Headwinds Continue to Impede the Recovery
Enough answered ‘no,’ either literally or figuratively, to put him in the White House. And since then, countless politicians have borrowed or slightly amended the phrase in an effort to advance their cause.
But economists have taken to employing that line as well, and many are asking that question today, although with a slight twist.
Indeed, people in virtually every region of the country can answer ‘yes,’ because four years ago was the height — or the nadir, depending on how one chooses to look at things — of the Great Recession, with national employment at or just above 10%. So the questions being asked today, especially in Western Mass., are ‘just how much better off are you than four years go?’ and, increasingly, ‘why aren’t we better off than we are?’
There are many factors that play into that latter query, ranging from persistent uncertainty on the part of business owners regarding the short and long term, to the emerging matter of sequestration and its impact on many sectors, from healthcare to precision manufacturing; from economic turmoil halfway around the globe to the simple fact that companies continue to find ways to do more with the same number of people (or fewer); from the expiration of the payroll-tax holiday, which has taken money out of the pockets of consumers, to widespread uncertainty about the effects of Obamacare.
Put it all together, and it adds up to a recovery that Bob Nakosteen, professor of Economics at UMass Amherst, called “surprisingly mediocre.”
Others we spoke to for this hard look at the economy and the prospects for real improvement used other words and phrases to describe the recovery (or lack thereof) to date, ranging from ‘painfully slow’ to ‘uneven’; ‘essentially jobless’ to ‘less than robust.’
That last, somewhat tongue-in-cheek offering was given by James Barrett, managing partner at Meyers Brothers Kalicka, P.C., who has prepared and analyzed second-quarter numbers for dozens of clients, and believes they speak to ongoing trends concerning companies in this region.
“Businesses are spinning faster than they used to, and they’re basically staying in place,” he told BusinessWest in what would be the first of several attempts to convey the opinion that businesses are working harder to merely stay at something approaching an even keel. “I haven’t talked to anyone, except in a few isolated cases, that has a June 30 year end that is hitting it out of the park. Companies are working harder, but they’re not necessarily seeing it on the bottom line.”
To be sure, there are some sources of optimism regionally, said Mary Burke, a senior economist with the Federal Reserve Bank of Boston, putting a surging housing market and its many ancillary benefits at the top of that list.
“The housing recovery is certainly one significant bright spot — prices are going up, people feel wealthier, they feel like things are moving in the right direction, they don’t feel stuck in their homes,” said Burke, adding that demand for housing has given the region’s construction sector its first real boost in years. “All that’s positive news, and it seems to be providing some momentum.”
Other encouraging developments include a record-busting stock market (indexes were up another 4% or more for July), long-awaited improvement in household balance sheets, and growth in some emerging business sectors, such as technology and the biosciences, she added, noting that the big question moving forward is whether these upward-arrow elements can overcome the considerable counterproductive pull of sequestration, rising interest rates, falling confidence among business owners, and other factors.
But the “$64 billion question” concerns if and when employers will begin hiring again, said Burke, noting that jobs, or the lack of them, has been the primary reason why the recovery has been defined by those aforementioned adjectives, with more discouraging news coming recently: July was the slowest hiring month since March.
“We still have a very elevated unemployment rate” of 7%, she noted. “It’s come down from the worst, but it’s still quite high.”
And it won’t be until a real, meaningful, and sustained dent is made in the jobless rate that more positive terms can be used to describe this recovery.
Getting Right Down to It
The lackluster state of the recovery is spelled out in the latest issue of MassBenchmarks, the journal of the Massachusetts economy published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston.
It recaps a significant slowdown in the second quarter that was not unexpected, due to factors such as sequestration and the employment-tax hike mentioned above, but was nonetheless troubling.
Real gross domestic product in the state grew at an annual rate of 0.8%. That’s in contrast to the 1.7% GDP growth nationwide for the same quarter, and the 2.8% logged in the state in the first quarter of this year. Meanwhile, state payroll employment, which grew at an annual rate of 3% in the first quarter, stalled in the second quarter, declining by 0.1% on an annualized basis, a number that has analysts concerned.
“The recent rise in unemployment is particularly disconcerting,” wrote Alan Clayton-Matthews, MassBenchmarks senior contributing editor and associate professor of Economics and Public Policy at Northeastern University, noting that overall unemployment rose from 6.4% in March to 7% in June. “It appears that unemployment rates increased for both men and women, and those increases were concentrated among youth — those less than 25 years old, and those with less than a high-school education. However, unemployment rates also rose for those between the ages of 25 and 54, and for those with a high-school diploma and some college but less than a bachelor’s degree.”
Burke concurred. “It looks like we’re going in the wrong direction,” she noted, adding that the numbers were down in almost every metropolitan area in the state, and this consistency is, in and of itself, alarming. “For a while, it looked like Western Mass. was weaker, and Boston has been doing very well, for the most part, in this recession, so I’m really surprised that Boston had an increase in unemployment.”
Nakosteen, who also serves as the executive editor of MassBenchmarks, said that employment numbers for the Springfield metropolitan area, which includes part of Connecticut, were lower than they were a year ago — 286,000 for 2013 versus 290,000 for 2012.
“And that’s really not a good sign for a recovery,” he told BusinessWest, “because that’s been the pattern. Every month, employment is lower than it was a year ago — not by much, but enough. What these numbers tell me is that the recovery is experiencing some headwinds.”
He didn’t add the word ‘again,’ but it was certainly implied, and with good reason, because there always seems to be some impediment to real improvement, from the fiscal cliff to turmoil in a host of European countries.
And when asked to look behind the numbers and identify these headwinds, those we spoke with said federal policy moves are starting to take the toll that many predicted they would.
Indeed, sequestration is starting to have an impact on overall federal employment, said Burke, and there is mounting evidence that major defense contractors in Rhode Island and Connecticut are reducing their workforces or, at the very least, being wary about new hiring or replacing those who leave or retire.
“Growth has been quite tepid for the year, and some believe sequestration is having an impact, taking perhaps as much as a percentage point off GDP growth, according to one estimate I’ve seen,” she noted. “That is definitely having effects across the country because it affects how much money flows to the state governments from the federal government. State-government jobs have been falling in the region, and federal-level government jobs that are situated in the region have been falling as well.”
Locally, Dave Smith, president of Tell Tool in Westfield, which logs 55% to 60% of its parts-manufacturing business from the military, said company officials talked about sequestration as a business risk, and there was verbiage to that effect placed in the strategic plan. Accordingly, a flat year was projected, and that’s what has transpired.
“We haven’t seen a reduction in orders,” he explained. “I wouldn’t describe them as strong, but they’re stable.”
Elaborating, he said that, apart from a slowdown in orders for the F-35 joint strike fighter, for which Tell Tool makes several parts, sequestration hasn’t had a deep impact — yet.
And as he speculated on why, Smith said that, while military aircaft (such as those at Westover or at Barnes Municipal Airport in Westfield) are not in the air as much, they’re on the ground being serviced, which thus far has led to more orders for parts.
Overall, the manufacturing sector on the whole has been off by about 1% across the country, said Burke, noting that a big reason for this has been a decline in due in exports to spiraling economies in China and elsewhere.
As for the payroll tax increases, or the elimination of the tax holiday, Burke said there are no hard numbers available yet to quantify its impact, but there is plenty of anecdotal evidence that people are spending less.
“Retailers say they’re seeing consumers being stingy again, and they noticed that it started happening after the payroll-tax increase,” said Burke, noting that, while the policy change to the FICA tax represents a loss of $1,000 to $2,000 annually for most families, those amounts are enough to take a toll.
Another factor contributing to the decline in employment and sluggish second quarter is waning confidence among employers, said Burke, noting that the Business Confidence Index (BCI), as measured by Associated Industries of Mass., fell below neutral on its 100-point scale in June to 48.9 after a drop of 3.2 points from May.
June swoons are not uncommon for the BCI — it fell 8.5 points during that month a year ago — but this decline is perhaps yet another indicator that business owners are troubled by the slowdown in the first half of this year and are likely still concerned about will happen — or not happen — next.
“Confidence has been quite volatile,” she explained. “It’s always volatile, but even moreso in this recovery. There have been so many times when we might think we’re out of the woods, and then some other roadblock happens.”
Barrett agreed. “Although we’ve heard that things are bottoming or turning around,” he noted, “I don’t think people have seen enough of a turnaround to get moving. They haven’t seen the growth — and I don’t think they have the confidence yet — to start financing expected future growth long-term.”
Looking ahead, though, those we spoke with said they can find some reasons for optimism, and they don’t have to look very hard.
The housing market is certainly one of those factors, said Burke, who noted that this sector is stronger in the eastern part of the state, but things are improving in the 413 area code as well. Analysis she’s seen indicates that the market could certainly weather the 1% increase in interest rates that many are predicting.
Meanwhile, household balance sheets are improving, which puts people in a position to spend more, said Burke, noting that, while interest rates have increased somewhat, they are still at historically low levels.
Bill Sullivan, senior vice president of Commercial Lending at Holyoke-based PeoplesBank, concurred, noting that this is a time for companies to be proactive and ready for when the skies are considerably brighter.
He said the phrase ‘cautious optimism’ is quite overused and he didn’t want to contribute to that phenomenon, but he did anyway.
While doing so, he looked back to the recession of the early ’90s — which was like the current cycle in terms of how slow the recovery was — for what amounts to inspiration.
“You try to find a point in time where that recession turned around,” he said, “but to me, it just seemed like one morning, people woke up and said, ‘hey, we’re still in business. We have sales, though not at the level we like; let’s move forward.’
“I don’t know what moves that rock forward,” he went on, “but I think it starts with confidence; people are pessimistic, and they have to be, and they really have to believe it before they make a capital investment or hire employees.”
Those we spoke with said the best-case scenario is that the economy can work its way through these latest headwinds and start to pick up some speed. But there are many questions concerning when and if that will happen.
“We definitely have to get through these tax increases,” said Barrett, noting that policy changes that will impact wealthier Americans will start to be felt later this year. “And it takes a while for them to work their way through the economy; it’s the same with sequestration.”
While the impact of those steps is still taking shape, there will be another round of Congressional action to deal with matters such as the deficit and the debt ceiling, he continued, adding that anticipation about what will happen could heighten levels of uncertainty.
The key, again, is jobs, and unfortunately, recent history is showing that recoveries are becoming increasingly jobless, and most signs indicate that this trend will continue.
“We’ve been having these jobless recoveries, and there’s a lot of work going on to try and figure out why that is,” said Nakosteen. “The recession in the early ’90s, the one in the early 2000s, and this one … they’ve been not entirely jobless, but that’s the phrase that’s been attached to them. Economists don’t fully understand why that is, but jobs don’t seem to be generated as quickly as economies recover anymore.
“I’m pretty optimistic about the next two or three years,” he went on, “but I just can’t understand why we can’t get there more quickly.”
The Bottom Line
In comments to the Boston Globe made in reference to the sluggish second quarter recorded in the Bay State, Nakosteen seemed to sum up the frustration felt by many with regard to the recovery.
“I’ve never seen a report when the economy is supposed to be growing that’s so somber,” he said. “It’s so deflating in a way.”
Deflating, because even though the Great Recession cut deep and the impact was felt across the country and in every business sector, actual recovery, which has often seemed close and real, has instead proven to be slow and quite elusive.
“The kind of recession we had, a financial-crisis recession, has historically had very slow and painful recoveries,” said Nakosteen. “I’ve been surprised by just how slow and painful this one has been, even though I’ve read the history.”
George O’Brien can be reached at firstname.lastname@example.org