The Geography of Jobs

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Update 1, September 14, 2009: Now with July 2009 data.

Map Highlights This animated map provides a striking visual of employment trends over the last business cycle using net change in jobs from the U.S. Bureau of Labor Statistics on a rolling 12-month basis. Read more…

Planning for Recovery The animated map makes clear that this recession has not treated all regions equally. But no matter where you are in the country, these trying times require a response. Read more…

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Resetting the Economy

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.

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Is the Sky Falling?

Jon Roberts has written an editorial addressing the current financial crisis and how economic development strategies will need to change as a result. We welcome your thoughts and comments regarding his thoughts.

It is extraordinarily difficult to keep abreast of our current economic woes. Just as IEDC schedules a web seminar on “The Future of Economic Development at $5 Gallon,” oil prices fall to under $90 a barrel and prices at the pump drop to $3. Just as sustainability conferences are announced, a large contingent of developers now speak of survivability instead. And just as we were sure that a $700 billion “rescue package” would bolster the economy, the Dow dropped further.

If you had heard someone make these predictions a year ago, you would have looked askance at the speaker. Things are bad, you would have said, but please don’t exaggerate. They are not that bad. But now we are facing unprecedented volatility in our financial markets. Whether we are economists, city officials, or economic developers, we are equally beset by uncertainty. What follows is a brief primer on why we find ourselves in the current situation, and what it might mean for economic development.

Let’s consider what lies at the root of the problem. Is it right to call this a “credit crisis?” No, it is not. What we have, and have had for a very long time, is a debt crisis. Bad credit is a consequence of too much debt backed by too few (or declining) assets. In short, we’ve been spending beyond our means – individually and as a nation. We’ve done that because banks and credit card companies and mortgage lenders have allowed us to do it. We are all complicit in this. We wanted things we could not afford and should not have bought. Lenders enabled us to do this because they were making enormous sums of money by doing so – even as they knew perfectly well that the risk was growing. They were willfully blind to the fact that the only tangible asset we could offer as collateral was our homes. As long as the value of homes was going up, the house of cards could be built higher. And was. Deregulation enacted in 1999 allowed banks to bundle and trade those loans. You noticed it as your mortgage was sold, and resold. And each time that happened, some firm made a lot of money. That money fueled a desire to make more, and lenders began offering loans at below market rates while only vaguely addressing the long-term debt burden being assumed by borrowers. This is how the crisis expanded to Freddie Mac and Fannie Mae, and beyond that to credit markets in general.

At the same time, the federal government was also sinking further into debt. Foreign wars and unprecedented domestic spending pushed the deficit steadily higher. It is difficult to comprehend just how onerous the burden has become. And we’re part of it. With a total national debt upwards of $10 trillion, we have a per capita debt for every man, woman, and child in this country of $33,333. These obligations must, eventually, be discharged. It is money owed by the government to, among other things, foreign countries – especially China and Japan. To recite further statistics at this juncture is to cast a deep gloom: Fully 10 percent of the nations 51 million mortgages are at least 90 days in arrears. Perhaps as many as 6 million homeowners may lose their homes by this time next year, and individual credit card debt stands at $8,500 per household. With the primary asset backing that debt (our homes) also in decline, it is highly unlikely that consumer spending will stimulate the economy. Meanwhile, credit for even the most successful small businesses is tightening and venture-backed IPOs have dropped precipitously. In short, we cannot spend our way out of this crisis.

This situation has been a long time coming. While this may not be cause for despair, it does require us to rethink how we do economic development. We have taken for granted that our unemployment rate will remain low, that we can borrow cheaply and freely, that consumer spending will continue unabated. Funding for our economic development organizations was predicated on these assumptions as well. Here in Texas, sales tax receipts fund most of our communities. Those receipts will almost certainly decline. Contributions from the city (or economic development departments within city governments) are already in decline. This is due in part to reduced tax revenues (including property and sales) and will have an effect on capital projects – which we are already seeing with the tightening of municipal credit. Corporate contributions can hardly be expected to remain at their current levels. At the same time that budgets decline, expectations for what economic development organizations can do will increase. Here, then, are assumptions that follow ineluctably from an economy in decline:

• Business expansions will slow dramatically – making business recruitment efforts extraordinarily difficult.
• Credit for start-up and small businesses will be difficult to secure – forcing entrepreneurial programs to change expectations.
• Unemployment will rise even as requirements for skilled workers will increase – placing increased demands on workforce programs.
• Commercial real estate activity will decline – putting a damper on professional service growth.

So is the sky falling?

No. Markets are adjusting downwards but are not in free-fall. Aggressive intervention by the U.S. and Europe will help support an admittedly strained economy. But even if the sky doesn’t fall, can we expect a rapid return to a vibrant economy? The answer, unfortunately, is that we are likely to face a prolonged period of uncertainty and market volatility. The challenge at the local level is to return to fundamentals. And what are those fundamentals? A diversified economy, a trained and flexible workforce, and a forward-looking public sector that can itself act as a stimulus for growth. Each of these fundamentals, however, must be viewed creatively. Diversification must occur not only by sector, but by size of business, by access to international markets, and by finding a way to maintain R&D spending. A skilled workforce will mean a fresh look at apprenticeship and the engagement of technical and community colleges. The involvement of local governments is, however, one of the most critical and underappreciated elements of a responsible approach to a recession. A clear understanding of what infrastructure projects can be undertaken with reduced revenues, how contracts are awarded, and how economic development at the public-sector level can stimulate future private investment is the immediate challenge.

These are frightening circumstances. It may be too trite by half to suggest that the time has come to pay the piper. It has become clear, however, that deficit spending (whether by individuals or by government) is not a substitute for a sound economy.

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