It's a grim winter day at VF Knitwear, a single-story apparel factory surrounded by a chain-link fence in Martinsville. Sitting inside the building, receptionist Deborah Preston, a 21-year veteran of the company, bravely maintains her smile as she answers the phone from her desk. "I can't believe this is real," says the middle-aged woman, who learned in November along with 2,600 other VF workers that she's losing her job.

Preston will be let go by the time most of VF's local operations shut down in April. Her husband, another VF worker, has already been laid off and is preparing for a new career by attending a local community college. Their predicament is being repeated thousands of times in this city of 15,000 that is marked by shuttered brick factories, weeded-over railroad tracks and lots of hope.

Global trade has a lot to do with the Prestons' plight, but the current recession that is devastating Virginia manufacturing isn't helping. The downturn, which began last March and may not bottom out until this year's second quarter, is slamming furniture, personal computers, semiconductors, telephones and switching gear, chemical processing, auto parts and metals. Some Old Dominion manufacturers are already facing job losses as bad as during the 1990-91 recession.

By contrast, this recession has treated other sectors of Virginia's economy a lot better. Overall, the recession's impact will be mild, according to an analysis of data gathered by Chmura Economics & Analytics, a Richmond econometric forecasting firm, for Virginia Business' annual "State of the State" report. Comparing the 1990-91 recession with the current one, Chmura tracked employment data from the peaks of the previous expansion to the troughs of the downturn.

While the woes of the glamorous technology sector in the big cities hogged most of the business headlines in 2001, the truly significant problems are in manufacturing hubs such as Martinsville, Lynchburg and numerous hamlets across Southside's manufacturing belt. Being hurt the most are apparel and textiles, which have already taken their lumps from international trade pacts such as the North American Free Trade Agreement. Job losses extend beyond those mainstays of Virginia's rural economy into furniture and other sectors. Furniture always has been a cyclical industry prone to layoffs, but the entry of China into the World Trade Organization could ease the penetration of Chinese furniture products into American markets, posing a long-term challenge to Virginia manufacturing operations. "The old line manufacturing industries have been deteriorating for many years," says Hugh Keogh, president of the Virginia State Chamber of Commerce. "They would diminish with or without NAFTA."

The grim picture in manufacturing, however, is offset by the relatively strong performance in Virginia's other industries. Overall, Virginia has suffered only a modest, 0.34 percent decline in employment so far during this recession, according to November employment figures, the latest available. Only eight other states have fared better. North Carolina, with an industrial mix similar to Virginia's, is in worse shape with a 1.39 percent drop in employment.

Another surprising Chmura conclusion: Virginia actually grew at a more modest pace over the past decade than many might expect. Despite its booming tech economy, the state's economic growth during the 1991-2001 expansion registered at 26.6 percent, ranking it only No. 19 in the country. Nevada ranked No. 1 at 70 percent. "Virginia was above average, but not at the top of the pack," says Christine Chmura, president and senior economist of the research firm. By comparison, the 1980s decade actually saw much more robust growth because of the Reagan-era defense buildup.

This may come as head-scratching news given the explosion of high-tech firms such as Internet services and telecommunications, especially in Northern Virginia from the mid-1990s to 2000. But take away NOVA's contributions to the state's economy and ROVA (the Rest of Virginia) wouldn't have that much to brag about.

Indeed, NOVA high tech is shielding the state from a much worse recession. High tech is growing much faster than the U.S. in general, and Northern Virginia is propping up the state's economy. For the 12 months ending on November, for example, employment in Northern Virginia rose 1.7 percent, translating into 20,100 new jobs. Yet, for the same period, Virginia had a statewide increase of only 19,400 jobs. Thus, NOVA more than made up for areas that had big job cuts, such as Danville, which lost 2,270 jobs, and Lynchburg, which saw 1,100 jobs vanish.

Many economists believe that the recession will be a mild one ending in the second quarter. But, warns Chmura, overall recovery is likely to be long and slow. "It can take more than two years to get up to pre-recession levels and a lot of business people forget that."
The high-tech sector isn't immune from problems. The broad employment numbers obscure wrenching transitions within Northern Virginia's tech-intensive economy. The sector that includes telecommunications shows a disturbing 7.4 percent drop in employment. This drop is due in part to the glut of phone equipment and the demise of such marquee name firms as Teligent and PSINet after the tech bubble popped in 2000. Chmura expects a round of negative employment data by March. Other tech sectors such as computer and data processing are rapidly decelerating, from a 6 percent growth rate in January 2001 to 1.5 percent. Also, the loss of tech jobs, which pay an average of $68,640 a year compared to $35,200 a year for non-tech sectors, has a disproportionate impact. "Northern Virginia still has a very favorable mix right now," Chmura says. "But that's not keeping Northern Virginia out of the recession."
The war against terrorism may buffer Northern Virginia and Hampton Roads by bolstering military spending and homeland defense, Chmura says. Specific numbers for defense are hard to come by since they are spread over many sectors. Yet stalwarts such as Newport News Shipbuilding have backlogs for new naval vessels, and the nascent but promising biodefense sector is seeing more contracts to fight against anthrax by terrorists. In mid-January BAE Systems North America, a defense and aerospace company, announced the addition of 1,000 new jobs in Fairfax County.

The Charlottesville and Roanoke economies are sailing through the recession relatively unscathed. The once-strong Richmond-Petersburg area is weakening, especially in manufacturing, now suffering a 7.6 percent slump. Chmura attributes that to poor markets for semiconductors and chemicals. Hampton Roads is hurting as well, albeit not by as much, 4.1 percent. Major layoffs include personal computer maker Gateway and electronics giant Canon. Analysts believe, however, that Ford's massive pickup truck plant in Norfolk should be spared the thousands of job layoffs.

The laggards, clearly, are in Southside, Lynchburg and the coalfields of the far Southwest. Among Virginia's metropolitan areas, Danville in Southside is feeling the most pain, with a 17 percent slide in manufacturing employment from the peak of the latest economic boom, September 2000, to last November, the latest month for which figures are available. In just a few short months, Southside's employment losses are nearly equal those of the 1990-1991 recession, according to Chmura's data. Among Virginia's metropolitan statistical areas, Lynchburg also has fared badly, suffering from a drop in phone making and related activities and a 9.9 percent drop in manufacturing overall.

The toll of layoffs in these regions is sobering. Since 1993, Henry County and the city of Martinsville have lost more than 9,000 jobs. Largely due to NAFTA, revered Martinsville apparel firm Tultex closed its doors in 2000. In November, due to a corporate-wide restructuring of Greensboro, N.C.-based VF Corp. that is costing 38,000 jobs, VF Imageware in Martinsville announced the closing of three of four plants in the city and Henry County, ending 2,600 jobs in a region of only 65,000 inhabitants. Then last month Burlington Industries announced that it is selling or closing five clothing plants, including ones in Halifax and Clarksville.

Furniture makers are struggling as well: Stanley Furniture has laid off 400 and Hooker Furniture has had seen firings, too. Unemployment in Martinsville is a whopping 11.2 percent - roughly four times that of most Virginia localities. Farther west, Volvo Trucks North America plant in Pulaski County cut more than 700 jobs last year. In Russell County, Alcoa Wheels announced in November it would close its aluminum wheel plant by August, laying off 220 people.

While some sectors such as truck makers and auto parts are likely to rebound when the recession abates, even bleaker times are in store for apparel, textiles and perhaps even furniture. Textile and apparel work forces have shrunk by roughly one third nationally over the past 10 years, leaving about 449,000 remaining jobs, says Gary Shoesmith, an economist and professor at the Babcock Graduate School of Management at Wake Forest University in Winston-Salem, N.C. "About half of these jobs are living on borrowed time."

While NAFTA has moved many U.S. apparel operations to Mexico in the past decade, those jobs left in the states, including Virginia, now will face profound new threats from China, says Shoesmith. Last year, Beijing was admitted into the World Trade Organization, which gives the Chinese relief on tariffs as well as other privileges. "With the WTO and China, it is going to be much worse," he adds. The Chinese have identified textiles as a star sector, and it will be receiving hefty government subsidies. With labor so incredibly cheap, Shoesmith says the Chinese can afford to have as many as 30 quality inspectors pore over each item of clothing, compared to roughly three inspectors at U.S. plants. "You are going to have superior products at much lower prices." Adding injury to insult, unlike Mexico, China is not likely to use U.S.-made fabrics and polyesters in its clothing, hurting yet another American industry.

Furniture is also at risk. "It is following right behind textiles," says Shoesmith, albeit at a slower pace. China and other Pacific Rim countries will be able to attack U.S. furniture makers with more finished, lower-end products. This will result in "a huge amount of restructuring due over the next 10 to 20 years," he says. U.S. furniture firms will be forced to streamline their product lines and become much more efficient at deliveries. "You're going to have to provide products in eight days, not eight months," says Shoesmith.
Some Virginia furniture makers are already anticipating the Chinese onslaught. Pulaski Furniture and Hooker Furniture have been importing finished products from China that complement their domestic sales strategies, says Wallace "Jerry" Epperson, a furniture industry analyst and managing director of Mann, Armistead & Epperson, an investment banking house in Richmond. Imports include bedroom sets, desks and entertainment centers. Epperson says China's entry into the WTO won't have that much impact on furniture because companies already have plenty of export clout. Unlike apparel firms, he says, U.S. and Virginia furniture makers are protected by the fact that furniture is harder to ship since it is much heavier and bulkier than clothing.
How long will the recession and its effects last? J. Alfred Broaddus, head of the regional Federal Reserve Bank in Richmond, expects that the negative activity will "level out in the first quarter and then accelerate." Some economists, he says, believe the recovery might be stronger than anticipated just a few weeks ago. Reasons include continued low inflation, liquidated business inventories and recovering consumer confidence.

While he says he's "cautiously optimistic" about a recovery, there still are some downsides, such as continued concerns over corporate profits, a lagging recovery in business investment and weak profits, especially in manufacturing. "There is a good chance that this recovery might not get going until the second half (of the year)."
Chmura's predictions are more circumspect. She estimates "recovery by mid-2002 with a slow rebound." Hampering a quick comeback will be over-capacity in the tech sector, softness in commercial real estate and increasingly risky residential real estate. Employment growth changes in Virginia, she surmises, will drop to a negative 1.5 percent this year before recovering to a lackluster 0.9 percent in 2003.

Should Chmura prove correct, the fallout will seriously impact state spending and aid for economic recovery in hard-hit areas (see story, page 20). To underline the point and draw bipartisan support for a new and tighter biennial budget, Gov. Mark Warner hosted a January meeting of 20 business leaders plus economic experts Chmura and Broaddus to discuss the state's economic and fiscal prospects. Warner must address budgetary woes left over from outgoing Gov. Jim Gilmore, including a $1.3 billion budgetary shortfall. Warner's first order of business: "Let us do no more harm."

Although the budget mess will hamstring Warner's efforts at finding new industries, he is trying to find remedies. Immediately after his inauguration on Jan. 12, the governor signed an executive order setting up a task force, headed by incoming Secretary of Commerce and Trade Michael Schewel, to find ways to assist communities facing an economic crisis, such as the shutdown of textile plants in Southside.

Money for such recovery efforts will be hard to come by, however. Virginia's budget is among those in the worst shape of all 50 states, says Scott D. Pattison, executive director of the National Association of State Budget Offices in Washington, D.C. While some 39 states face budgetary shortfalls, Virginia faces one of the worst crunches. Only California's woes exceed Virginia's by a significant degree. "Virginia is facing a very serious situation," says Pattison. In terms of remedies, Warner is considering layoffs of state employees and health cuts, although he vows to keep a campaign promise to keep teacher salaries competitive.

Back in Martinsville, Deborah Preston contemplates how the VF Imagewear layoffs will affect her community along with her family. The bleak employment picture is already forcing the city to close and consolidate some schools. "I hate to think about what this does to the community and the school system," she says. There's little hope for the apparel industry, recession or no. "There's no knitting, dying and finishing anywhere in Virginia that I know of. It's just prep and packing now," she says. Too bad that jobs in promising new industries can't simply be packaged and sent to places like Martinsville.