percent of all mortgaged households in the US are now effectively underwater — unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. And because repeat buyers have always carried the market as the foundation, this is why demand has not come back.
The fact is that today’s buyers are not-only skittish and skeptical, they are under no particular pressure to move the deal ahead. And that has translated throughout the national economy, where caution and fear continues to reign … at kitchen tables and in boardrooms.
But yet there are certain tantelizing hopeful signs that the U.S. economy could grow. Factory output expanded last month. Retailers reported a strong start to holiday sales over the Thanksgiving weekend, consumer confidence surged in November to the highest level since July, and Americans’ pay rose in October by the most in seven months.
Car sales also rose sharply in November, normally a lackluster month for the auto industry, with Chrysler, Ford, Nissan and Hyundai all reporting double-digit gains compared to a year ago.
But the debt crisis in Europe still lingers and coming presidential election in the U.S. make it difficult to predict the level of economic expansion. Michael White, chief executive officer of DirecTV, the largest U.S. satellite-TV provider, told Bloomberg last month that the uncertainty caused DirecTV to “slow our growth rate.”
“We’re tightening our belts in terms of spending,” White said. “We’ll cut back on overhead, hiring and programming.”
The labor market may be gradually healing, as the unemployment rate is edging down. The unemployment rate declined to 8.6 percent from 9 percent. But the decrease reflected a 278,000 gain in employment at the same time 315,000 Americans left the labor force.
“You’d like to see the unemployment rate coming down when people are coming into the job market, not disappearing,” James Glassman, senior economist at JP Morgan Chase & Co. in New York, told Bloomberg. “That’s probably exaggerating the trend in unemployment.”
Well, at this point, we will take what we can get. Any good news, no matter the caveats, should be welcomed. Maybe, just maybe, our long national nightmare is coming to an end.
We can only hope.
Need a partner in results-oriented site selection? Contact me, Dean Barber, at 972-890-3733 or at dbarber@barberadvisors.com Barber Business Advisors, LLC, is a site selection and economic development consulting firm in Plano, Texas. Please visit our website at www.barberadvisors.com
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Dean, I also feel like some southern states have not put the needed emphasis on education. Increasing educational attainment and skills development creates better “fundamentals” for states weathering economic changes. Investment in capacity building efforts are much stronger plays in the long run.
Dear Dean, you write a most interesting blog that I look forward top reading. But really was My Sweet Sunny South that you write about ever sustainable? Was it really ever that sweet and sunny? There are books written about the economic history of the South and I can little add to what is already on the record. However I do have a few thoughts… For a century chambers of commerce and politicians have promised prosperity to the South. Low wage jobs and sweat shops were to be tolerated as the first steps toward real economic development. Somewhere along the way the goals of high wages and decent benefits generating expanding markets were lost.
Is the South in a race to the bottom? If yes, then why? I am not sure but as an informed citizen with years for economic development experience I have some ideas. First the South as a region has not excelled in public education. This attitude has been called “intentional ignorance” because we all know the problem exists but do not do anything about it. Race may the reason but that is another argument for another day. Second the rise of other low wage counties into the global economy means that an uneducated worker in South Carolina nows has to compete with a low wage worker in China. The rote, repetitive and monotnous jobs that were the backbone of the South’s economic development are now located off-shore. Companies are forced to drive down prices for their products as low as possible and the only place to cut is labor costs. It seems that poverty and unemployment are the consequences. I am reminded of the old saying, “cheap labor is very expensive”.
At present we are in an period of austerity. The coin of the day is tax cuts. I admit that I pay enough in taxes and I am sure some of what I pay in taxes is wasted. However I do not feel the heavy hand of government on me enough to deny our future generations an excellent public school education. We must do better. How about making public school teacher’s salaries the same as at least a mid-level civil servant? Paying excellent teachers an excellent salary would be a good start. As for tax cuts, they should be focused on employment and not just across the board tax cuts. In this way companies will benefit only if that create jobs in this country and not just take the tax savings and go overseas. Also we should incentivise advanced manufacturing and have excellent public education systems as the foundation for the South’s future prosperity.
Yours for a sweeter sunnier South,
Don
Don, Sara, I think you are both absolutely correct that the South has historically not invested in public education as compared to other parts of the country.
Alabama, where I lived for almost 25 years, prides itself as having the lowest property taxes in the nation. As we know, property taxes are the general mechanism that funds public schools. So it’s no accident that Alabama has some pretty sorry school systems.
For the life of me, I do not know why I didn’t bring this up in my blog. I must be getting old. But I would encourage you both to publish your comments on one of the LinkedIn groups in response. I truly appreciate your input.
Dean,
OK. Where to begin. Your initial question, “What happened to my sweet, sunny South?”, is a multi-faceted question. Your writings focused on the unemployment level and the effects of housing and development on the South’s economy, so I will tackle that today.(And, this is not a defensive response to your post, since I live in Virginia and our rate has consistently been below the national average and that of the Southern states you referenced. I only offer my observations as a long-time Southern economic developer, observer and resident.)
Is the unemployment rate the best barometer of a State’s economic strength? One can certainly argue that broader composite index of measures such as employment/unemployment, job creation, quality of jobs, per capita income in relation to cost of living, unfunded government obligations (such as pension funds and infrastructure needs) and capital investment would provide a stronger basis for comparisons, but let’s focus on the current unemployment rate as the test of the economy.
Playing on the football analogy that you started with, and since we are in the midst of bowl mania, the South’s economy for the past 30+ years has been akin to the more recent, creative offenses and teams, while the north and mid-west have retained the traditional approach to the game. (And as you pointed out, these are generalizations, so there will be exceptions.) The traditional economy focuses on the fundamentals and work in the trenches. The new Southern economy is more like the run-and-gun. Let’s make the deal. How fast do you need to get your business up and running? No problem. We need some more streets? Let’s build them. You need some incentives to make the deal work”. Let’s talk.
The key to the new Southern offense is speed and agility and continuous movement. The key to the Southern economy is continued growth and development. The economic downturn (whether you blame it on Wall Street, government housing policies, or whatever) exposed the South’s gameplan weakness. A couple key players, namely development, housing sales/values and in-migration (if you can’t sell your house up north, you can’t move south), got sidelined with injuries. Clearly the housing deflation and the construction slowdown (or crash, depending on how hard you have been hit) has affected everyone around the country, but it has been disproportional on the Southern communities dependent on growth, as well as western growth mecas such as Phoenix and Las Vegas. Florida is a good example, where the economy and local and State budgets have been built, in large part, on continued growth. Florida’s economic model, by default more so than by design, needs population growth, housing construction and capital investment to work effectively, just as a run-and-gun offense needs fast receivers and a quarterback with a good arm.
There are other issues, of course, that can be discussed in relation to regional economic differences. The value of education has been pointed out as one such issue. But hitting your question head on, in my mind, the construction sector alone makes up the current difference in unemployment rates and short-term economic outlook across regions. And I think, Dean, that you answered your own question in the first half of your blog, and I agree with your assessment. Does the South stay with its current economic model or shift to something else in the future? That is yet to be seen.
For now, Southern states are sill pro-business and remain agressive for the deals that are, unfortunately, too few and far between these days. But, as the national economy gets back to “normal” (either before of after next year’s election)… as the injured players return to the game….. the South is poised to continue its economic rise.