Economic Outlook 2007

As the calendar turns to 2007, economists see some growth for the Commonwealth, but mostly a continuation of the pattern of unspectacular progress that has defined the past few years. In other words, look for a continuation of the jobless, or nearly jobless, recovery. As for the Pioneer Valley, “it just keeps plugging away,” said one observer, noting that its relative stagnancy is better than some regions have experienced.

It’s been 16 years since a Democrat has been governor of the Bay State, and anyone in business who can clearly remember 1990 and the years that followed … would rather not.

Which is why some apprehension on the part of the business community at the dawn of the Deval Patrick era would be understandable. But there has been little of that to date, according to most observers, who say that, for now at least, Patrick is being given the benefit of the doubt when it comes to business, keeping the costs of conducting it in this state under control, and a host of issues that impact the Commonwealth’s ability to attract and retain jobs.

There are several reasons for this, said Andre Mayer, senior vice president of Communications and Research for the Associated Industries of Mass. (AIM), starting with the fact that the outgoing governor, Republican Mitt Romney, would receive only a mixed report card from many in the business community about containing business costs. There is also the rhetoric Patrick issued during the campaign, especially about education and creating a better-trained workforce — and the promise that it will translate into positive action in the months and years ahead.

“Thus far, I haven’t seen any real alarm about Patrick or a one-party government,” he said, referring to the Democrats’ stranglehold on Beacon Hill. “In fact, the business confidence index rose while Patrick was pulling away in October.

“I think part of the reason he was elected is the feeling that the emphasis will shift from taxes to other issues,” he continued, “and so far, Patrick has been saying all the right things; he doesn’t act like a tax-and-spend Democrat.”

But while Patrick is apparently not a cause of real concern as the calendar turns to 2007 (things may change later), there are some other matters that do warrant apprehension. At the top of the list is the condition of the housing market, especially in the Eastern part of the state. Prices have declined between 10% and 15% over the past year or so, and some analysts say they could fall another 10% before bottom is officially hit.

The falling prices are making the state marginally more affordable for workers, which is good news, said Bob Nakosteen, faculty member of the Isenberg School of Management at UMass and executive editor of Benchmarks, the university’s quarterly report on the state’s economy. But that downturn has certainly impacted consumer spending, while also hurting both the construction sector and the legion of Realtors operating across the Commonwealth.

The broad result is an overall decline in confidence, which is another of the matters to watch closely as the new year unfolds, said Nakosteen, adding that the slow start to the holiday shopping season, a few rough days for the stock market after that first shopping weekend, and talk nationally of inflation and possible interest rate increases to ward it off won’t help boost confidence.

There are other factors to consider, including energy prices — lower for the time being, but always volatile — that have most analysts projecting modest (2.5% to 3%) growth for the year ahead, said Nakosteen.

That would represent a modest decline from recent events, he said, noting that the Massachusetts economy performed better over the past six months (3.6% growth in gross state product) than at any time since the current expansion began in 2003. This growth was prompted by a resurgence in technology markets, especially demand for microchips, he explained, noting quickly that there are signs that things are already slowing down again.

For the longer term, analysts are wondering, as they have for the past several years, where the next surge in jobs for the Bay State and the Pioneer Valley will come from. In a recent article written for Benchmarks (see page 37), Nakosteen chronicled 20 years of relative stagnancy for Western Mass., with questions about if, when, and how it might end.

“The region just keeps plugging along,” he said, noting that, while ‘stagnant’ is generally not a positive economic term, in this case it’s better than some areas of the state, which have witnessed dramatic surges, but equally dramatic declines.

Through the Looking Glass

When asked about what to expect from the Deval Patrick administration, Jeff Ciuffreda, vice president of Government Affairs for the Affiliated Chambers of Commerce of Greater Springfield, said he’s not hearing a lot of negative talk.

Like Mayer, he said Patrick’s campaign and its theme, Together We Can, created generally positive vibes, and the business community is, by and large, withholding judgment until the picture is colored in.

“He seems to at least speak the language of business,” said Ciuffreda, noting that Patrick has served on several corporate boards and would seem to appreciate the needs and concerns of business owners. “How that will translate … we don’t know yet.”

To date, Patrick has been short on specifics with many issues ranging from the the fate of the Finance Control Board — the ACCGS would like it to remain in business — to his first budget. He has been outspoken on public higher education, and recently told an audience at UMass that he would push to increase spending on state schools by $400 million over five to seven years.

As for Western Mass., Patrick, like previous candidates and governors, has pledged support for the region. However, some are already alarmed by how few members of his transition team (7%) are from the Pioneer Valley.

“We may need to keep his feet to the fire on Western Mass.,” said Ciuffreda. “We’ll know a lot more in a year or so.”

That statement applies to many issues and concerns, he said, noting that while waiting to see what Patrick and his team members do in their first year, economy watchers will also be monitoring the housing market, energy prices, the war in Iraq, and the strength of the dollar — or lack thereof.

The softening of the housing market is still largely an Eastern Mass. phenomenon, although sales volume has fallen in the Pioneer Valley and prices has remained steady, said Nakosteen. But the impact is felt statewide because of the broad ripple effect. Consumer spending will continue to decline if the trend does not reverse itself, due to a phenomenon known as the ‘wealth factor.’

As Nakosteen explained, many individuals now view their homes as their principle vehicle for investing (savings rates remain low), and when homeowners see the value of their property diminish, they feel less wealthy and are thus less apt to spend.

“That’s why the housing market is the biggest concern for the year ahead,” he said, adding that economic projections for the next several quarters are muddled because of general uncertainty about housing prices and sales. Debate continues on whether bottom has been hit and, if it hasn’t, when that might occur — the consensus is the second or third quarter of next year.

The Big Picture

The sum of the many factors influencing the economy will determine how much of a surge will be seen — in the overall economy and in jobs.

While current conditions wouldn’t be described as a truly ‘jobless economy,’ the phrase that became popular in ’03 and ’04, there haven’t been significant gains in employment statewide or regionally.

“We set a record for merchandise exports this year,” said Mayer. “We’re making the stuff the world wants, but we’re just not employing a lot of people to make it.

“Hiring is still regarded almost as a last resort for some employers,” he continued, “and the availability of good people is one big reason why. Some companies just can’t find people.”

Overall, the state has seen roughly 1% growth in the number of payroll jobs over the past year, said Nakosteen, noting that the state was registering 2% to 2.5% increases during the early years of the decade. Most recent gains have come in professional and business services (7,100 jobs), education and health services (6,800), and financial services (4,200). In addition, 3,900 jobs were added in construction.

This relative stagnancy on the jobs market has contributed to an ongoing out-migration of state residents, the extent of which is still being debated, said Mayer, noting that the exodus, however large it may be, has some economists worried.

And the trend will continue, he said, until the state creates large numbers of new jobs. When and how that will happen are both $64,000 questions.

There are many theories about where the next large wave of jobs will emerge — from renewable energy to biotechnology to medical instruments manufacturing — but no clear indicators, said Mayer, who doubts that any of those sectors will blossom into large-scale jobs centers.

“I’ve heard that renewable energy could be the next big growth area, but I don’t see it,” he told BusinessWest. “How many people does it take to run a windmill?”

Nakosteen agreed, saying that the next big source of jobs probably hasn’t identified itself yet.

“Massachusetts has a long history of reinventing its economy, and it will do so again,” he explained. “But if there’s a new engine out there that’s going to drive us, it’s not at this point identifiable. And one of the reasons we’re going to see very, very minimal, almost stagnant employment growth over the next few years is because we don’t have this new engine out there.”

That same statement can be applied to Western Mass., which has seen some job growth in biotechnology and medical instruments, but, overall, hasn’t found anything to replace the manufacturing jobs that have given the region its identity. This fact, coupled with the region’s minimal but consistent growth, adds up to remarkable resiliency, he said.

“Over the past century, the Pioneer Valley has lost most of its important employers, especially in manufacturing,” he explained. “If you look at other areas of the country, when they lose their major employers and enter a recession, they go into a death spiral; we just keep plugging away.”

Nakosteen attributes this phenomenon to the region’s employment anchors — UMass, MassMutual, Baystate Health, and others, who have maintained their core strength over the years — and also to new small-business development. “This region is much better off than other areas that have lost their manufacturing bases,” he said, “and I think it’s because of those core businesses.”

Identity Crisis

Can the region break free of the stagnancy that has defined it for the past few decades? Possibly, said Nokosteen, but it probably won’t come from companies leaving Boston for the Valley and its lower cost of doing business.

“The prevailing theory is that if business owners are going to leave the Boston area, they’ll go all the way to the Research Triangle,” he explained. “They won’t stop along the way in Springfield.”

Thus, growth will likely be organic, and Nakosteen isn’t sure where it will come from.

“We don’t have an economic identity, and we don’t have an engine of growth; I don’t see anything coming to the fore,” he told BusinessWest. “But it’s not obvious that anything has to come to the fore; we could be like this forever more.”

George O’Brien can be reached at[email protected]