A New Reality?
Is This as Good as the Recovery Is Going to Get?Andre Mayer says business owners who are still waiting for what would be considered a real economic recovery should probably stop waiting.
That’s because, in his view, this is about as real as it’s going to get.
“At this point, we’re really past the recovery phase; the recession ended five years ago,” said Mayer, senior vice president for communications and research at Associated Industries of Massachusetts. “We never had the recovery we were hoping for and expecting — that big burst of growth where GDP goes up quickly and rejoins the prior trend line. It never happened.”
And it’s very likely that it just won’t happen, at least not any time soon, he said, adding that business owners would be wise to accept this state of the economy and get on with hiring people, expanding their ventures, and moving forward rather than waiting for that aforementioned burst.
And he believes many are doing just that.
“We have been adding quite a few jobs in the first quarter of this year, when the national economy was contracting,” he said, adding that ‘we,’ in this case, refers to the state as a whole, but includes Western Mass. “And that, to me, seems to reflect a change of attitude. In other words, employers, instead of hunkering down and going all out to preserve productivity and not dilute it, because that’s what got them through the recession, are now taking a more sustainable path and sort of coming to the realization that this is the economy we have to live with.”
Bob Nakosteen, professor of Economics at the Isenberg School of Management at UMass Amherst, agreed, and pointed to the latest unemployment figures as evidence of what he considered progress, at least in some respects.
Indeed, while the state’s jobless rate fell to 5.5% in June, the lowest since August 2008, and 3,700 jobs were added, the manufacturing sector lost more than 1,000 jobs, and the construction industry lost more than 900, what Nakosteen called “hidden disappointments.”
And he said they may provide more evidence of something that many are now calling ‘secular stagnation,’ or ‘economic immobilism,’ terms that aren’t new — they go back at least as far as the Great Depression — but are being summoned with greater frequency by many economists to help describe and explain the phenomenon that Mayer touched on: a recovery that certainly doesn’t look or feel like one.
“There are a number of factors in our economy, some of them demographic, some of them technological, some of them stemming from globalization, that imply that we’re simply not going to experience the growth in this economy that we have in the past, especially job growth,” said Nakosteen while explaining secular stagnation, which he said is now being hotly debated in the “economics blogosphere.” “The workforce is getting older and large numbers are retiring, technology is developing quickly — but it’s doing so in a way that seems to be removing jobs rather than adding jobs — and globalization continues to put great pressure on our domestic workforce, especially the blue-collar occupations and manufacturing.
“And the prospects for any of this changing are simply not good,” he went on, adding that some economists believe it may be decades before the current scene improves markedly.
Meanwhile, the tepid state of the recovery is being reflected by ongoing caution on the part of area business owners, said commercial lenders we spoke with, who noted that many, perhaps still waiting for that burst they have seen following other downturns, such as the ones in the mid-’90s and just after 9/11, are hesitant about pulling the trigger on expansions or new hiring.
“I don’t see anybody really jumping in full force to bring people back or undertake plant expansion,” said Michael Oleksak, executive vice president and chief lending officer at Holyoke-based PeoplesBank. “Everyone is still pretty hesitant.”
Luke Kettles, senior vice president and chief lending officer at Hampden Bank, agreed, summoning a phrase that has been given a thorough workout over the past several years.
“People are guardedly optimistic,” he said, adding that, in this case, that means they often lack the confidence to move ahead with expansion plans or new hiring.
“Employers are not adding people unless they really need to,” he explained, adding that most are still looking to improve efficiency and trim fat rather than add to their workforces.
For this issue, BusinessWest takes an in-depth look at the state of the recovery, such as it is, and whether any change in the forecast can be expected any time soon.
While secular stagnation, if that’s what the region is experiencing, is a mostly negative term, there are some positives to be gleaned from recent economic statistics and trends, said both Nakosteen and Mayer.
Perhaps the most important of these is that the recovery — and job growth — has finally extended beyond the Greater Boston area, said Nakosteen, adding that both Central and Western Mass. are enjoying better unemployment numbers of late.
The June jobs report provides more evidence of this, he noted, but real signs of improvement started appearing earlier in the spring.
“Over the past few months, unemployment rates have come down dramatically in metropolitan areas in the Berkshires and Springfield, where they were the highest,” he noted. “This is a really good thing. It doesn’t mean they’re low enough to make you feel you’re in a true recovery, but for the first time since the recovery began, it now seems to be extending past Route 495.”
Mayer agreed. “Growth has evened out a good deal,” he told BusinessWest, adding that the Greater Boston area recovered quickly and profoundly after the recession while most of the rest of the state lagged well behind.
“Over the past year, the jobs have been added in the Worcester and Springfield metro areas at the same rate as in the Boston and MetroWest areas,” he noted. “At this point, we’re seeing growth, albeit modest growth, on the labor-market side almost everywhere.”Still, the recovery being witnessed in this region — and many other parts of the country, for that matter — is atypical of what is generally seen after prolonged downturns, said Mayer, citing a lack of growth in GDP and describing what much of the country, and this region, have experienced as a “watered-down version of a boom.”
“One reason, maybe the main reason, why this recession was such a bad one is that it seems to have knocked our GDP down a few percentage points long-term — we haven’t just bounced right back to that point where we left off,” he said. “And by now, waiting for that to happen doesn’t seem realistic, although we are on an upward track.”
Nakosteen concurred. “Sometimes after a recession, we’d have 9% or 10% gross-domestic-product growth for a year or two — it was just stunning,” he said. “We haven’t done better than two or three percentage points the past several years, and I just don’t think you’re going to see that big figure ever again.
“That’s a dangerous thing for me to say,” he added quickly, reflecting on the gravity of his own words. “But I’m buying into this secular-stagnation argument, and I don’t know what to tell people except that, however they have to adjust to the idea that there may not be a pot of gold at the end of the rainbow, they’d probably better at least think that through.”
Referencing the declines in both manufacturing and construction jobs, he said those numbers, if they don’t change, are ample evidence that the recovery lacks “oomph,” and that this is as good as it is likely to get.
“I thought manufacturing, and construction as well, were on very positive trajectories, and that this might continue more or less unabated,” he noted. “Now, there’s been an abatement.”
That said, both Mayer and Nakosteen anticipate further improvement in the economy, especially if business owners and managers can somehow gain the confidence needed to expand operations and add to their workforces — and consumers can buy again — possibly by recognizing the new economic reality for what it is, and making it better than it’s been.
“It’s time for us to not wait for magic, but to think hard about what we can do to continually make our economic climate better,” Nakosteen said.
But Oleksak and Kettles said there are still a number of factors holding area business owners back when it comes to hiring and borrowing to expand.
And many are still continuing to do what essentially got them through the recession, said Oleksak, referring to everything from better inventory control to improving production efficiencies to controlling or, in many cases, reducing salary.
Uncertainty about health-insurance costs is one of the factors leading to hesitancy, he noted, adding that these expenses have been a drain on hiring for some time because they keep going up and there is little, if anything, to indicate that this trend will not continue.
Meanwhile, interest rates, which are still historically low but moving back up and projected to continue rising, are another impediment to progress.
“We’ve had such low interest rates for so long that’s there’s also concern about over-leveraging yourself in light of the fact that we’re going to see some higher interest rates down the road,” he explained. “And when interest rates start increasing, there’s more concern about the economy, with people asking if we’re going to fall backward again.”
Kettles said that some sectors, such as senior living, medical office facilities, social services, and even self-storage, are doing well, and Hampden Bank is having a solid year in commercial lending, due in part to the many bank mergers in recent years.
Still, he also sees hesitancy among many business owners, especially when it comes to hiring.
“Benefit costs are increasing, and healthcare costs are pretty significant, so people do not hire unless it’s really necessary,” he said. “Profit margins may be improving, nationally as well as locally, but I think it’s through improving efficiencies and doing more with less. People aren’t going out and adding a position unless they really need to, and a lot of times they’ll try to use part-time labor until they really need a full-time position.”
Kettles noted that many of the manufacturers the bank does business with have been willing to make investments in new equipment and technology, but these purchases often translate to fewer jobs, not more of them.
Overall, confidence, or the lack thereof, remains a factor as well, said both Kettles and Oleksak, noting that, while the June jobs report is generally positive, business owners aren’t necessarily buying into such reports.
“There is some improvement going on,” said Oleksak, “and people are being cautiously optimistic, but I’m not sure they’re really believing what they’re seeing.”
As evidence of this, he cited the residential real-estate market. While those at PeoplesBank and other institutions were expecting the refinancing market to slow this year, mainly because most everyone who could refinance already has, they were expecting sales to pick up, but they haven’t.
“If you look at the numbers, we’re about 5% to 10% behind last year,” he said, adding that an overall lack of confidence is the primary reason.
Whether confidence improves in the near future is likely a function of whether the news continues to improve, and whether it can actually convince people to believe what they see, said those we spoke with.
Nakosteen, for one, believes conditions will continue to improve.
“I think the next 12 months are going to be pretty good,” he told BusinessWest. “A lot of things, especially at the national level, but also at the state level, are getting better. Households are just in a much better position than they’ve been in for years to make healthy consumption decisions, and therefore employers will be making more job offers, buying more equipment, and so on. Over the next year, we’re going to see reasonable economic growth.”
But what does ‘reasonable’ mean?
It probably doesn’t mean the kind of burst that traditionally accompanies the end of a recession, or the kind of oomph that economists expected and business owners are in many respects still waiting and hoping for.
As Mayer explained, that kind of jolt simply isn’t realistic a full five years after the recession was declared over.
This is the economy this region may have to deal with — like it or not.
George O’Brien can be reached at [email protected]