Slow home sales could continue to drag on Virginia’s economy
- August 1, 2008
By Robert Burke
Editor’s note: Virginia Business has teamed up with up Chmura Economics & Analytics in Richmond to take stock of the commonwealth’s economy. This report offers an overall assessment and a look at conditions in regions throughout the commonwealth.
If you’re looking for good economic news, good luck, because there’s not a lot of it out there. In Virginia and across the U.S., many numbers that economists track now point in the wrong direction, says Richmond-based economist Christine Chmura.
Unemployment is up and job growth is slumping, with many losses in Virginia’s hard-hit construction sector. Virginia’s job growth was an anemic 0.5 percent for 12 months ending in April, compared with 0.3 percent in the nation. Houses aren’t selling, consumer confidence is dropping and gas prices are pushing the cost of almost everything up. “The economy, at best, is creeping,” says Chmura.
A standard rule of thumb for defining a recession is two consecutive quarters of declining real (inflation-adjusted) gross domestic product. Real U.S. GDP grew 1 percent in the first quarter, but there’s growing consensus that we’re in a recession. Chmura says the National Bureau of Economic Research likely will declare that the recession began in the first quarter and that it will last into the third quarter before the national economy begins a slow recovery.
The question now is: How long will it take to get through this? This spring Chmura predicted real U.S. GDP would shrink 0.3 percent in the second quarter before beginning a slow rebound over the next several quarters. But the economy is shedding job 438,000 in the first six months of this year. With the Federal Reserve signaling it will hold firm on interest rates, home prices still falling, banks tightening credit, and oil prices rising, Chmura now is leaning toward a slower recovery.
It’s not that things have been going terribly around the state, where growth typically is above the U.S. average and unemployment is lower. Virginia’s GDP was nearly $321 billion in 2007, up 1.9 percent from 2006, according to the U.S. Bureau of Economic Analysis, which has since stopped tracking state-level GDPs.
In the 12 months ending March 2008, most regions around the state added jobs, though not many. Meanwhile, the state’s biggest regional economies, in Hampton Roads and Northern Virginia, still are getting billions of federal dollars. Plus, port business in Hampton Roads continues to grow but at a slower clip.
Even so, the downturn in the housing market and the spillover effects of the subprime mortgage crisis on the banking industry are going to be tough to escape and could be a drag on economic recovery in many places, says Chmura.
Northern Virginia, for example, saw months of double-digit appreciation in home values a couple of years ago. Now, just 31 percent of potential buyers in the Northern Virginia market could afford a median-price home in the first quarter, according to Chmura estimates, compared with 40 percent statewide and nearly 44 percent in the U.S. Overall, six of the state’s largest metro areas were above the national average in affordability during the first quarter.
The presence of fewer home buyers means less construction, lower retail sales, and so on. “This time it doesn’t matter how much the Federal Reserve lowers interest rates,” Chmura says. “People are not going to start buying homes until they become more affordable. So this slow period is different.”
Sectors faring poorly in Virginia include manufacturing, which shed 3,888 jobs in the past year. Construction lost 5,645 jobs, while the finance, insurance and real estate sector shed 3,124 jobs. The leading sector for employment growth was education and health, which added 11,546 jobs.
Chmura says it’s not unusual for colleges to see higher enrollment during slow economic times, because students can’t find jobs and decide to stay in school. Plus, the health-services sector is generally immune to business cycles.
Federal spending continues to pump up key economies here, mostly in Northern Virginia and Hampton Roads. Even that is slowing, though. “We just don’t have the growth rate” seen a few years ago, when federal spending climbed about 9 percent a year in the Washington region, says John McClain, deputy director of the Center for Regional Analysis at George Mason University.
Last year’s spending was up just 2.5 percent over the previous year, he says. So while the region is still adding jobs it won’t add as many. This year’s projection is 12,000 new jobs, compared with 35,000 in 2006. “It hasn’t gone down; it’s just slowed way down,” McClain says.
What’s to come? Building permits will keep dropping this year and next year, Chmura predicts. Job growth will be minimal for 2008 — 0.5 percent — but climb 1.2 percent next year. Retail sales should stay flat at 0.3 percent growth this year but climb 3.6 percent in 2009, she says.
Still, much depends on how other factors — inflation, fuel prices, mortgage and unemployment rates — play out. Yet in the downside of a business cycle it’s worth keeping a little perspective, says McClain. “These aren’t bad times, really. They’re only bad by comparison to what they were.”
The Richmond region is escaping the downward spiral in construction jobs that hit other regions. In the 12 months ending April 2008, its construction employment ticked upward 0.6 percent, while statewide construction employment dropped 2.3 percent.
Chmura says that growth in the region is likely to continue, because construction workers are finding jobs in the six-year, $2 billion expansion that began last summer at Fort Lee, an Army base on the banks of the Appomattox River near Petersburg. The 2005 Base Realignment and Closure plan calls for developing a new logistics training center at Fort Lee and adding 16,000 personnel and contractors by 2011.
The biggest job gain for the region came in the government sector, which added 2,260 jobs in the 12 months ending in April 2008. Sectors doing relatively well included leisure and health/education, adding 1,752 jobs and 2,196 jobs, respectively.
Some sectors slipped: the information sector dropped 9.5 percent, equal to 1,113 jobs. The finance, insurance and real estate sector (FIRE) dropped 566 jobs, a 1.2 percent decline regionwide. Losses in manufacturing jobs also slightly outpaced the state decline of 3.7 percent for the same period. Overall, the region added 5,313 jobs in the 12 months ending in April.
The region took a major hit in April when regional employer Wachovia Securities announced plans to lay off up to 929 employees in the Richmond area, as the firm works toward completing its merger with A.G. Edwards and its move to St. Louis. The job cuts began this summer and continue through early next year. When the merger was announced last spring Wachovia had about 2,600 employees in the region, but that will drop to 500-600 when the merger is done.
Employment in the region grew 1.8 percent last year and is expected to slow to 0.5 percent this year before rising slightly to 0.9 percent next year. The region’s housing market is slumping too, Chmura says, with building permits for single-family homes down 23 percent last year and expected to continuing to decline this year and in 2009.
Tourists pumped $890 million into the Virginia Beach economy last year, creating about 11,000 jobs and generating $78.4 million in fees and taxes. But this year they’re likely to spend some of that cash pumping gas instead, which will hurt the region’s tourism industry.
With gasoline going for more than $4 a gallon, consumers are cutting back and beach trips are on the chopping block, says Gilbert Yochum, professor of economics at Old Dominion University’s College of Business and Public Administration, and a leader of the school’s Economic Forecasting Project.
There’s already some hint of trouble: Hotel revenues for Hampton Roads for the second quarter are down 2.1 percent from the same period a year ago, to $219.4 million, according to the ODU project. Back in January ODU forecasters had predicted a 2.4 percent annual increase in hotel revenues for 2008, but with gas prices climbing, Yochum is less optimistic. The average household will have about $800 less this year in discretionary spending, “and that might be a vacation.”
With housing prices down as well, even those who have the cash don’t feel quite as wealthy, he says. Plus, lenders are less willing to refinance mortgages “so it’s more difficult to extract equity. When you put those three together, it’s not the best news for tourism.”
Fortunately for Hampton Roads, the Port of Virginia is a major economic pillar. The port recently signed a $500 million, 10-year contract with a consortium of ocean carriers, securing 97 percent of its customers. The Virginia Port Authority is certainly not unscathed by a slowing economy, but the port is still growing. The port expects container traffic to grow 2.5 percent in 2008, slower than the 3.2 percent growth in 2007.
Like Northern Virginia, this region enjoys a strong level of defense-related spending. In 2008 spending is expected to rise nearly $1 billion to $18 billion, Yochum says, which has the effect of “inoculating” the region from the effects of a slumping economy. That’s good news, because housing construction is plummeting here, too, down 25 percent this year. “That extracts a lot of economic growth… but the big picture is the military and the port will keep the area from recession.”
When the housing market was hot here, it was very hot. But now it’s not, and as a result that sector of the region’s economy is taking a harder hit. Northern Virginia lost 64,617 construction jobs in the year ending April 2008, according to Chmura’s data. That 5.2 percent drop is more than twice the 2.3 percent decline in construction jobs statewide over the same period.
Those jobs likely won’t come back soon, says John McClain, deputy director of the Center for Regional Analysis at public construction projects — the new Woodrow Wilson Bridge over the Potomac River, and the Springfield Interchange — are completed. Chmura says building permits will drop nearly 20 percent this year and another 12 percent in 2009, meaning the residential building market may not rebound until 2010 or 2011.
Other slumping sectors include the finance, insurance and real estate (FIRE) sector, which dropped nearly 2,129 jobs in the 12 months ending April 2008. Even the retail sector, traditionally a sector of steady growth, has slipped, dropping 457 jobs during the 12 months leading up to April 2008. “That’s a big change,” McClain says. “Retail never grows fantastically but it’s surprising to see it turn negative.” One likely reason: fewer new-home owners out there shopping.
And now Northern Virginia, home to more than a third of the total jobs in Virginia, will likely find its job total growing this year at a sluggish 0.4 percent, increasing to 1.8 percent in 2009.
But there are also signs of the core strengths it has that other regions lack. For example, more than 4,800 high-tech jobs were created in the 12 months ending in October 2007. And, its professional and business services sector added 7,686 workers in the past year, much of that driven by federal spending, which was nearly $55 billion in the Washington region in fiscal year 2007, with Northern Virginia collecting about $29 billion, says McClain.
Even that federal spending, though, has slowed. “We just don’t have the growth rate” seen a few years ago, when federal spending climbed about 9 percent a year in the Washington region. The 2007 spending was up just 2.5 percent over the previous year, he says. So while the region is still adding jobs, it’s not going to be adding as many. Back in 2006 Northern Virginia added more than 35,000 jobs, but this year it’s expected to add 12,000. “It hasn’t gone down, it’s just slowed way down.”
Residential construction is way down in the Shenandoah Valley as it is almost everywhere else. Building permits for single-family homes dropped 29 percent in the year ending in March, to 45 a month, according to Chmura’s data.
But the other projects under way seem to be softening that blow. SRI International, a nonprofit research institute, broke ground in December in Rockingham County on a new 40,000-square-foot building for its Center for Advanced Drug Research, which now works out of space at James Madison University. The hope is that the facility, which will open next summer, will help spur other bioscience investments in the region.
There’s also a new hospital — the $280 million Rockingham Memorial Hospital, on 254 acres in Rockingham County. In addition, major regional employer Merck & Co. is planning expansion, and James Madison University is building a $100 million performing arts center that will open in 2010.
In the year leading up to September 2007 (the most recent data available) construction employment here grew slightly, 1.1 percent, while the rest of the state dropped 4 percent. The new projects “certainly helped to ease that slowdown in residential” construction, says Brian Shull, director of Harrisonburg’s economic development department.
Chmura’s data for the 12 months ending April 2008 shows employment growing here 1.3 percent, equal to 861 jobs. Though retail sales have been slowing here, dropping 2 percent in 2007, Chmura predicts most of that loss will be made up this year. Shull says one reason is that other localities — such as Waynesboro and Albemarle County — are stealing away shoppers by beefing up their own retail sectors.
But the region’s high-tech industry grew 5.7 percent in the year ending October 2007, the highest growth rate among the state’s metro areas. A major new project in that sector is Washington-based DBT Data’s new $120 million data center in Harrisonburg.
Chmura predicts slightly better times for the region’s employment. The number of jobs rose 1 percent last year and she predicts a 1.3 percent increase for 2008, and nearly 2 percent increase in 2009.
For the year ending March 2008, Danville has the unhappy distinction of being the only metropolitan statistical area in Virginia to have an unemployment rate higher than the national average. Danville’s was 7.6 percent (it has since dropped back to 6.3 percent) while the national average was 5.1 percent. But in this small-sized MSA — with a work force of about 51,000 people — that translates to only about 3,200 people out of work.
So the arrival of large employers is welcome here. And the Danville region, which includes the city of Danville and surrounding Pittsylvania County, has had good news of late. In February, Com.40 Ltd., a Polish firm that makes mattresses and upholstered furniture, announced plans to build a manufacturing facility in the city that would create 800 to 900 jobs. Construction is supposed to begin at year’s end. In May, Sweden’s Swedwood — an IKEA subsidiary — opened its new 903,000-square-foot furniture manufacturing facility in Pittsylvania. It opened with about 100 workers and could have about 260 on the payroll by year’s end.
One reason the region can attract new employers is the lower costs of doing business here. The average weekly wage runs around $592, compared to $992 statewide, according to the Virginia Employment Commission.
Its housing market also is suffering a particularly deep slump, with building permits for single-family homes down 40 percent in the year ending March 2008, compared to 27.6 percent statewide during the same period. Retail sales are growing slightly, up 1.1 percent in the 12 months ending April 2008.
The next 18 months look flat for the region, according to Chmura’s forecasts. Employment will dip slightly this year and stay flat in 2009, she predicts, and building permits will likely drop another 22 percent this year. Despite the gains in retail sales early this year, sales are expected to climb just 1.4 percent this year and decline in 2009. The retail sector should get a boost though, with the opening this summer of Coleman MarketPlace, a 550,000-square-foot shopping center with a mix of big-box stores and smaller retailers.
This may be the best place in the state to buy a home. While Northern Virginia and other urban areas around the state have seen double-digit increases in housing prices in recent years, Chmura says, the Roanoke region “saw only one quarter of double-digit appreciation over the past 10 years. Homes are much more affordable there.”
Better prices are producing a stronger-than-average construction sector. In the 12 months ending in March 2008 building permits here for single-family homes declined, 1.5 percent. But compare that to the rest of the state, which averaged 27 percent drop in building permits. In fact, each of the other 10 metro regions in the state posted declines of 20 percent or more in the number of building permits issued during the same period, Chmura says.
Building permits actually climbed about 6 percent in the first quarter of the year, but Chmura predicts a decline — 7.6 percent for 2008. The region’s job market is stagnant this year and will be next year too, with job growth under 1 percent, she says.
While it might be a good place to buy a home, it’s been a tougher-than-average job market lately. The region lost jobs in seven of 12 job categories compared to the state’s other metro regions, according to Chmura data. The biggest gaps came in professional and business services, which lost 523 jobs in the year ending March 2008, and manufacturing, which lost 439 jobs.
The region’s biggest gain came in education and health jobs, which increased 1,043 during the same period, a 4.6 percent gain nearly double the state average of 2.4 percent. Chmura attributes some of that gain to expansions by Carilion Clinic, which has six hospitals and 82 primary-care practices around Southwest Virginia and more than 10,000 employees. The clinic added more than 1,000 employees during a yearlong growth spurt ending in July 2007, says spokesman Eric Earnhart.