The economy has a direct impact on state revenue collections. OSBM continuously monitors relevant economic indicators likely to affect state revenues in support of the Governor's role as Director of the Budget.
The North Carolina constitution requires the Governor to continually survey state revenue collections to ensure that the State does not incur a fiscal deficit. The constitution also directs the Governor to include anticipated revenues as part of the Governor's recommended budget.
Below are several key economic indicators OSBM monitors to inform projections of state revenue collections:
State Unemployment Rates
After nearly a decade of elevated unemployment levels, North Carolina’s labor market, at least in most areas of the state, is showing signs of reaching full employment (that is, the lowest unemployment rate consistent with low and stable inflation). Among the clearest signs of the strength of North Carolina’s labor market is the unemployment rate, which has held steady near or below 5.0% during the latter half of 2016. In August 2016, the state unemployment rate fell to 4.6%, matching the lowest level reached between 2000 and 2010. Even broader measures of unemployment that include “marginally attached” workers and part-time workers who would rather work full time, shown in the chart below, signal that unemployment levels are near pre-recession lows. As North Carolina approaches full-employment levels, wage growth is likely to accelerate even as the overall rate of job growth in the state declines.
State Job Growth by Industry
Private service-providing industries, especially professional and business services, trade, and transportation, continue to account for most of the net new jobs created in North Carolina. For the past three years, professional and business services have accounted for more than one in four net new jobs in the state. The trade, transportation, and utilities super-sector has accounted for another one in four to one in five net new jobs. Other private service-providing super-sectors, with the exception of information services, have also consistently added jobs in recent years. Due to differences in prevailing wages across industries, which industries are experiencing the most job growth affects growth in state income and sales taxes.
Like most states, North Carolina experienced a dramatic decline in construction of new housing after the nationwide housing bubble burst in 2006 and 2007. The decline in construction contributed directly and indirectly to the rapid decline in sales tax revenues during the most recent recession. Although the state’s housing market has gradually improved over the course of the last five years, helping to boost sales tax collections, construction levels remain far below the levels of the late 1990s through the mid-2000s. Demographic trends, including lower population growth and migration, an aging population, and delayed household formation by young adults, will likely keep housing construction from fully recovering to pre-recession levels. However, the demand for new homes in many of North Carolina’s major metropolitan areas is likely to sustain the gradual rise in new-home construction for the next several years.