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Boom times
S.C.’s economic growth robust, but housing market troubles analyst
By Dan McCue
Staff Writer
South Carolina’s economy, as defined by its real gross state product, grew robustly in the second quarter of 2006, according to an analysis compiled by Wachovia.
But given the recent well-documented slowdown of the U.S. economy, Palmetto State residents shouldn’t be surprised to see a significant decrease in that statistic over the next six to 12 months, according to the economist who wrote the report.
“There’s no question South Carolina’s economy grew significantly earlier this year, but people need to realize that a 6 percent growth rate, which is what we saw in the second quarter, is simply not something you should expect quarter after quarter,” said Mark Vitner, senior economist with Wachovia.
“Given the strong year South Carolina has had in regard to tourism, the numbers for the third quarter will probably remain pretty strong, but after that, especially given what’s happening in the U.S. housing market, I suspect the growth rate may begin to slow considerably,” he said.
According to the report, South Carolina led the Southeast, which underwent the most vigorous growth of any region in the nation during the period.
In all, real gross state product—the value of all goods and services produced in the state—grew 6.3% in the second quarter, compared to a regional growth rate of 4.6% and a national rate of 2.5%.
This marks the third consecutive strong quarter for South Carolina, following what Vitner described as several quarters of more sluggish gains.
“Based on these numbers, there’s no question the South Carolina economy is booming, led by robust economic activity in Charleston, Columbia, Greenville and, to a lesser extent, in Myrtle Beach and Hilton Head,” Vitner said.
According to the report, growth in the state over the past several quarters was driven by robust tourism, surging activity at the Port of Charleston and a marked increase in manufacturing activity in the state.
“Industrial development has been picking up in the state, businesses are expanding and the port appears to be having a really strong year,” Vitner said. “However, the wild card moving forward will be what happens to the housing market, particularly along the coast, where it has simply been red-hot.”
A cooling housing market
Shortly after Vitner’s report was released, the U.S. Department of Commerce reported that sales of new homes across the United States and orders for durable goods both fell more than expected in July, providing further evidence of a slowing national economy, the agency said.
Purchases of new homes, which account for 15% of the market, dropped 4.3%, the Commerce Department said. The figures were released only a day after the agency reported the slowest rate of sales of previously owned dwellings in more than two years.
Combined, those statistics add up to a rapidly cooling housing market. In total, home sales dropped 8% in the Southeast, the busiest sales region, and 21.3% in the Midwest.
At the same time, home sales rose 11.7% in the West, the second busiest sales region of the country, and 1.8% in the Northeast.
“Here at Wachovia, we’re looking for these figures to add up to a soft landing for the economy over a year to 18 months, but because home sales have been such a big positive in the South Carolina economy, probably playing a more prominent role than any other factor, the slowdown may be quite disturbing to some people,” Vitner said.
“Some folks, those with houses to sell, especially, will be questioning what’s going on, and likely saying, ‘This landing doesn’t feel so soft to me.’ In South Carolina’s case, I would expect growth to slow to somewhere between 3 percent and 6 percent in the coming year.”
Port of Charleston’s role
For most states, a soft economic landing is defined as having an economy growing at somewhere near 2%—slow, but growth nonetheless. A state’s economy falls into a recession when its growth slows to 1% to 1.5% over two or more quarters.
To keep its unemployment numbers steady, however, South Carolina needs to grow a little faster than everyone else, and certainly faster than the national average, Vitner said.
“That’s simply a byproduct of its having a stronger rate of population growth than the nation,” he explained.
The fragile state of the nation’s housing bubble, and the volatile impact it has on local economies like Charleston’s, illustrates why an economic cornerstone such as the Port of Charleston is so important.
“The housing bubble started because we had low interest rates, favorable demographics and, at the time, relatively low housing prices,” he said. “Soon demand outstripped supply and that attracted the speculators.”
Hurricane Katrina changed everything, Vitner said. Where speculators once saw opportunity, they suddenly saw overwhelming risk and began to lose their nerve. While the housing market remained strong well into 2006, even here the signs suggest the wave has crested.
“That’s why the growth of the Port of Charleston is the key, not only to the city’s future, but to that of the entire state as well,” Vitner said. “I understand there are tremendous constraints on its growth, in terms of sheer space, but the opportunity for an increase in container volume is there, and Charleston has something no other ports I can think of in the region have—the fact that it’s so well situated relative to other states’ major population centers.”
Slowdown may spur growth
Apart from the port, Vitner said a slowing South Carolina economy may actually spur activity in other segments of the Lowcountry’s business environment.
“Certainly tourism still has room to grow, particularly given the variety of vacation experiences one can have in the region, and it could inspire renewed efforts to develop the convention business,” he said. “The other thing I expect to see is a marked increase in commercial construction.”
The frenzied home market actually chilled commercial construction for a time, Vitner said.
“The cost of land and building materials have just been so high that it didn’t make economic sense to build a lot of brand new commercial properties and search for
tenants,” he said. “That will be changing now.”
Political courage needed
If the political leadership is going to keep South Carolina’s business engine firing during the nation’s economic slowdown, it’s going to have to take on big issues and look for long-term rather than politically expedient solutions, Vitner said.
“The biggest drawback South Carolina has, and has had since probably the Civil War, is in the area of education,” he explained. “I believe much of the poverty that exists in pockets of this state is related to low educational attainment.
“The state tries to make up for it in some ways, for instance, by having one of the best technical college systems in the nation.”
Regardless of the slowdown, the economist is not pessimistic about South Carolina’s future, something he illustrated by recalling a recent speaking engagement in Columbia.
A large part of his talk focused on the fact that growth in the Southeast continues to be some of the most vigorous in the nation. The region’s economy grew at a 4.8% annual rate in the second quarter, with the strongest gains coming from South Carolina and Florida. Most other states in the Southeast also continued to post strong gains, particularly Tennessee, North Carolina and Georgia.
After the talk, “people were not asking about home sales, but about whether all the talk they hear about luring high-tech industry to the state and our becoming a hydrogen economy had a chance of coming to fruition,” Vitner said. “My answer was to suggest they look at the example of Arizona. Thirty years ago, Arizona had the very same problems we have now, and they don’t have a coastline to bolster the tourism economy. What they did have was a vision to evolve into a high-tech economy, and now places like Phoenix are just flat-out booming.
“It takes strong political leadership to reshape an economy, and you have to have political leaders with very strong character and a strong commitment to the state. Because the reality is in most places these days, elected officials are term-limited, and these things require decades-long efforts that are unlikely to have an immediate pay-off for them.”
While current homeowners interested in a big payoff from their property might be pained in the months ahead, Vitner said it would be foolish to bemoan the anticipated slowing growth rate of the fourth quarter of this year and all of 2007 while losing sight of the “tremendous strides” the state made while the economy was blazing.
“There’s the Savannah River research site, the automotive research facility growing in the upstate around Clemson and Vought in North Charleston, which is just getting rolling,” he said.
“Has anyone stopped to think about the fact that all of these tremendous orders Boeing has gotten for the 787 are all from overseas? Domestic carriers haven’t stepped up to the plate yet because they’ve been cash-strapped for so long, but eventually you know they’re going to have to replace their fleets. And that bodes very well for Boeing’s contractors, like Vought.”
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
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