North Carolina's total payrolls swelled in August as local government employment surged unexpectedly. The sharp increase in government employment may be misleading and is unlikely to reflect the underlying strength in the state's economy. Outside of government, payroll employment continued to increase modestly. Meanwhile, the state's unemployment rate rose again in August. Our own Carolinas Business Activity Index fell into negative territory in August, suggesting a general loss of economic momentum in the region.

North Carolina's total nonfarm payroll employment rose by 16,500 in August as local government employment jumped unexpectedly. The big jump in local government employment is likely the result of a statistical quirk related to the timing of the return of public school teachers, and not a reflection of a trend in actual hiring. The recent gains left payroll employment in North Carolina a little more than 31,000 above recession lows, but nearly 295,000 shy of the pre-recession peak. Firms in the private sector did manage to create 2,900 jobs in August, which continues a modest hiring pattern of late. Most of the net new jobs in August were created in service-providing sectors such as professional and business services; education and health services; and information. The state lost some jobs in leisure and hospitality during the month. The decline here is unlikely related to the hurricane, however, since estimates are based on surveys taken prior to the storm. The goods-producing sectors lost jobs in August. North Carolina's factories shed 1,200 workers during the month and construction lost another 200 jobs. Both sectors continue to struggle to add jobs following the steep recession.

Since last August, employers in North Carolina have added 21,100 net new jobs. The bulk of those were created in the private sector, which added 35,800 positions over the year. The professional and business services sector showed the biggest gains, both in absolute and percentage terms. Employment in the sector was up by 15,500, or 3.2 percent, since last August. Tourism spending along the coasts and in the mountains helped boost leisure and hospitality, which came in a close second with about 11,300 net new positions. Trade, transportation and utilities; financial activities; and manufacturing also added jobs over the year. Notwithstanding the recent gains, the public sector led the job losses over the past 12 months, as nearly 14,700 net jobs disappeared. The downward trend in public sector employment will probably resume in coming months as governments continue to struggle with revenue shortfalls. Not surprisingly, North Carolina's depressed construction industry wasn't far behind as the sector shed 5,600 jobs over the last year, or 3.2 percent of its total.

Our Carolinas Business Activity Index generally softened in July before dipping into contraction territory in August. Importantly, the number of workers indicator remained in positive territory during the month, meaning that a larger share of respondents was still hiring compared to the share that was firing. The comparable forward looking indexes suggest that hiring will pick up in the coming six months, but the gains will continue to be modest.