There’s Nothing Like the Real Thing

As the calendar prepares to turn to 2004, economic analysts project that the regional recovery that has been predicted for the past 18 to 24 months will finally materialize. Those business owners looking for a return to the halcyon days of 1999 and 2000 are due for a disappointment, however; this recovery will be far less pronounced.
’It’s six months out.’

Area business owners have been hearing that now for at least two years. They have it heard so often, many are becoming more than a little skeptical.

It, of course, is the recovery from the recession-turned-economic-downturn that started, by most accounts, in early 2001. This prolonged period of sluggishness will come to an end early next year — if it hasn’t officially ended already, say economic analysts who tell BusinessWest there is plenty of evidence to suggest that things have started to turn around and that it is time to believe the ’six months out’ talk.

Indeed, the technology sector that has been mired in a slump since the end of the Y2K craze is finally showing signs of life. Meanwhile, manufacturers that have been stymied by a persistent lack of confidence among business owners say orders are starting to come in again (see related story, page 19). And the tourism industry, which is becoming one of the pillars of the region’s economy, has outperformed the rest of the state again in 2003 and is looking toward a stout 2004, buoyed by the Women’s U.S. Open to be played next June in South Hadley (see related story, page 9).

Overall, analysts say, the question isn’t whether there will be a rebound, but what kind of upturn it will be.

In short, no one is using the word ’robust to describe the year ahead, and experts say those pining for a return to the glory days of 1999 and 2000 should adjust their thinking.

The phrase being bandied about is "jobless recovery," and analysts insist it is not an oxymoron. Ever-improving technology and enhanced productivity that allows companies to do more with fewer people mean that the economy may well rebound, but without significant new employment.

However, many we spoke with said the recovery won’t be entirely jobless. Manufacturers are expected to do some hiring, and the tourism and service sectors should also add jobs, although they will not be high-wage positions (see related story, page 22). Meanwhile, some are predicting that the availability of land in Western Mass., a statewide commitment to developing a biotech sector, and the sky-high price of housing in the Boston area may finally prompt some companies to take a hard look at the Pioneer Valley as a place to locate.

In general, analysts are predicting a decent bounce for the state’s economy in the year ahead — especially if the current surge in technology spending continues. The Pioneer Valley, which didn’t have so far to fall during the downturn because of the diversity of its economy and less dependence on technology-related businesses, won’t see as significant an upturn.

"Though current conditions are bad and consumer and business expectations are weak, the excesses of the technology bubble may be nearly wrung out of the economy," Alan Clayton Matthews, an assistant professor and the director of quantitative methods in the Public Policy Program at UMass Boston, wrote in the latest issue of Massachusetts Benchmarks, a quarterly report of the state’s economy. "Technology spending appears to be headed back into growth after crashing in 2001 and remaining stagnant through 2002. The Massachusetts economy should begin to turn around accordingly.

"The state is in the process of recovery," he told BusinessWest. "But it won’t feel like it until we see some jobs."

Spending Time

Many of the analysts who spoke with BusinessWest said the recession, or economic downturn, that has visited the region — and the rest of the country to one degree or another — has been unique in many ways, especially with regard to consumer spending and housing prices.

In short, consumers never really stopped spending, and housing prices never declined, said Matthews, who termed this an "investment recession." Indeed, auto sales have been steady — helped along by special financing packages spawned by 9/11 and continued through 2003 — while sales of most other goods, boosted by numerous tax cuts and checks to families from the federal government, have remained strong. The problem has been business spending, said Andre Mayer, senior vice president for Research at the Associated Industries of Mass. (AIM). He told BusinessWest that many employers simply haven’t had the confidence (or the need, in many cases) to move forward with hiring, expansions, new equipment purchases, or investments in technology. If most business owners can become true believers in the economic recovery, then it may become a self-fulfilling prophecy.

"The slow pace of progress in this state has many business owners reluctant to get on the bandwagon," he said. "They want more evidence that things are turning around."

What has really hurt Massachusetts in this recession and kept it from recovering as quickly and profoundly as the rest of the country, said Mayer, has been the concentration of technology-related businesses here. Boston has been especially hard hit, but every region, including the Pioneer Valley, which is far less dependent on that sector, has felt an impact.

But recent statistics show technology spending is on the rise nationally, said Matthews, and that bodes well for the Bay State’s economy.

"U.S. investment spending for information and processing equipment was up 15.4% in the third quarter this year, and it was up 15.5% in the second quarter," he said. "That’s two quarters in a row of very strong growth in investment spending, and all indications show that this will continue."

Another healthy indicator is the Federal Reserve Board’s Index of Industrial Production, said Matthews. That barometer has an ’information and processing business equipment’ component, and that number has been growing since the beginning of the year at a rate of 9.5%. Meanwhile, shipments recorded nationally by the Computers and Electronics Industrial Sector — the largest manufacturing group in the Commonwealth — were up 16.2% for the first eight months of the year.

"New orders are up, and unfilled orders are also up," he said, adding that inventories are very low across the technology sector. "That means that these new orders will have to come out of production."

What all this means for the Western Mass. economy remains to be seen, said Matthews, but generally, what’s good for one part of the state is good for the whole state.

Charting Progress

There are other positive signs of turnaround beyond the technology sector, said Mayer, pointing to improvement in many foreign economies, especially Japan’s.

"It’s been a problem for all of us that Japan has been in a recession for 10 years," he said, noting that exports statewide improved markedly in the first three quarters of 2003. "It looks like the world’s economy is climbing its way back to growth without one big engine to pull it; instead, it’s a lot of little engines pulling together, and I think the Western Mass. economy is well-positioned to take advantage of all this."

As for the outlook on jobs, most analysts say there will be some growth locally, if only because companies that are already stretched thin will not be able to handle a larger volume of orders without adding personnel.

"Companies are pressing people very hard already," said Mayer. "The notion that there won’t be any job growth because improved productivity can make up the difference when orders come in is simply not true."

Allan Blair, director of the Economic Development Council of Western Mass. (EDC), concurred, but told BusinessWest that if there is to be any significant job growth, it must come from new businesses coming into the area. And he and others say conditions are ripe for cultivating new jobs.

For starters, the state is making a real commitment to growing its biotech industry, and the recently passed economic stimulus package contains many incentives for entrepreneurs in that sector. The Pioneer Valley has a suitable infrastructure for that industry to develop, said Blair, noting the research facilities created by Baystate Health System and UMass.

Another factor working in the region’s favor is the still-escalating price of residential real estate in the Boston area, which is making it difficult for some companies to locate there.

"There is a phrase people are using these days — ’drive till you qualify,’" said John Mullin, director of the Center for Economic Development at UMass, referring to the fact that people who can’t afford homes in Boston are lengthening their commute to communities where prices are lower. That same phenomenon should help attract companies to Western Mass.

"I’ve heard more anecdotally than ever before about businesses looking at the western part of the state," he said. "And the prices in Boston are part of the reason why."

Blair said the continued marketing of the Hartford-Springfield Economic Partnership — the Knowledge Corridor — will also pay dividends in the near future. He said site selectors are becoming increasingly aware of the region, and the statistics concerning it, including everything from the number of college students to the price of doing business, are starting to turn heads.

The Bottom Line

While analysts were adding the necessary caveats about any projections for 2004 — and predicating their expectations on no further terrorist attacks or escalating global conflicts — they were generally in agreement that things would improve in 2004.

The question is: how much will they improve?

Few are expecting anything spectacular, but they spoke for area business owners when they said that any upward movement would be appreciated.

And this time, people can believe it when they hear the phrase, ’it’s six months out.’ That’s because, in many respects, it’s already here.