By Jon Roberts, Managing Director of TIP Strategies

The past three months have seen a precipitous drop in production, a staggering loss of jobs, and an unprecedented decline in consumer spending. As the map below illustrates, the nation’s economic problems are widespread. While a few regions are still bucking the trend, especially in Texas, the overall picture is bleak. The current situation cannot help but make us think about how we got here, how the future will unfold, and what our options for dealing with it will be. It is in this context that we raise the question: What would it mean to “reset” the economy?

Unfortunately, the limitations of economic data make it peculiarly difficult to understand what all these grim statistics portend. Think of riding in a car faced backwards, that’s a fair analogy of how economic indicators work. That’s the way it is for a recession: two or more quarters of declining gross domestic product (GDP), but not always visible until after the fact. So we learn that we have been in a recession now for four quarters. And, worse, we won’t know the severity of this recession for some time yet. Better, perhaps, to ask whether we should think differently about the economy as a whole.

Several factors contributed to our current woes – the housing bubble, careless lending practices, and a dramatic increase in consumer spending. Of course, we now see that these are related and that we created an entire “shopping infrastructure” for what may turn out to be an unsustainable habit. This infrastructure consists not only of millions of square feet of retail space, but also of hundreds of thousands of jobs. In the 15 years leading up to October 2008, we created nearly 6 million jobs in retail, accommodation, and food services. One out of every four new jobs in the last five years falls into these sectors. Even if this level of retail employment were just 20 percent beyond what we could maintain, that would mean we could expect to shed over a million jobs in those sectors alone. And it is not just direct jobs that are affected; the businesses that make the goods we consume are also laying people off – not just in the U.S., but in Asia and Europe and elsewhere. For much of this decade we lived with the illusion that “deficit household spending” was justified by the increasing value of our homes. It was the classic bubble, and it was doomed to burst.

As with most economic assumptions, there is an expectation that whatever jobs we lose we will – over time – regain. To the extent that our population continues to grow and that past practices continue, this is not an unreasonable view. The chart below shows the roller-coaster ride of job creation (and loss) experienced by the U.S. over the last 50-plus years. But what if we changed our ways? What if we adopted consumption patterns that were more sustainable? What if we accepted that there are consequences to our actions and that those consequences might be painful? Which brings us back to the initial proposition, what would it mean for the economy to be reset?

At the least, resetting the economy would involve accepting a different norm. If Americans were to conserve more and spend less, we could not expect to regain all the jobs we have lost. Aside from the consequences of changing course too quickly and too broadly – creating a situation where personal virtue becomes public vice (Keynes’s “paradox of thrift”) – this may seem like a sensible path. But it is sobering to see how this might play out and what it means for business and for economic development. This thought-experiment assumes the following:

Consumer demand is reduced to 1998 levels. When consumers cut back, it is never an even process. Broadly speaking, the more expensive the item the more likely the consumer’s caution. Naturally, homes are at the top of the list. For reasons that are well-known, housing sales have plummeted, creating ripples through the construction and professional services sectors. Automobiles are the next largest spending category. As we ask ourselves whether we “need” a new car, we quickly see that repair costs are only a fraction of monthly car payments, even with a no-interest car loan and four years of free maintenance. In the hunt for good deals, none matches that of re-investing in your existing automobile. The average owner keeps his car for about six years. Extending that to eight or ten years would further destabilize the entire automotive industry. The same effects would be felt for all durable goods. Add to that a reduction in spending on non-essential durables (the stuff that collects dust and winds up in the garage), and all that’s left are groceries and a few other staples.

Exports decline. The U.S. has long suffered a serious trade imbalance: we buy much more from other countries than they buy from us. This is a problem for many reasons, since the export sector is hugely important to our economy. From Boeing airplanes to Intel chips, we are a far stronger nation when we sell more abroad. Ironically, the ability of other countries to buy from the U.S. depends on the vibrancy of their economy. As interwoven as we now are (the dark side of a flat world), our economic weakness translates into reduced demand from abroad.

Business investment stays low. U.S. GDP is, of course, not wholly dependent on consumer demand. Our economy grows when businesses invest in plants and processes and equipment for other markets and for other businesses. As this editorial is being written, Intel has announced that it plans to spend $7 billion on improvements to its domestic fabrication facilities. This is good news, but it does not automatically signal a return to the same levels of consumer spending (on computers and other electronics) that we experienced between 2000 and 2008. Similarly, other sectors of our economy (transportation, utilities) are themselves affected by changing consumer patterns.

The consequences of resetting the economy are not easy to accept: entire industry sectors forced to rethink their business model, higher levels of unemployment, a reduction of government services (because tax revenues would decline). Whether or not Americans have the appetite and attention span for such sacrifice is one question; whether or not a sustainable level of economic growth is even possible is another. Since we’re racing forward but looking backward (our speeding car analogy), we won’t know for quite some time whether the current economic policies will work, or whether some lasting change will take place in the American psyche. But history says we’ll return to the boom-and-bust cycle of previous eras.

The implications for economic development have similarly uncertain consequences. As a result it pays to consider both short- and long-term effects. The recession is real and it will be longer and deeper than we anticipated. Here at TIP Strategies, Inc., we have begun focusing on the following:

Understand business consolidation practices. In our interviews with corporate CEOs, we are learning that business models are changing, lean operations with fewer workers are anticipated – now and into the future – and “value-driven” product offerings are supplanting add-ons and feature-rich bundling. While overall employment levels will decline, consolidations will increase and some regions will benefit even as overall corporate job levels drop. This pattern is already visible. Contrast announcements of continued job cuts at Caterpillar (now totaling more than 22,000) with news that the company will consolidate operations in Seguin, Texas – a gain of 1,400 jobs for the region.

As an element in this approach, the Wall Street Journal has already noted resurgent interest in state and local incentive policies. But this is nothing new to economic development. The more important question is what it takes for incentives to be effective (in the short term), and whether the gains outweigh the costs (in the long term). This has everything to do with a resetting of the economy towards a sustainable level of growth.

Invest in infrastructure. The combination of a stimulus package focused on construction-related activity paired with a desire to enhance business growth suggests a return to economic basics. This includes physical infrastructure improvements (sewer, water, and roads), and telecommunications. Along with these basics is a continuing opportunity around alternative energy and conservation projects. Ideally, these would be conducted in conjunction with businesses. Examples include retrofitting of facilities (think solar panels, co-gen, and water recovery), green construction practices, and broad-based energy efficiency practices.

It may well be that other public policy initiatives will come into play: land banking and cooperative ventures with developers seeking business park improvements are likely examples. Of course, each of these opportunities requires extensive analysis. In an area such as telecommunications, it has become apparent that large investment may yield only minimal benefits. Conversely, small changes in policy can open huge opportunities for business expansion.

Capitalize on countercyclical industries. Healthcare and education continue to see year-over-year gains nationally, making them good targets for investment. They also help position a community regionally and attract talent and create opportunities while other sectors struggle. Repair and maintenance industries are likely to thrive, with none being too mundane for consideration (both the Wall Street Journal and the New York Times have covered the rising fortunes of the shoe repair industry). The decision to make do with what we have – from cars to major appliances to clothes – can translate into increased earnings for establishments in the business of fixing them.

Some technology companies show resilience in their ability to offer streamlined products that replace previously cumbersome and expensive alternatives (computers and cell phones are good examples). In fact, the process of “paring down” is likely to creep into product lines. Those companies that can respond quickly to changing markets remain excellent targets for recruitment and consolidation.

The challenge for economic developers is a reflection of the challenge we all face. We are uncertain how much capital will be available to us (in Texas we worry about how the sales tax receipts that fund EDCs will affect operations); we are uncertain about whether to invest while prices are low or wait for them to go lower yet (think land banking); and we are uncertain how tight to pull the belt in anticipation of further job losses. We know that a region that loses its vibrancy does not easily recover. Companies naturally migrate to where risks are low and where recovery will be rapid. Positioning to that end is critical.

Related posts:

1. Position your Community for Recovery: Three Essential Tasks
2. Is the Sky Falling?
3. TOP 5 To-Do’s for Economic Developers
4. The Evolving Recession
5. The Geography of Jobs