Economic Stories of Relevance — 2019
The Expansion Holds — While the Industrial Cycle Turns
THE LEVELS REPORT — 2019
The American economy entered 2019 carrying an unusual contradiction from the previous year. It had just completed one of the strongest years of the long expansion that followed the Great Recession. After adjusting for inflation, economic output had grown 2.9%, unemployment had fallen below 4%, wages were finally rising at a faster pace, and North Carolina and the Foothills continued attracting industrial investment. Yet the conditions surrounding that expansion were becoming increasingly uncertain. The Federal Reserve had raised interest rates four times during 2018, the trade confrontation with China had moved beyond political arguments into tariffs covering hundreds of billions of dollars in goods, and manufacturing around the world was losing momentum. Financial markets had also experienced sharp swings during the final months of the year, while the economic pressures identified throughout the 2018 ESR were beginning to influence actual business investment decisions.
The central question entering 2019 was not whether the economy was still growing. It plainly was. The question was whether an expansion increasingly supported by household spending and the service economy could continue while manufacturing, international trade and business investment faced higher borrowing costs and growing uncertainty around the world.
The answer that emerged during the year was more encouraging than many pessimists had expected, but less reassuring than the strong employment numbers alone suggested.
At Ground Level, the economic position of American households continued improving. Unemployment eventually fell to 3.5%, the share of people participating in the labor force increased modestly, and wages continued rising. Figures subsequently published by the Census Bureau showed that median household income, the midpoint of the nation's household income distribution, had increased substantially. Poverty fell to its lowest recorded rate since the government began tracking the statistic in 1959. Gasoline became somewhat cheaper, while lower interest rates during the second half of the year reduced some of the borrowing pressure that had developed in 2018. In many respects, American households entered 2020 in their strongest economic position of the entire post-recession expansion. (Census.gov)
Manufacturing and international trade told a different story. American manufacturers added only about 46,000 jobs during 2019, compared with 264,000 the previous year. Manufacturing employment in North Carolina reached a peak around the middle of the year before declining during the second half. The Hickory area followed much the same progression. The volume of goods traded around the world actually declined slightly, marking the first annual contraction since the Great Recession, while global economic growth slowed to an estimated 2.9%. China's economy slowed, Europe weakened, and uncertainty spread through the international supply chains connecting manufacturers, suppliers and customers across national borders. (Bureau of Labor Statistics)
The Federal Reserve's changing policies provided perhaps the clearest indication that economic conditions were shifting. The central bank entered 2019 after several years of gradually raising interest rates and a more recent effort to reduce the large portfolio of securities it had accumulated while supporting the economy after the financial crisis. By July, however, the Fed was cutting interest rates rather than raising them. Additional reductions followed in September and October, and the effort to reduce its securities holdings ended ahead of schedule. Then, in September, serious pressure developed in the financial system that banks and other institutions use to obtain short-term funding, often overnight. The disruption became severe enough that the New York Fed began providing short-term cash through transactions known as repurchase agreements to keep interest rates under control. The economy hadn't returned to the crisis conditions of 2008, but the central bank that had spent 2017 and 2018 gradually withdrawing support found itself providing support again before 2019 was over. (Federal Reserve)
The year developed along two different tracks. Employment, household income and consumer spending remained strong enough to sustain overall economic growth, while manufacturing and international trade were increasingly behaving as though a slowdown had already arrived. The economy hadn't stopped expanding, but the sources of that expansion were changing, and the difference between household strength and industrial weakness was becoming increasingly important.
That divergence defines 2019.
I. GROUND LEVEL
Entering 2019, the household economy remained protected by a labor market whose strength had become historically unusual. Employers added 304,000 payroll jobs in January while unemployment stood at 4%. The labor market had been expanding for nearly a decade, yet companies were still finding enough demand to hire large numbers of additional workers. The broader economic significance was no longer simply the number of jobs being created. The long period of falling unemployment was beginning to change the relationship between workers and employers. As available labor became harder to find, workers who changed jobs or entered occupations experiencing genuine shortages increasingly had more choices and greater negotiating power than they had possessed during the early years of the recovery. (Bureau of Labor Statistics)
Households also received some immediate relief from the higher energy costs that had developed during 2018. Regular gasoline entered January near $2.24 per gallon after crude-oil prices had fallen sharply during the final months of the previous year. Prices subsequently climbed toward $2.90 in May, but the yearly average ultimately settled at approximately $2.60, eleven cents below 2018. The movement mattered because transportation remained one of the largest unavoidable household expenses outside densely populated urban areas, particularly throughout suburban and rural regions such as the Foothills Corridor. Every reduction in gasoline expenses left a little more money available for groceries, restaurants, retail purchases, debt repayment or savings. (U.S. Energy Information Administration)
The first half of the year nevertheless revealed that economic strength was no longer automatically leading toward higher interest rates. Yields on ten-year U.S. Treasury bonds, which serve as an important benchmark for borrowing costs throughout the economy, declined substantially between January and June. The average ten-year yield fell from approximately 2.71% in January to 2.07% in June. Financial markets were beginning to anticipate slower economic growth and the possibility that the Federal Reserve would eventually need to lower interest rates, even while unemployment remained exceptionally low. That created an unusual combination for households: jobs remained plentiful, while longer-term borrowing costs were already beginning to decline. (FRED)
Housing prices continued rising, although at a slower pace than during the preceding years. By the fourth quarter, national home prices were 5.1% higher than a year earlier. That remained a meaningful increase, especially after several years of rising property values. Homeowners continued building equity as their properties appreciated, while prospective buyers faced increasingly expensive homes. Falling mortgage rates later in the year partially offset those higher prices, but affordability depended upon several factors working together: household wages, purchase prices, financing costs and the amount of savings available for a down payment. Lower interest rates could make monthly payments more manageable, but they couldn't automatically make an increasingly expensive house affordable. (FHFA.gov)
Around July 1, the most important Ground Level signal was the growing difference between the strength of the labor market and the Federal Reserve's changing assessment of the broader economy. The Fed's July Monetary Policy Report described economic activity as continuing at a solid pace and the labor market as strengthening further. However, inflation remained below the Fed's 2% objective, while growing uncertainty surrounding international trade and the global economic outlook was leading policymakers to prepare for possible action. The household economy itself wasn't breaking down. The danger was developing elsewhere, through weaker business investment, slowing manufacturing and global uncertainty that could eventually reach American workers and their families if those conditions continued. (Federal Reserve)
The first interest-rate reduction arrived on July 31, lowering the federal funds target range to 2–2.25%. Two additional reductions followed in September and October, bringing the range down to 1.5–1.75%. The cumulative reduction of 0.75 percentage points represented a substantial change in Federal Reserve policy. The central bank was no longer attempting to slow an economy considered at risk of overheating. It was attempting to preserve an expansion that remained healthy at the household level while manufacturing and international economic conditions deteriorated around it. (Federal Reserve)
Those lower rates helped relieve some of the pressure on housing and other household activities dependent upon borrowing, but total household debt continued increasing. By the fourth quarter, outstanding household debt had reached $14.15 trillion, marking the twenty-second consecutive quarterly increase. That was approximately $1.5 trillion above the peak reached before the financial crisis, measured in dollars without adjusting for inflation. Mortgage balances reached $9.56 trillion, while automobile loans, student loans and credit-card debt remained substantial. The comparison with 2008 requires caution because lending standards and the types of debt households carried were different. Nevertheless, the underlying change in household behavior was unmistakable. The period following the financial crisis, when households concentrated heavily upon reducing their debts, had given way to another extended period of borrowing. (Federal Reserve Bank of New York)
The paradox was that stronger household finances and higher borrowing could both reflect improved economic confidence. A household with steady employment and rising income could qualify for credit that would have been unavailable during the recession. A homebuyer taking out a mortgage increased household debt while simultaneously acquiring property that could appreciate in value. Borrowing wasn't necessarily evidence of financial weakness, particularly when it helped acquire assets or supported productive economic activity. The problem emerged when households increasingly needed to borrow simply to maintain the standard of living their wages and employment were supposed to provide. There was an important difference between using credit to build financial security and depending upon credit to preserve everyday living standards. That distinction would become increasingly important during the years ahead.
By the second half of 2019, the labor market continued outperforming many of the industrial indicators surrounding it. Unemployment fell to 3.5% during September and returned to that level at year-end. December labor-force participation, which measures the share of the civilian population age 16 and older either working or actively seeking employment, reached 63.2%. That represented a modest improvement over the roughly 62.7–63% range that had characterized much of the preceding several years. Employers added approximately 2.1 million payroll jobs during 2019, although hiring had slowed from the previous year. Average hourly earnings finished December 2.9% above their level a year earlier. (Bureau of Labor Statistics)
Later Census Bureau evidence demonstrated how far the household recovery had progressed. Under the Census Bureau's 2019 income series, real median household income reached $68,703, an increase of 6.8% over its revised 2018 estimate. The figure represents the middle of the household income distribution after adjusting for inflation, meaning half of households earned more and half earned less. The official poverty rate fell from 11.8% to 10.5%, the lowest level recorded since the government began publishing these estimates in 1959. Approximately 4.2 million fewer Americans were living below the official poverty line than a year earlier. Earnings adjusted for inflation also increased among workers generally and among those employed full-time throughout the year. (Census.gov)
These improvements provide an important correction to any interpretation of 2019 that concentrates too heavily upon trade tensions, industrial weakness or financial-market anxiety. For a large portion of American households, the year didn't resemble an economy sliding toward recession. Jobs were plentiful, earnings were improving and poverty was declining. After years of economic recovery that often appeared stronger in financial markets than in ordinary household experience, the benefits were reaching more workers and families. The weakness was occurring elsewhere in the economic system.
By December, the Ground Level economy had consequently become the principal stabilizing force behind the broader expansion. Households continued spending because employment and income remained strong enough to support consumption. Cheaper gasoline helped preserve purchasing power, while lower interest rates during the second half reduced some borrowing costs. Rising home values also strengthened the financial position of many homeowners.
But the broader economy was relying increasingly upon that household resilience to compensate for weakness in industrial production, business investment and international trade. Consumer spending had become an important source of stability, even as the industries and investments responsible for much of the nation's productive capacity were losing momentum.
The American household had spent most of the decade waiting for the recovery to arrive. By 2019, that recovery had finally reached households strongly enough that they were helping hold the entire economic expansion together.
II. LOCAL — HICKORY / CATAWBA COUNTY
Hickory and Catawba County entered 2019 with industrial capacity expanding even as manufacturing employment was beginning to level off. Manufacturing employment across the Hickory–Lenoir–Morganton metropolitan area stood around 42,000 jobs in January, essentially unchanged from the end of 2018 after several years of steady recovery. The regional labor force had climbed to approximately 169,400 on the seasonally adjusted series, significantly above its level two years earlier. For a period, declining unemployment had partly reflected a shrinking workforce rather than increasing employment alone. The latest numbers suggested that this workforce contraction had at least temporarily stabilized. (FRED)
The region's efforts to address its workforce needs moved forward almost immediately. Catawba Valley Community College's new Workforce Solutions Center opened during early 2019. The 83,000-square-foot facility contained advanced classrooms and laboratories supporting computer and electrical engineering, machining, electronics, automotive systems, welding, mechanical engineering, mechatronics, robotics and related technical programs. The facility represented a change that had been developing through K-64 and other regional initiatives: workforce development was no longer a secondary consideration in economic development. It had become part of the infrastructure required to attract and sustain industrial investment. Communities needed more than available land and suitable buildings. They needed workers with the technical skills required to operate increasingly sophisticated production systems.
Catawba County's own 2019 economic assessment explicitly described the county as a major fiber-optics and telecommunications center while simultaneously emphasizing deliberate workforce development. Corning, CommScope, GKN Driveline, Prysmian and other industrial companies had created a business environment in which the availability of skilled workers increasingly determined whether additional expansion could occur. The county was no longer dealing primarily with the problem of filling vacant industrial buildings left behind by earlier economic contraction. It was investing in workers capable of operating the more advanced production systems arriving in those buildings.
The largest local corporate development of the first half occurred on April 4, when CommScope completed its acquisition of ARRIS International. The transaction dramatically expanded the reach of a company headquartered in Hickory, combining network infrastructure, broadband, wireless and connected-home businesses into a global communications enterprise. The combined company estimated that it could compete in a worldwide market worth more than $60 billion. The transaction was remarkable from a regional perspective. A company associated with Hickory's evolution as a telecommunications-manufacturing center had become large enough to acquire another major global communications company. (Vistance Networks, Inc.)
Yet the scale of the transaction also changed the type of risk the local economy was carrying. CommScope was no longer simply an important manufacturing employer. It was a multinational enterprise carrying substantial debt while attempting to combine two large companies during a period of slowing global industrial activity and unstable financial conditions. The consequences of success or failure would depend less upon the traditional Hickory considerations of land availability, local labor and regional demand than upon global technology markets, corporate borrowing costs, interest rates and international competition. Hickory's connection to the global economy had become deeper precisely because its companies had become more sophisticated.
Other local projects were moving forward through more conventional industrial investment. Catawba County's fiscal-year report identified Corning's planned $60 million Hickory cable facility, Shurtape's $31.4 million distribution and manufacturing investment in the Town of Catawba, Design Foundry's plans for 202 jobs, and Star Snax's expansion. The same report placed county unemployment at about 4.2% and emphasized that taxable sales had increased another 4% after a 9% increase the preceding year. The local consumer economy was participating in the broader expansion even while the industrial side became more complicated.
Manufacturing employment itself offered an early warning. The metropolitan count eased from about 42,000 jobs in January to 41,900 in June. That was hardly a collapse, but it interrupted the upward progression visible from 2015 through 2018. At the same time, the regional labor force remained close to 169,500 on the adjusted series. The area wasn't experiencing another major contraction in its available workforce. Rather, manufacturing had stopped adding workers at the pace seen during the earlier recovery. (FRED)
Around July 1, Hickory consequently presented a more complicated economic picture than industrial recruitment announcements alone suggested. Industrial infrastructure was expanding, workforce training was improving, and Corning and other companies remained committed to the area. CommScope had become a much larger global corporation. These were meaningful developments that strengthened the region's long-term industrial position, but manufacturing employment had stopped growing.
This is where the national industrial slowdown began to matter locally. Hickory's manufacturing economy didn't need to lose thousands of jobs for weaker global trade and slowing industrial demand to have meaningful consequences. A region with approximately 42,000 manufacturing jobs could experience economic pressure through reduced overtime, delayed hiring, postponed equipment purchases, more cautious suppliers and slower capital investment long before any major layoff announcement appeared. Those changes could affect household income, local businesses and future employment opportunities even when the total number of manufacturing jobs appeared relatively stable.
The second half continued that gradual weakening. Hickory-area manufacturing employment moved from approximately 41,900 in July to 41,500 by October and November before recovering slightly to 41,800 in December. The year ended about 200 manufacturing jobs below January and roughly 400 below the previous summer's peak. The change was small enough to escape casual attention but large enough to confirm that the local industrial economy had stopped gaining momentum. (FRED)
At the same time, public and private investment continued preparing the region for its next phase of development. Downtown Hickory's bond-funded redevelopment moved through a major physical transformation during 2019, while Trivium Corporate Center continued developing as a site prepared for additional industrial operations. These projects reflected the two-part strategy emerging across Catawba County: create the industrial facilities and infrastructure needed for future investment while simultaneously developing a community capable of attracting and retaining the workers required to operate them. Industrial recruitment and community development were increasingly connected because employers needed both suitable facilities and a dependable workforce. (Hickory NC)
The year's closing industrial announcement made that strategy tangible. On December 18, Cataler North America Corporation, a Toyota affiliate, announced that it would become Trivium Corporate Center's third tenant, constructing a 100,000-square-foot automotive-catalyst facility that could eventually expand to 300,000 square feet. The company planned at least $42 million of investment and 151 jobs over five years. (Hickory NC)
Cataler was significant for reasons beyond the number of jobs announced. Hickory had long been associated with furniture, textiles and telecommunications. Automotive suppliers had become increasingly important during the recovery, and Cataler strengthened that diversification. A company linked directly to Toyota's international manufacturing system was placing another advanced-production operation inside an industrial park developed through coordinated local public investment. That represented considerable economic evolution, demonstrating how far the region had moved beyond the industries that once defined its manufacturing economy.
Yet December's manufacturing employment figure remained lower than January's. This was the apparent contradiction at the center of Hickory and Catawba County's economy in 2019: new industrial investment continued even as employment within the existing manufacturing base stopped growing.
Hickory was attracting projects, constructing infrastructure and extending its industrial reach into new technologies, but established manufacturers were beginning to feel the effects of the national and international slowdown. That didn't invalidate the investments or diminish their potential value. It demonstrated why investment announcements and current economic momentum must be measured separately. An announced factory, a planned expansion or a newly developed industrial site represented a commitment to future economic activity. Current employment, production and business conditions revealed what was actually happening in the economy at that moment. Both were important, but they weren't interchangeable.
By year-end, the local economy had established a substantially stronger foundation for future productive capacity than it possessed entering the year. The Workforce Solutions Center was operating. Trivium had attracted additional tenants. CommScope had become larger. Corning's fiber-optic expansion continued. Cataler had committed to Hickory. These developments represented genuine industrial progress and demonstrated that the region remained competitive in attracting companies and investment.
But the economic engine underneath those announcements was no longer accelerating. The distinction would become critical in determining how much resilience the region actually possessed when the next disruption arrived.
III. FOOTHILLS CORRIDOR
The broader 20-county Foothills Corridor entered 2019 from a stronger position than it had occupied during the earlier years of this annual review, but its economy was becoming increasingly difficult to describe through any single industry or labor market. Manufacturing remained especially important across substantial portions of the region, while tourism, higher education, health care, outdoor recreation, logistics and services provided additional sources of employment and economic activity in different communities. That variety offered some protection against an industrial slowdown because the region was no longer dependent upon the fortunes of one industry alone. Nevertheless, the Foothills continued facing a fundamental challenge: its economic resources and opportunities were spread across many communities, while the strategies and institutions responsible for developing them remained largely separate.
The first half of 2019 supplied clear evidence that manufacturing investment was spreading throughout the broader Corridor rather than concentrating around Hickory. Companies were making commitments in communities with different industrial histories, available resources and workforce characteristics, demonstrating that the region's productive economy extended well beyond any single metropolitan area.
The largest announcement came in Cleveland County on May 30, when Greenheck Group selected Shelby for a major expansion expected to create more than 400 jobs and involve approximately $58.8 million of investment. The manufacturer of ventilation and air-movement equipment was expanding within the Foothills Commerce Center, reinforcing Shelby's development as a diversified manufacturing location connected to Interstate 85, Charlotte and national industrial markets. (NC Commerce)
That project was substantial by any regional standard, but equally revealing evidence came from several smaller projects approved by the Rural Infrastructure Authority in June. These investments demonstrated how communities could use existing industrial facilities and targeted infrastructure improvements to attract businesses without having to build everything from the ground up.
Burke County received support for the reuse of a 206,522-square-foot building in Hildebran by SynergyLabs, which planned to move pet- and veterinary-product manufacturing from Florida and invest more than $12 million. Rutherford County secured assistance for Cardinal Tissue in Spindale, with 40 expected jobs and approximately $8.5 million of investment, and SSD Designs in Forest City, a plastic-recycling company expected to create an additional 18 jobs. North Wilkesboro received funding for a 500,000-gallon water tank supporting Jeld-Wen's specialty-door operation and an anticipated $8 million investment. (NC Commerce)
These projects were economically important not because every individual job announcement was large, but because they demonstrated the continuing value of resources left behind by an older industrial economy. Vacant manufacturing buildings, industrial water systems, access to freight transportation and an experienced production workforce remained useful decades after many of the industries that originally required them had declined. Reusing those assets could reduce the cost of attracting new businesses because the buildings, utility connections and transportation networks were already available. Property once viewed primarily as evidence of industrial decline was increasingly being recognized as infrastructure that could support a new generation of economic activity.
Around July 1, however, the Foothills Corridor was encountering the same industrial pressures becoming visible across the country. The Greenheck project demonstrated that manufacturers remained willing to make substantial long-term investments. The projects in Rutherford, Burke and Wilkes counties showed that industrial reuse remained a practical development strategy, while Hickory continued expanding its future manufacturing capacity through Trivium Corporate Center. Yet those commitments were unfolding against an increasingly uncertain international economic environment.
World trade was weakening, American manufacturing employment growth had slowed dramatically, and the trade confrontation with China had intensified in May when the United States increased tariffs from 10 to 25% on approximately $200 billion of Chinese imports. (United States Trade Representative)
For the Foothills, this wasn't simply a political or economic disagreement between Washington and Beijing. Manufacturers throughout the Corridor purchased machinery, components, metals, electronics, chemicals and other materials whose prices or availability could be affected by tariffs and changes in international supply chains. Companies exporting finished products faced the possibility of retaliatory tariffs or weaker demand from foreign customers. Even manufacturers whose own products were never directly targeted could face higher costs when their suppliers raised prices to cover more expensive imported materials. The consequences could spread through a series of business relationships before reaching the local factory where workers assembled the final product.
The Corridor was confronting changing characteristics of the modern industrial economy. Advanced manufacturing had helped restore the region's importance as a center of production, but that progress also connected its businesses more closely to international markets. The same global relationships that created new opportunities for investment and sales could expose local employers to economic and political decisions made far beyond the Foothills.
The second half of 2019 demonstrated that the region's growing economic diversity could provide at least some protection against those pressures. While manufacturing faced uncertainty, opportunities continued developing in industries that drew upon a different combination of regional strengths.
In August, Kitsbow announced that it would relocate its specialty cycling-apparel manufacturing and distribution operation from California to Old Fort in McDowell County, creating 53 jobs. The project was relatively small in terms of capital investment, but it represented one of the more interesting economic developments in the Foothills that year. Outdoor recreation and manufacturing were being combined within the same local economy. McDowell County wasn't merely attracting another production facility; it was using its proximity to mountain biking, trails and the broader outdoor recreation culture as part of the business case for locating a specialized consumer-product company in the community. (NC Commerce)
That combination suggested an economic-development strategy different from simply attempting to recreate the large factory economy of the twentieth century. The Foothills possessed natural attractions that couldn't be relocated elsewhere, industrial skills that remained valuable, relatively inexpensive buildings left behind by earlier industries, and communities situated between major metropolitan markets and the mountains. When those resources were considered together rather than treated as unrelated advantages, they created opportunities for businesses that combined manufacturing, recreation, specialized products and regional identity.
The High Country continued demonstrating other ways the region could bring income into its economy. Historical tourism estimates placed visitor spending in Watauga County at approximately $351 million during 2019, compared with roughly $327 million in 2018. Wilkes County visitor spending increased from approximately $81 million to $84 million. Tourism didn't necessarily produce the same wage opportunities or support as much related economic activity as a large advanced-manufacturing operation, but it brought spending into local communities from people who had earned their income somewhere else. That outside money supported lodging, restaurants, retail businesses, transportation and other services while creating additional demand within the regional economy. (Visit North Carolina)
This distinction became particularly useful while manufacturing growth was slowing. A factory economy and a visitor economy didn't always respond to national economic conditions in the same way. International trade disputes could weaken industrial orders without necessarily reducing weekend tourism. Changes in gasoline prices or the value of the dollar could affect the industries differently. Higher education provided another source of economic activity through students, institutional employment and university spending. Because these industries depended upon different sources of demand, weakness in one part of the economy didn't automatically produce the same results everywhere else.
The Corridor's economic diversity had become a source of resilience, even though its different industries and communities hadn't developed through one coordinated regional strategy. That remained an important limitation. A major Greenheck investment in Shelby, the reuse of industrial property in Rutherford and Burke counties, infrastructure improvements supporting Jeld-Wen in North Wilkesboro, tourism growth around Watauga County and specialized apparel manufacturing in Old Fort all belonged to the same broad regional economy. Yet these developments were generally planned, promoted and measured through separate local institutions.
The economy crossed county boundaries more easily than the institutions responsible for economic development did.
By December, 2019 had revealed both the strength and weakness of that arrangement. The strength was that no single industrial downturn could define the entire Foothills economy in the way furniture and textile contraction once had. Manufacturing itself had become more varied, tourism had expanded, and higher education and health care had grown into larger sources of economic stability. Older industrial buildings were finding new uses, while outdoor recreation was becoming part of the region's economic development rather than remaining simply an attraction for residents and visitors.
The weakness was that the Corridor still lacked sufficient coordination to convert those individual successes into broader regional benefits. A Greenheck employee might live outside Cleveland County, just as a Kitsbow supplier might operate somewhere beyond McDowell County. A visitor to Boone or Lake Lure might purchase gasoline, food or lodging in several communities during the same trip. A Jeld-Wen expansion required public water infrastructure, while a company reusing a factory in Spindale depended upon transportation, electricity, available workers and financing supplied through systems extending well beyond the town itself. These examples illustrated how economic activity moved across county lines even when the institutions planning and measuring economic development remained focused primarily upon their own jurisdictions.
The industrial slowdown of 2019 made that distinction increasingly important. A region made up of largely independent local economies can perform well when overall economic conditions are favorable because individual communities have enough opportunities to pursue their own development. When external growth weakens, however, cooperation becomes more valuable. Workforce availability, supplier relationships, infrastructure capacity, tourism activity and business investment can produce greater regional benefits when communities recognize their shared interests and make better use of resources that already exist across county boundaries.
The Foothills Corridor ended 2019 with considerably more economic capability than it had possessed five years earlier. Its manufacturing base was more diverse, its older industrial infrastructure was finding new purposes, and additional industries were providing sources of employment and income beyond traditional factory production. These developments represented meaningful progress and gave the region more ways to withstand changes in the national and international economy.
What remained underdeveloped was the regional coordination required to connect those capabilities, strengthen the relationships among communities and allow more of the resulting economic benefits to circulate throughout the Corridor.
IV. STATE — NORTH CAROLINA
North Carolina entered 2019 with unemployment near historically low levels, but signs were emerging that manufacturing growth was beginning to level off. The state's seasonally adjusted unemployment rate stood around 4% in January, according to figures subsequently revised to account for seasonal employment patterns. Manufacturing employment stood at approximately 476,600, slightly below its late-2018 level but still substantially above the annual average of 432,500 recorded in 2010, near the bottom of the post-recession period. The numbers reflected how far North Carolina had recovered, even as the pace of industrial expansion was beginning to change. (FRED)
Population growth continued providing an important economic advantage. North Carolina remained one of the country's leading destinations for people moving from other states and abroad, supporting residential construction, consumer spending, workforce expansion and a growing tax base. Yet, as in previous years, that growth was unevenly distributed. The metropolitan economies around Charlotte and the Triangle were attracting residents more successfully than many industrial and rural communities, where employers were simultaneously reporting difficulty finding qualified workers. The state was gaining population, but that didn't mean every community was gaining the workers it needed.
The first half of 2019 nevertheless remained strong enough for North Carolina manufacturing employment to increase again. Monthly employment moved from approximately 476,600 in January to 479,500 in June and reached about 480,300 in July. The state had recovered another portion of the manufacturing employment lost during the Great Recession, although the number of factory workers remained far below the levels of the 1990s, before major changes in international production and domestic manufacturing employment. (FRED)
This recovery was taking place through a manufacturing economy that operated differently from the one North Carolina had known in earlier decades. The state was attracting projects in pharmaceuticals, advanced automotive production, technology and specialized manufacturing, while many traditional industries required fewer workers to produce the same amount of goods. Automation, improved machinery and more efficient production methods had changed the relationship between industrial output and employment. North Carolina could become a more important manufacturing state, producing greater economic value, without recreating the enormous factory workforces associated with the twentieth-century industrial economy.
Around July 1, the manufacturing employment figures still appeared favorable, but conditions beyond North Carolina were deteriorating. The state's industrial workforce was approaching its yearly peak at almost the same moment that international trade uncertainty was increasing and manufacturing activity elsewhere was slowing. The difference between those favorable employment figures and the weakening economic environment helps explain what happened during the remainder of the year.
Manufacturing employment began declining during the second half, falling from approximately 480,300 in July to 477,800 in December. The annual average for 2019 remained slightly above 2018, but employment measured from December to December had declined. North Carolina Commerce subsequently reported that manufacturing was the only major statewide industry showing a meaningful year-over-year employment decrease in December, with approximately 1,900 fewer positions than a year earlier. The distinction mattered because the annual average reflected the strength of the earlier months, while the year-end figures revealed the weakening trend that had developed more recently. (FRED)
Other industries continued growing and helped offset that weakness. Total North Carolina nonfarm payroll employment increased by nearly 94,000 jobs during 2019, with major gains in leisure and hospitality, trade and transportation, education and health services, financial activities and professional services. Manufacturing was losing employment, but the broader economy had developed enough sources of job creation that weakness in one major industry no longer determined the statewide employment picture. (NC Commerce)
This represented a significant structural difference from the North Carolina that had entered the twenty-first century. During earlier industrial contractions, manufacturing job losses could dominate the state's economic performance because factory production supported so much employment in its cities, towns and rural communities. By 2019, a manufacturing slowdown could occur alongside strong overall job growth because health care, tourism, finance, technology, logistics and professional services had become much larger parts of the economy. The state had developed additional sources of economic activity that could continue growing even when industrial conditions became less favorable.
North Carolina's efforts to attract new business investment also remained active. The state's 2019 Job Development Investment Grant program, commonly known as JDIG, included projects expected to create 9,404 direct jobs and approximately $1.74 billion in investment. These grants were part of the state's effort to encourage companies to establish or expand operations in North Carolina. The projected employment included jobs associated directly with the companies receiving awards, while additional employment was anticipated among suppliers and businesses benefiting from the spending generated by those operations. The figures represented commitments and projections over the life of the projects rather than jobs already created during 2019. They covered only JDIG projects, not every investment announced during the year, but demonstrated how actively North Carolina continued competing for major corporate investments even as national manufacturing growth slowed. (NC Commerce)
Rural economic development continued through smaller infrastructure grants. Throughout the year, the Rural Infrastructure Authority provided financing for the reuse of industrial buildings, utility improvements and other investments intended to help communities with fewer financial resources compete for business expansion. Those projects mattered because smaller counties often lacked the financial capacity available to major metropolitan areas. A large county with a substantial tax base might be able to prepare an industrial site, extend water and sewer lines or improve road access using its own resources. A rural county might require state assistance to make the same improvements before a prospective employer could realistically consider locating there. These investments helped narrow some of the disadvantages facing smaller communities, although they couldn't eliminate the broader differences in resources and economic opportunity. (NC Commerce)
Population growth remained one of North Carolina's clearest long-term economic advantages. Census estimates placed the state's population at approximately 10.49 million residents by July 2019, an increase of about 106,000 in one year. That represented the fourth-largest numerical population increase among all states. North Carolina had gained nearly one million residents since the 2010 Census base, expanding its workforce, consumer market and potential tax base. (Census.gov)
That growth supplied economic momentum, but it also intensified the uneven distribution of opportunity identified in the 2018 report. New residents were frequently settling in places where employment, infrastructure, services and desirable amenities were already concentrated. Their arrival reinforced the advantages those locations already possessed, encouraging additional construction, business development and investment. Meanwhile, industrial communities attempting to rebuild their economies faced a different challenge. They were competing not only with other states for employers and capital investment, but also with Charlotte, Raleigh, Durham and other expanding metropolitan areas for young workers and skilled labor. Population growth was strengthening North Carolina as a whole, but its benefits weren't reaching every part of the state equally.
By December, North Carolina's unemployment rate had fallen to approximately 3.7%, the number of employed residents had increased by more than 137,000 over the year, and total nonfarm payroll employment was substantially higher. The employment figures reflect different measurements: one counts residents who are employed, while the other counts jobs reported by employers. Both indicated that the broader labor market continued expanding. Manufacturing had weakened, but growth in other industries was strong enough to preserve the state's overall economic momentum. (NC Commerce)
The statewide interpretation resembled the conditions developing at Ground Level. Consumers, service industries and population growth were carrying the expansion while manufacturing lost momentum. North Carolina had developed enough economic diversity to continue growing through that divergence, and the broader Foothills Corridor had acquired enough diversity to participate in the same pattern.
But neither condition meant the industrial slowdown was irrelevant. Manufacturing remained especially important to exports, productivity, business investment and many of the smaller communities located outside the state's principal metropolitan economies. A statewide increase in employment could provide reassurance about the overall economy while concealing difficulties in places where manufacturing continued providing a disproportionate share of jobs and income.
North Carolina ended 2019 demonstrating that a diversified economy could continue expanding through an industrial slowdown. The unanswered question was how long the broader economy and its manufacturing sector could continue moving in opposite directions without the weakness in one eventually affecting the strength of the other.
V. UNITED STATES
The United States entered 2019 at what appeared to be the high point of the Federal Reserve's gradual return to higher interest rates following the financial crisis. The Fed's benchmark interest-rate target stood at 2.25–2.50% following four increases during 2018. The central bank was also gradually reducing its holdings of government securities and other financial assets accumulated while supporting the economy after the recession. Unemployment remained near 4%, while the effects of the 2017 tax legislation and increased federal spending continued supporting consumer and business demand.
But financial markets had already begun questioning whether the economy could withstand much more restraint from higher interest rates and reduced Federal Reserve support. Although employment remained strong and consumers continued spending, concerns were growing about manufacturing, international trade and the broader outlook for economic growth.
Interest rates on U.S. Treasury securities declined during the first half of the year, borrowing conditions became somewhat easier, and the Federal Reserve stopped raising its benchmark rate. The change wasn'table because policymakers weren't responding to rising unemployment or collapsing consumer spending. They were responding to a weakening industrial and international environment surrounding an otherwise strong domestic economy.
Trade became the principal source of uncertainty. Negotiations between the United States and China appeared to make progress during the early months of 2019, and a planned tariff increase was postponed. That apparent improvement broke down in May. On May 10, the United States raised tariffs from 10 to 25% on roughly $200 billion of Chinese imports and began the process of imposing additional duties on most remaining imports from China. (United States Trade Representative)
The consequences extended well beyond higher prices on imported consumer products. American manufacturers had to reconsider purchasing and supply relationships that had developed over many years. A tariff imposed upon an imported component could increase production costs for an American company using that component to manufacture a finished product, making it more difficult to compete on price. At the same time, the tariff could make materials produced by American suppliers more competitive by increasing the cost of foreign alternatives. The outcome depended upon where a company operated within the chain of businesses supplying materials, parts and finished goods. Policies intended to protect one domestic industry could create additional expenses for another.
That complexity contributed to the uncertainty surrounding manufacturing investment and employment. American manufacturers added only about 46,000 jobs during 2019 after adding 264,000 the previous year. Construction employment growth also slowed substantially, while health care, professional services, leisure and hospitality continued producing substantial employment gains. The broader economy was still creating jobs, but manufacturing was no longer contributing to that growth at the rate seen during 2018. (Bureau of Labor Statistics)
Around July 1, the American economic expansion had become divided internally. Consumer spending and employment remained strong, and unemployment stood around 3.7%. Yet inflation remained below the Federal Reserve's target, industrial activity was weakening, and international trade uncertainty had increased enough that policymakers were openly preparing to respond. The July 5 Monetary Policy Report captured that transition: economic activity was still increasing at a solid pace and the labor market was still strengthening, but subdued inflation and growing uncertainty about future economic conditions had changed the Fed's assessment of what was needed to sustain the expansion. (Federal Reserve)
On July 31, the Federal Reserve reduced interest rates for the first time since the financial crisis. The significance extended beyond the initial reduction of one-quarter of a percentage point. The Fed had spent several years gradually raising rates and reducing the extraordinary financial support introduced after the recession. That effort had now changed direction. Additional rate reductions followed in September and October, bringing the total reduction to 0.75 percentage points. The Fed also ended its program of reducing securities holdings earlier than previously scheduled. Rather than continuing to withdraw support from the economy, the central bank had begun providing additional support to preserve the expansion. (Federal Reserve)
Financial markets continued signaling concern. By late August, portions of the Treasury yield curve had inverted, meaning that some shorter-term U.S. government securities were paying higher interest rates than longer-term securities. Under more typical conditions, investors expect higher returns for lending money over longer periods because they are committing their funds for more time. In August 2019, however, yields on two-year Treasury securities temporarily exceeded those on ten-year securities. Such an inversion doesn't automatically cause a recession, but it has historically been associated with expectations of slower economic growth and future reductions in interest rates. Investors were anticipating that the Federal Reserve would eventually need to lower short-term rates enough to make existing longer-term bonds comparatively attractive. (Federal Reserve Bank of St. Louis)
Then, in September, problems developed within the financial system responsible for supplying short-term funding to banks and other major institutions. On September 16 and 17, borrowing rates in the overnight repurchase market, commonly called the repo market, rose unexpectedly. This market allows financial institutions to obtain short-term cash by temporarily exchanging securities, usually with an agreement to reverse the transaction shortly afterward. It is an important part of the system that keeps money moving between banks and other financial institutions.
The disruption occurred as corporate tax payments and the settlement of Treasury securities absorbed cash reserves from the banking system. With less money readily available for short-term lending, the cost of obtaining overnight funds increased sharply. The Secured Overnight Financing Rate, a major measure of borrowing costs in this market, jumped, and the pressure began affecting the market for federal funds as well. The New York Federal Reserve responded by offering up to $75 billion in overnight repurchase funding to restore stability and prevent short-term interest rates from moving beyond the central bank's intended range. Subsequent operations helped bring the market back under control. (Federal Reserve)
The New York Federal Reserve responded by offering up to $75 billion in overnight repurchase funding to restore stability and prevent short-term interest rates from moving beyond the central bank's intended range. Subsequent operations helped bring the market back under control. (Federal Reserve)
The Fed had spent years reducing a securities portfolio that had grown extraordinarily large during its response to the financial crisis. As those holdings declined, the amount of reserve money available within the banking system also decreased. By September 2019, reserves had fallen enough that ordinary demands for cash, including corporate tax payments and Treasury settlements, could produce unexpected pressure in short-term lending markets. The process of reducing the central bank's involvement in financial markets had encountered a practical limit. What appeared to be a technical adjustment to Federal Reserve policy had become a matter of maintaining the financial system's ability to function normally.
The second half of the year nevertheless demonstrated why describing 2019 as a recession would have been incorrect. Consumers continued spending, employment kept increasing, and the service economy remained strong. Residential investment began recovering as mortgage rates declined, providing additional support to housing and construction. After adjusting for inflation, the nation's gross domestic product, the total value of goods and services produced throughout the economy, ultimately increased 2.3% during 2019. That was slower than the 2.9% growth recorded in 2018, but it still represented meaningful expansion for an economy that had been recovering and growing for more than a decade. (Bureau of Economic Analysis)
Trade tensions also began showing signs of stabilization during the final months of the year. On December 13, the United States and China announced an agreement on a Phase One trade arrangement covering intellectual property, technology transfer, agriculture, financial services, currency and additional Chinese purchases of American goods and services. The agreement didn't eliminate the tariffs already imposed. The United States retained 25% duties on roughly $250 billion of Chinese imports and 7.5% duties on another approximately $120 billion. The underlying dispute remained unresolved, but the agreement offered some relief from the possibility of further immediate escalation. Businesses still faced a more complicated international trading environment than they had before the confrontation began. (United States Trade Representative)
By December, unemployment had fallen to 3.5%, labor-force participation stood at 63.2%, and employers had added approximately 2.1 million jobs during the year. The economy was still growing, and household incomes were improving. Despite the industrial slowdown and financial uncertainty, American consumers and workers had remained strong enough to support continued economic expansion.
But the underlying conditions had changed considerably. The Federal Reserve had reversed its monetary policy, manufacturing employment had essentially stopped growing, Treasury yields had fallen, and portions of the yield curve had temporarily inverted. The central bank had been required to intervene in the overnight lending market, while international trade growth had weakened dramatically. These developments demonstrated that the economy was encountering meaningful pressure even though the broader employment and consumer spending figures remained favorable.
The distinction is important because the United States didn't finish 2019 in recession, nor had the economic expansion collapsed under the weight of manufacturing and international trade weakness. Instead, households continued providing enough demand to sustain growth while other parts of the economy struggled to maintain momentum.
The American economy didn't end 2019 because household demand failed. It endured because household demand didn't fail.
VI. INTERNATIONAL
The international economy entered 2019 considerably weaker than it had entered 2018. The broad global expansion identified during 2017, when many of the world's major economies were growing together, had already begun to break apart. The International Monetary Fund's January 2019 update was titled “A Weakening Global Expansion.” The organization expected worldwide economic growth to slow to 3.5% during 2019, citing weaker conditions in developed economies, economic contraction in several emerging markets and the effects of international trade actions on China and other Asian economies. Even that projection would prove optimistic as the year progressed. (IMF)
China continued slowing as changes within its domestic economy and the trade confrontation with the United States affected manufacturing and business investment. Official figures ultimately placed China's economic growth at 6.1% during 2019, down from 6.6% the previous year. More revealing was the progression throughout the year. Growth slowed from 6.4% during the first quarter to 6.2% during the second, before reaching 6.0% during both the third and fourth quarters. China's economy remained enormous and continued expanding at a pace that would have been considered strong in most developed countries, but the direction was consistently downward. That slowing mattered because China had become a major customer, supplier and manufacturing center within the international economy. (National Bureau of Statistics of China)
Europe weakened more sharply. Economic growth across the euro area fell to approximately 1.2% from 1.9% in 2018. Employment continued improving and unemployment declined, but weaker international trade weighed heavily on manufacturing and business investment. Germany was particularly exposed because its industrial economy depended substantially upon exports, including automobiles, machinery and other manufactured goods. Weaker automobile production and slowing demand from international customers created consequences for suppliers and manufacturers throughout Europe. The slowdown was not confined to individual factories or national economies; it spread through the business relationships connecting European production to the wider world. (European Central Bank)
Around July 1, the international economy was operating in almost the opposite direction from the American household economy. Employment and consumer spending remained strong in the United States, while manufacturing and international trade were weakening across much of the world. That contrast was important because the strength of American consumers could continue supporting domestic economic growth even as the international conditions affecting business investment and industrial production became less favorable.
The May escalation in tariffs between the United States and China intensified uncertainty at precisely the moment when international trade and business investment were already weakening. A manufacturer considering a new supply contract had to calculate more than the ordinary costs of labor, shipping and materials. It also had to consider whether another government decision might change the final delivered cost of an imported component almost overnight. A product that appeared affordable under existing trade rules could become substantially more expensive if additional tariffs were imposed before the order was completed.
That type of uncertainty carried real economic costs even when a particular company was never directly affected by a tariff. Businesses facing unpredictable costs had greater reason to postpone decisions until conditions became clearer. Factories could delay equipment purchases, corporations could postpone expansion plans, purchasers could reduce inventories, and suppliers could become reluctant to enter long-term contracts. Each individual decision might appear reasonable from the standpoint of the business making it, but when thousands of companies responded in similar ways, the combined effect was slower investment and weaker economic activity.
By September, Europe's central bank was responding to deteriorating conditions much as the Federal Reserve was in the United States. The European Central Bank reduced its deposit rate to minus 0.50%, meaning banks faced a charge for holding certain funds at the central bank rather than receiving interest on those deposits. It also announced that purchases of financial assets would restart in November at €20 billion per month. Those purchases were intended to help keep borrowing costs low and support economic activity by adding monetary support to the financial system. The ECB had ended its previous program of net asset purchases less than a year earlier. Like the Federal Reserve, it was discovering that returning monetary policy to more normal conditions had been easier to begin than to sustain. (European Central Bank)
International trade provided perhaps the clearest measurement of the economic deterioration. The total volume of merchandise traded around the world declined 0.1% during 2019, marking the first annual contraction since 2009. Merchandise trade measures the movement of physical goods between countries, including manufactured products, raw materials and other commodities. The dollar value of merchandise exports fell 3% to approximately $18.9 trillion. International trade in commercial services continued growing, but at a significantly slower rate than the previous year. The distinction was important because the global economy was still expanding overall, yet the movement of physical goods across international borders had begun declining. (World Trade Organization)
For the Foothills Corridor, these developments carried considerable significance. The region had rebuilt much of its industrial future around companies connected to international production and trade, including fiber optics, automotive components, specialty chemicals, ventilation equipment, engineered materials, plastics, paper products and communications infrastructure. Those industries could no longer be understood through the older argument that globalization simply meant foreign factories taking American jobs. International competition had certainly contributed to the decline of traditional regional industries, but the manufacturing economy that survived and developed afterward had become deeply connected to the same international system.
Cataler arrived in Hickory because Toyota operated an international automotive manufacturing network. CommScope purchased ARRIS because communications infrastructure had become a global technology market. Corning's demand for fiber-optic products depended partly upon the worldwide expansion of data transmission, while Greenheck manufactured products that competed in international markets. Regional manufacturers also purchased metals, electronics, chemicals, machinery and other production materials from suppliers located around the world. These relationships demonstrated that the Foothills was no longer simply competing against international manufacturing. Its own industrial economy had become an active participant in international production and trade.
The region's future industrial prosperity depended upon two objectives that had to be pursued together. Its manufacturers needed to remain competitive in international markets, but the region also needed to retain a meaningful share of the economic benefits created by that participation. Investment and production could generate substantial business activity without necessarily producing equivalent improvements in local wages, household income or long-term economic security. The greater opportunity was to ensure that international business relationships supported local employment, regional suppliers, additional investment and stronger communities. The objective wasn't merely to participate in global production, but to convert that participation into prosperity that remained within the Foothills.
By December, China and the United States had reached their Phase One trade agreement, creating some hope that the deterioration in trade relations had at least stopped accelerating. International financial conditions had also become more favorable as central banks around the world reduced interest rates or introduced additional monetary support. Those developments offered some reassurance that the global economy might begin stabilizing after a difficult year.
Nevertheless, the year-end estimates revealed how much momentum had already been lost. The International Monetary Fund subsequently estimated worldwide economic growth at only 2.9% during 2019. Merchandise trade had contracted, Europe had slowed sharply, and China had recorded its weakest annual economic growth in decades. The broad, simultaneous expansion that had characterized 2017 was no longer present. By the end of 2019, the global economy appeared to be stabilizing, but at a slower pace and with greater dependence upon central banks that had been attempting only a year earlier to withdraw the extraordinary financial support introduced during earlier periods of economic weakness.
THE SYNTHESIS — THE WRAP
The economic system standing at the end of 2019 presents one of the most deceptive pictures in this series of Economic Stories of Relevance reports. On the surface, the American economy appeared remarkably strong, with unemployment at historically low levels, household incomes improving and consumer spending continuing to support economic growth. Yet beneath those favorable conditions, manufacturing and international trade were losing momentum, business investment was becoming more cautious, and central banks were reversing policies they had spent years putting into place. The contrast between those developments defines the economic condition that 2019 would hand into the following year.
Beginning at Ground Level, the year appears exceptionally strong. Unemployment ended at 3.5%, labor-force participation improved, and wages continued increasing. Median household income rose substantially under the Census Bureau's 2019 reporting series, while poverty reached its lowest recorded rate since the government began measuring it. Gasoline was cheaper on average than during 2018, and housing values continued appreciating. These weren't superficial improvements or favorable statistics disconnected from everyday economic experience. They reflected the long-delayed arrival of the economic recovery into household employment and income, giving many American workers and families a stronger financial position than they had experienced during the preceding decade.
Moving to Hickory and Catawba County, however, the picture becomes more complicated. Local investment continued as Catawba Valley Community College's Workforce Solutions Center opened, CommScope completed its acquisition of ARRIS International, and development advanced at Trivium Corporate Center. Corning remained an important industrial employer, while Cataler announced a $42 million advanced-manufacturing operation. Those developments represented meaningful commitments to the region's productive future, yet manufacturing employment finished the year slightly below where it had begun. Industrial capacity was expanding, but employment within the existing manufacturing base had stopped gaining momentum. The investments were real, but so was the slowdown.
Across the broader Foothills Corridor, the contradiction became more widespread. Greenheck announced more than 400 jobs in Shelby, SynergyLabs prepared to relocate manufacturing into Burke County, and Cardinal Tissue and SSD Designs moved forward with the reuse of industrial property in Rutherford County. Infrastructure improvements supported Jeld-Wen in North Wilkesboro, Kitsbow selected Old Fort for its specialty cycling-apparel operation, and tourism continued expanding in Watauga County. The Corridor wasn't standing still, nor had its communities stopped developing new sources of economic activity. What had changed was the environment in which those investments and expansions were taking place.
International trade was slowing, worldwide industrial demand was weakening, and regional manufacturers were becoming increasingly dependent upon supply chains whose costs and reliability could be affected by government decisions made thousands of miles away. The Foothills had developed a more diverse economy, with manufacturing, tourism, outdoor recreation, health care and education providing different sources of employment and income. Yet its industrial foundation had also become more closely connected to international markets. That connection created opportunities for investment and growth while exposing local businesses to economic conditions beyond their direct control.
North Carolina displayed much the same pattern on a larger scale. Manufacturing employment reached its yearly peak around July before declining through the second half, while total employment continued increasing strongly. Population growth remained among the strongest in the country, and health care, leisure and hospitality, finance, logistics and professional services created enough additional employment to offset the weakness developing in manufacturing. That diversification represented a major source of economic resilience, allowing the state to continue growing even as an important part of its industrial economy slowed. At the same time, favorable statewide employment figures could conceal the difficulties facing manufacturing communities whose economic well-being remained more directly tied to factory production.
Nationally, the difference between household strength and industrial weakness became impossible to ignore. The American economy still grew 2.3% during 2019, employers added more than two million jobs, and unemployment fell to 3.5%. Manufacturing employment, however, barely increased, and the Federal Reserve responded to deteriorating conditions by reducing interest rates three times during the year. Its effort to reduce the large securities portfolio accumulated after the financial crisis ended ahead of schedule, Treasury yields fell sharply, and portions of the yield curve temporarily inverted as shorter-term government securities offered higher returns than longer-term securities. In September, pressure in the overnight lending market became serious enough to require Federal Reserve intervention. Taken together, these developments revealed growing uncertainty within the financial and industrial economy even as employment and consumer spending remained strong.
Internationally, the slowdown was more apparent. China's economic growth continued weakening, Europe struggled with declining industrial momentum, and worldwide economic growth fell to 2.9%. The volume of merchandise traded across international borders contracted for the first time since 2009, while the European Central Bank resumed purchasing financial assets to support economic activity. The United States and China reached a partial trade agreement in December, but only after spending much of the year escalating a confrontation involving hundreds of billions of dollars in international commerce. The global economy hadn't stopped growing, but the broad expansion that had characterized 2017 had given way to a considerably weaker and more uncertain environment.
These developments give 2019 a particular position within the chronology established by the preceding annual reports. The year 2015 represented normalization without restoration, as economic conditions moved further away from the financial crisis without fully repairing its consequences. In 2016, recovery continued without providing lasting reassurance. During 2017, that recovery broadened into expansion, and the challenge increasingly shifted from generating sufficient demand toward providing the workers, equipment and productive capacity needed to support continued growth. By 2018, the expansion was beginning to encounter the costs of its own success, including higher borrowing costs, tighter labor markets and increasing trade friction. The year 2019 marked another change in that progression: the household economy was now carrying an expansion that manufacturing and global trade could no longer lead.
That represents the central structural change. During the earlier years following the Great Recession, the American economy depended heavily upon Federal Reserve support and favorable financial-market conditions because households weren't yet strong enough to generate sufficient demand on their own. High unemployment, weakened household finances and the long process of recovering from the financial crisis had restrained consumer spending and delayed the broader recovery. By 2019, that relationship had almost reversed. Employment was strong, household incomes were improving, and consumer spending was providing much of the stability needed to sustain overall economic growth. The principal weakness was no longer centered upon the household, but upon business investment, manufacturing and international trade.
The Federal Reserve consequently reduced interest rates not because American households had collapsed financially, but largely to prevent weakness in industrial activity and international markets from eventually reaching employment and consumer spending. Its policy reversal was intended to preserve an expansion that remained healthy in many of the areas most directly affecting ordinary Americans. This was evidence of a more mature economic recovery, but it also demonstrated a more vulnerable form of resilience because the strength of one part of the economy was increasingly being relied upon to compensate for weakness elsewhere.
Consumer spending could support economic growth while factories slowed, just as service industries could continue creating jobs while manufacturing employment stopped increasing. A diversified state such as North Carolina could expand while individual industrial communities experienced little employment growth, and tourism could bring additional money into the Foothills even as international trade contracted. These differences demonstrated the value of economic diversification, but they couldn't continue widening indefinitely without creating consequences elsewhere in the system.
Companies that reduced investment would eventually purchase fewer goods and services from other businesses, while factories facing weaker demand could reduce overtime, postpone hiring or delay expansion. Slower international trade could eventually affect transportation and logistics, while declining corporate profitability could weaken employment and household income. Families carrying increasing levels of debt also depended upon steady employment and sufficient earnings to continue meeting their obligations. The longer industrial and international weakness persisted, the greater the possibility that those pressures would eventually reach the households whose spending was holding the expansion together.
By December 2019, however, that broader deterioration hadn't occurred. There were legitimate reasons for cautious optimism. Federal Reserve policy had become more supportive, mortgage rates had declined, and the United States and China had reached a preliminary trade settlement. Treasury yields had recovered somewhat from their summer lows, unemployment remained exceptionally low, and household incomes were strong. Although manufacturing and international trade had experienced a difficult year, the broader American economy had continued growing without entering recession.
Standing in December, an informed economic observer could reasonably have concluded that the Federal Reserve had successfully managed a midcycle adjustment. By lowering interest rates and providing additional support to financial markets, the central bank appeared to have offset enough of the industrial and international weakness to allow the consumer-led expansion to continue. The economy had slowed, but it hadn't collapsed, and the conditions developing toward year-end suggested that some of the pressures responsible for the slowdown were beginning to stabilize.
That was the economic condition being handed into 2020. The United States wasn't entering the new year in recession, nor was it experiencing a renewed period of rapid acceleration. Instead, a remarkably resilient household economy was supporting a slower industrial and international system that appeared, by December, to be finding a more stable footing. The expansion had survived the pressures of 2019, although the underlying differences between household strength and industrial weakness hadn't been fully resolved.
Nothing in that December economic picture, viewed without hindsight, suggested the scale or nature of the disruption that would shortly rewrite every Level of the system.
