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Cliff Hanger

Hard Questions Cloud the Picture for the Year Ahead

Bob Nakosteen calls it the ‘fiscal gentle slope.’

That’s his slight yet meaningful adjustment to the term that has been dominating headlines and providing ample material for editorial cartoonists for the past several weeks.

Nakosteen, an economics professor at UMass Amherst, deployed the phrase to get across what he believes will happen if elected leaders fail to come to some kind of compromise on the fiscal cliff before the end of the year. He said the impact from spending cuts (such as those involving the military) and the elimination of various tax cuts — if they come to pass — will not be instantaneous and, in some cases, won’t really be felt for months, hence the gentle slope.

Still, in the larger scheme of things, the cliff, slope, or whatever one chooses to call it will likely be a serious impediment to economic progress, and one of many reasons why Nakosteen believes the word ‘sluggish’ will come to define the landscape in 2013.

“It will be like a wet blanket spread over an economy that’s already struggling,” he told BusinessWest, referring to the regional, state, and national pictures. “We just don’t need this right now.”

Karl Petrick, an assistant professor of Economics at Western New England University, agreed. He told BusinessWest that, to get the economy moving again, businesses need to hire more aggressively, and consumers need to open their wallets more liberally — two things that won’t happen if unemployment benefits are reduced, payroll tax cuts are eliminated, and other cliff-related measures come to pass.

“The Congressional Budget Office says that, if the fiscal cliff is not dealt with, they expect the country to go back into recession,” he noted. “And as we’re coming out of this very slow state of recovery, any recession we come into now would be very bad, and hit people hard at a time when they’re already down.”

Petrick, who recently returned from more than three weeks in London, where he taught a portion of a course titled “Globalization and the Business Environment” to WNEU students spending the semester in that city, said U.S. residents and elected officials would be wise to watch and hopefully learn from what’s happening in England, especially as the cliff approaches.

“England’s had an austerity budget for two years, and they went back into recession,” he said, noting that leaders there imposed budget cuts and other deficit-reducing measures. “They’re in danger of becoming the first country with a triple-dip recession — and yet they’re still talking about the need to balance the budget and cut spending. It hasn’t occurred to them, apparently, that all this is happening because they’re doing the wrong things.”

But, despite mostly tepid projections for 2013, there are some signs of progress on the local and national scenes.

Cliff Noreen, president of the Springfield-based MassMutual subsidiary Babson Capital Management, said the stock market has enjoyed a solid year — the S&P was up 12% in early December, and that auto sales are up, there are indications that the housing market is improving, and consumer debt continues to shrink.

“All of these are signs that people are feeling wealthier,” he explained, adding that such sentiments lead to the spending that fuels real recovery.

Kent Pecoy, president of West Springfield-based Pecoy Homes, said he’s encouraged by many of the things he’s seen and heard over the past several months, including more enthusiasm for simply owning a home.

Kent Pecoy

Kent Pecoy says home ownership is becoming important again, one of many positive signs he sees in home construction — and the economy in general.

“For a long while, people were saying, ‘let’s rent something and see what happens,’” he told BusinessWest. “People are coming around to wanting to own again, and that’s a good place to start.”

He’s also seen seven closings on homes in a project he’s handling at the former Northampton State Hospital site, movement that’s indicative of many things happening within the market, from a desire for newer, more energy-efficient homes to the growing popularity of neighborhoods within walking distance of destinations like Northampton’s downtown.

For this, its annual Economic Outlook, BusinessWest talked with several economists and business leaders to gain some perspective on what will happen in the months to come. As has been the case the past several years, question marks dominate the landscape.

 

Cliff-notes Version

Nakosteen, a frequent contributor to BusinessWest’s outlook stories over the past several years, acknowledged that his comments for this edition sound a great deal like the ones offered the past few Decembers.

“I’m just waiting for the day when I can really be optimistic,” he said, acknowledging that he feels somewhat like Bill Murray’s character in Groundhog Day. “Unfortunately, that day is not here yet.”

And with that, he went back to something he said at the start of what was supposed to be a recovery in late 2009. He was explaining that upturns take different shapes — some are like a ‘V,’ with a quick and pronounced spike, while others, like this one, are more like a ‘U,’ with a longer bottom before improvement is recognizable. “I had no idea the bottom of the ‘U’ would be this long.”

There have been many reasons for the extended ‘U,’ he said, listing everything from the relatively jobless nature of the recovery — a pattern that continues despite some progress in lowering the jobless rate — to persistent problems in Europe and, to a lesser extent, Asia; from a lack of confidence among consumers and business owners alike to the prolonged housing slump.

And now, the fiscal cliff has been added to the list.

Noreen left the hosts of CNBC’s Squawk Box stammering in search of a response when he suggested in a recent interview that going over the cliff would actually be a good thing for the country in the long run. But he stuck to his guns.

“This country is addicted to stimulus … in 2007, we crossed $9 trillion in debt; now we’re at $16.2 to $16.3 trillion five years later, with deficits of $1.25 trillion for the last five,” he said. “We have a problem in this country that needs to be resolved.

“This isn’t a Democratic problem or a Republican problem,” he told BusinessWest a few days after the Squawk Box interview, referring specifically to the huge problem of servicing all that debt. “It’s an American problem, and we have to fix this. We need shared sacrifice among all Americans.”

But while agreeing, sort of, with the basic premise that growing deficits must be controlled, both Nakosteen and Petrick said that going over the cliff will likely slow the recovery even more, and perhaps propel the country back into recession — although they quickly noted that most feel it had never emerged from it in the first place.

“This wouldn’t be a double dip, technically, because we’ve been growing for some time,” said Petrick, acknowledging that this has been very modest growth of just a percentage point or two. “But to the person on the street, it would feel like a double dip, and I certainly wouldn’t argue with them.”

While many elements of the deficit-reduction strategy due to take effect if the nation goes over the cliff would take some time to be felt, others would have more immediate consequences, he went on, listing, as an example, an end to emergency unemployment benefits on the federal level.

Set to expire on Dec. 29, those additional 28 weeks of support would impact roughly 45,000 people in the Bay State, said Petrick, with potentially serious consequences for those families and the economy as a whole.

“With Springfield and Holyoke both hovering around 10% unemployment, this is going to hit Western Mass. pretty hard,” he said. “And those are people who spend the money; they don’t save it, because they can’t afford to. It would be a really bad time for businesses in this state if 45,000 people lose whatever safety net they had in terms of unemployment benefits.”

A similar negative impact would likely result if payroll tax cuts put in place by the Obama administration are allowed to expire, he went on. That cut, from 6.5% to 4.5% for both businesses and employees, amounts to a 2% raise for the average person, Petrick explained, adding that this relatively small amount is generally not saved, but spent. If the cut expires, consumers will have less money in their pockets, and business owners will have to pay more taxes as well.

“For every dollar of unemployment benefits, there’s more than a dollar in economic activity, and with the payroll tax cut, it’s almost one for one — it cost $115 billion, and we’ve seen a $100 billion increase in GDP,” he said, adding that these programs and others generate considerable bang for the buck.

Jeff Ciuffreda, president of the Affiliated Chambers of Commerce of Greater Springfield, said he doesn’t know how the cliff issues will be addressed, but he believes that resolution of those matters, in whatever shape it takes, should help remove some of the uncertainty that is putting many business owners in a holding pattern.

“In 2013, we should see the ‘fear of the unknown’ feeling being experienced by businessmen and women lifted,” he explained. “Whether that is falling off the cliff or parachuting off the cliff, some resolution should take place. Once this feeling is lifted, the business community can then do what it does best — formulate long-term plans and carry them out, meaning an expanded workforce in our area and the growth of our many small businesses.”

 

Flat Out

As president of the Economic Development Council of Western Mass. (EDC), Allan Blair is another frequent contributor to BusinessWest’s annual Outlook section.

Allan Blair

A few years back, Allan Blair thought 2013 would be the year the development sector would witness a surge. Now, he’s predicting more flat conditions.

He can recall saying at least a few times since the height of the recession that he thought 2013 would be the year when the region finally begins to turn the corner when it comes to new building projects and filling some of the available parcels in the industrial parks administered by EDC affiliates Westmass Area Development Corp. and Westover Metropolitan Development Corp.

But as that year approaches, he finds himself forced to recalibrate, alter that projection, and predict that 2013 will bring more of what the region and the EDC have seen the past several years.

“Right now, we’re predicting 2013 to be another flat year,” he said in a voice tinged with frustration. “It will be similar to what we’ve seen this year and the past few years.”

Elaborating, Blair said the phone has actually started ringing a little more often in recent months, and with some solid prospects on the other end. But there just isn’t enough of that activity to warrant what amounts to real optimism for the year ahead.

“We’ve had a couple of leads that have gone beyond just suspects, and that gives us some cause for encouragement, but we wouldn’t call it a trend,” he explained. “These are serious prospects that need to be somewhere in the Knowledge Corridor, and we have some sites that are contenders.

“We feel like we’re on the intermediate list at the very least,” he continued, “and that’s good because we haven’t had the chance to even compete for projects frequently over the past five years. It’s been a very different environment than the previous 20 years.”

Quantifying those comments, Blair said that, on average, Westover and Westmass probably saw 25 to 30 acres absorbed for new development projects annually over those two decades. In each of the past several years, there has been no acreage absorbed.

“All that just stopped in 2006,” he said, adding that the recession and a resulting hesitancy on the part of business owners to invest in new projects has been a contributing factor. But a bigger one has been the huge difference in price between new building and buying existing property — roughly $60 per square foot and $30 per square foot, respectively — at a time when there is a huge inventory of buildings.

That supply is slowly being exhausted, said Blair, noting that several properties were acquired over the past year, and this is encouraging.

“During this year, we’ve seen the absorption of these buildings at a more rapid pace than in the prior three or four years,” he said, adding that, while there will be some pent-up demand for buildable land, there are still far too many for-sale signs on existing properties for the picture to change considerably in 2013.

And there are more concerns for the year ahead, he went on, listing, among other things, cutbacks in defense spending that may impact the many manufacturers in the area that handle work for defense contractors, and a lingering reluctance among many employers to hire, as well as a lack of need to do so because technology allows them to do more with fewer bodies.

“Business owners are saying, ‘we’re doing OK, we’re profitable, we’re not growing rapidly, but we’re staying ahead of inflation’ — but they’re not hiring people,” he said, “because they’ve found ways to increase productivity with their existing people, or they’re offering overtime. I’m afraid that we’re going to see this very stubborn unemployment rate stick at this level for at least another year.”

And that trend doesn’t bode well for out-of-work Baby Boomers, or people “aging out of the power zone of their employment cycle,” Blair went on, noting that many lack the needed skills to rejoin the workforce after years (or decades) in one job or field.

“This is an extremely scary time for people in their 50s and 60s,” he said. “I’m predicting that many of them will never earn as much as they earned in their last job because of the rapid change in the skill base and the economy.”

 

Progress Report

There are some positive signs, said Blair, noting that two projects have been announced for the Ludlow Mills project (a Westmass development) — a new HealthSouth facility and an elderly housing project — and there is some movement within the housing market.

“This slight nudging up of housing sale prices is encouraging,” he said, “but it’s really housing starts that we all look at, and want to see more of, because that’s where the churn in the economy comes. And we’re starting to see more of that new construction.”

Pecoy, who has spent more than 30 years in homebuilding and renovations, said the brighter skies he’s seeing — business is up on both sides of the ledger — are a great relief, because this recession has been longer, deeper, and more troubling than anything he’s experienced.

Elaborating, he said that many people simply gave up on the American dream, something he’d never seen before.

“What I’m sensing is that, for many people, getting anchored again is a good thing,” he explained. “For so long, people wanted to be loose on their feet; all of a sudden, home ownership is appealing to them. It’s a bit of a shift — we just need to see more of it.”

While different from previous downturns, he said, this current economic turbulence is similar to others in that it is coming to an end (he hopes) because people are running out of acceptable options.

That’s true with auto sales, he said, adding that many people simply cannot put off replacing what’s sitting in their driveway any longer. And it’s true with the housing market as well.

“A lot of the inventory of existing homes has been evaporated,” he said, explaining a slight uptick in new building. “And many existing homes need an awful lot of work; if you’re looking at buying an existing home, the amount of money you have to spend to renovate it makes new homes a more attractive option.

“People know they need to do something,” he went on, “and they are getting serious about doing it.”

Noreen, meanwhile, said the solid year on Wall Street, with the Dow up nearly 7% and the Nasdaq up more than 14% as this issue went to press, many Americans are at least feeling wealthier — something they haven’t experienced in a while.

“And when people feel more wealthy, they’re usually more inclined to spend,” he said, adding that recent activity in the auto and housing markets provides some evidence to support that theory.

But the big question hanging over the region and the country as 2013 approaches is for how long, and to what degree, will people feel wealthy and be willing to spend.

Nakosteen, again, was not exactly optimistic, even with what appears, by most accounts, to be a very good holiday-shopping season.

“It happens in fits and starts,” he said of consumer spending. “You see a month where retail sales have picked up, and then they fall back down. It’s really encouraging that we’re having good Christmas sales, but we’ll have to wait and see. It might be a harbinger of better things to come and a sign that household balance sheets look better, stocks have come back, and housing prices have started rising, but I’m not willing to say that this is something long-term yet — we’ve had too many disappointments.”

And in his final analysis, Nakosteen believes that consumer spending, or lack thereof — more than uncertainty, the regulatory environment, or any other factor — is what is holding businesses back when it comes to hiring.

“If sales just picked up across a wide spectrum of businesses, if people just came in the stores, businesses and households alike, and took out their wallets and started spending, everything would change,” he told BusinessWest. “And that’s just not happening right now.”

 

Dropping Hints

Returning to the subject of the fiscal cliff and what’s happening in England, Petrick said he wished more people on this side of the pond were aware of what’s happening — and not happening — over there.

“If people in the States knew that Britain tried this two years ago, it’s been an abysmal failure, and they’re still pushing forward with it and it looks like a triple-dip recession, maybe people would be thinking differently back home.

“What we’re seeing in the U.S. is a long, slow climb out of a very deep recession,” he continued. “We shouldn’t be doing anything that’s going to mess with that recovery and make it worse, and I think it’s much easier to make it worse than it is to make it better.”

Whether the economy goes over a cliff, either literally or figuratively, remains to be seen, but clearly, the question marks that have muddled the economic landscape for the past several years are only going to multiply in the weeks and months ahead.

 

George O’Brien can be reached at obrien@businesswest.com


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