News Column

Economic Uncertainty Still Looms

Nov. 5, 2012

Katie Brandenburg, Daily News, Bowling Green, Ky.

When voters head to the polls Tuesday, the economy and jobs will be foremost on the minds of many.

The economy shows signs of being just as important to voters as it was in the 2008 presidential election, when the country's economy was still in recession. In total, 87 percent of registered voters said the economy is very important to their vote now, as it was in 2008, according to a report by the Pew Research Center for the People and the Press released in September.

The importance of jobs to voters has grown, with 83 percent of registered voters rating jobs as very important in September 2012 versus 80 percent in October 2008.

In the wake of those economic concerns, the percentage of people who say other top political issues, such as terrorism and immigration, are very important has dropped from 2008 to 2012, according to the report.

Presidential candidates Mitt Romney and President Barack Obama are offering different solutions to voters on how to boost an economy that has yet to recover from the recession, but simply seeing an end to the election cycle and a leader for the nation selected -- regardless of who he is -- may have a positive impact on jobs and the overall economy, according to some.

Business can handle anything but uncertainty, according to Don Vitale of Manchester Capital in Bowling Green.

The uncertainty created by the presidential election is having a generally paralyzing effect on business, he said.

After the outcome of the election is clear, then businesses will be able to react to the policies that the winner will likely lay out when he takes office, Vitale said.

Catherine Carey, chair of the Economics Department at Western Kentucky University, is of a similar opinion. She said it's hard for businesses to make long-term investments when so many future policies are unclear.

"They're making 30-year investments when they don't know what the rules are going to be next year," she said.

While the real estate market in the Bowling Green area is seeing signs of recovery, that recovery will likely become stronger after the election, said Steve Davis, president of the Realtor Association of Southern Kentucky.

"Politics is going to change no matter who is elected in Washington, and it's going to affect our jobs, it's going to affect our housing industry, I feel like in a positive way," he said. "I feel like that's what we need to get through to get things started."

He said he expects to see real estate activity in spring of 2013 to be much higher than that seen in recent years.

Effects of the recession locally

A diversity of industries in Bowling Green and the Warren County area means that, though the recession hit some sectors hard, the overall effects have been more mild than in many other areas of the country, Vitale said.

"We are enjoying a faster recovery, I believe, because of our attractive balance," he said. "By that I mean, we are a center for health care in the region, for higher education. We are a retail center. We have a wonderfully diverse industrial manufacturing base as well as a strong agricultural sector that is enjoying attractive commodity prices."

The principal negative impact that the area experienced during the recession was in the manufacturing sector. Assembly plants, parts manufacturers and people involved with the sale of automobiles saw a sharp decline in 2008 and 2009, Vitale said.

But fluctuations in areas such as retail and manufacturing were buffered by the industries of education, health care and to some extent agriculture, he said.

Some sectors of the economy have seen growth in employment in recent years, Carey said. The sectors of education, heath services and government were least affected by the recession in the Bowling Green area while manufacturing, transportation and utilities and construction employment have seen the biggest declines and haven't yet recovered to pre-recession levels.

The Warren County area has weathered the recession better than many areas of the country, according to Brian Strow, associate professor of economics at Western Kentucky University.

Education, which is a big part of the local economy, tends to do particularly well during periods of recession because students will often make the decision to stay in school and pursue higher levels of education when work is scarce.

Business-friendly policies, an educated workforce and good infrastructure mean the county is poised to take advantage of recovery, Strow said.

"I think largely we've positioned ourselves well," he said. "When there is an increase in America's economic growth, we'll be in good position to take advantage of that. It's just harder to buck the national trend."

While the unemployment rate in the area is coming down generally, employment is staying relatively flat, Carey said. That's possible because of a decline in the labor force, which happens most often when people stop actively seeking jobs or sometimes move out of the area in question, she said. The labor force in the Bowling Green area had fallen by nearly 2 percent by September 2012, according to information provided by Carey.

In the Bowling Green area, the overall employment level is short about 1,860 jobs compared to the number of jobs when the recession began, according to information provided by Carey. Manufacturing employment in the area is down by 20 percent since the start of the recession and trade, transportation and utilities employment is down about 8.5 percent.

"We're doing better than we were, but we've got a ways to go," she said.

A report released Friday showed that nationally, the unemployment rate rose to 7.9 percent from 7.8 percent in September, mainly because many more people began looking for work, and not all of them found jobs, according to The Associated Press.

The Kentucky Education and Workforce Development Cabinet reported last week that the Bowling Green area's preliminary unemployment rate for September 2012 is 6.6 percent, down from 7.5 percent in August and 7.9 percent in September 2011.

Local signs of improvement

The best sign Bowling Green City Manager Kevin DeFebbo sees that the city is recovering from the recession is that there is a new home going up in his neighborhood. For about six years, he's seen no development there. In the last few months, a house started going up nearby, he said.

Builders are still doing less work than before the recession in southcentral Kentucky, and most people are still sticking with building more custom than speculative houses, said Anita Napier, CEO of the Builders Association of South Central Kentucky.

However, the number of building permits issued is going up.

In Warren County, the number of building permits dropped from 905 in 2006, with 462 of those being for single-family residences, to a low of 443 in 2009, with 196 of those being for single-family residences. In 2012 to date, 552 permits have been issued -- 255 of those being for single-family residences.

In Bowling Green, 336 building permits were issued in 2007 for construction worth about $74.9 million. They hit a high in 573 permits worth about $128.4 million in 2008 and dropped to 262 permits worth about $98.6 million in 2011. This year, 446 permits have been issued worth about $145 million.

Napier also believes people will always want to own a home, which is good for builders. "We believe that home ownership will always be the American dream," she said.

A Pew report from April 2011 showed that 81 percent of adults polled agreed that buying a home is the best long-term investment a person can make. In the same report, 81 percent of renters said they would one day like to buy a home.

Napier said that, while the worst effects of the recession on members of the builders association came in the latter part of 2008, it hit much of the nation earlier that year.

"People just kind of migrated down I-65 and actually sought out homes here, and there were still jobs here," she said.

There is a low cost of living in the area and good business practices tend to be taught, so many builders were able to hold on for longer than those in other parts of the country, Napier said.

Builders in southcentral Kentucky were also able to see signs of market declines in other parts of the country and started to scale back when the recession hit, she said.

Warren County has always been an area where fluctuations in the real estate market tend to be milder than in many other places, Davis said.

He said he's starting to see home values and sales go up. The real estate market in Bowling Green started to experience the effects of the recession in 2007, with a steeper decline in sales and prices in 2008. So far, 2012 looks as though it is going to double 2011 in terms of real estate activity, he said.

In Warren, Butler, Allen, Logan, Simpson and Edmonson counties from January through October, homes sold with a median price of about $125,900, Davis said. In 2008 during the same period in the same area, homes sold with a median price of about $119,900, he said.

Housing prices are recovering in the Bowling Green area, Carey said. They increased by 1.67 percent in the first quarter of this year, compared to an average of 0.89 percent nationally, and 1.34 percent in the second quarter, compared to a national average of 1.8 percent.

Many people, however, are choosing to rent, Davis said.

Uncertainty about the real estate market, coupled with the inability of some to qualify for home loans, have played into the robust demand for rental housing, he said. Another factor is that some who have moved to the area have been unable to sell homes in other parts of the country and are waiting to do so before buying again.

In Bowling Green city government, there are also signs of recovery. This fiscal year is the first that revenues are anticipated to rise past the levels of those in 2007, though not by much, DeFebbo said.

The city derives most of its revenues from its occupational tax, meaning that as unemployment increased, revenues to the city decreased. In the current fiscal year, more than 71 percent of revenues are expected to come from occupational fees.

But overall, Bowling Green government has managed the recession effectively, DeFebbo said.

The city first started to make adjustments because of the recession in December 2007, though prior to that point the city had started to reduce government costs and eliminate unnecessary positions based on direction from the Bowling Green Board of Commissioners, he said.

"Some cities didn't take the recession seriously," DeFebbo said. "We took it serious and early."

The city's workforce has been reduced by about 5 percent overall since 2006, which has helped save about $5 million in salary, benefits and retirement costs, he said.

The worst effects from the recession on city government came in 2009 and 2010, when about $3.6 million was cut from city budgets, DeFebbo said.

"We've created what you call a new normal," he said.

That new normalcy includes a focus on the essentials, investments in a few key areas and a focus on operating with fewer employees, DeFebbo said.

Causes of the recession

One key factor behind the economic recession was excess spending by consumers, businesses and government in the early 2000s, Strow said.

"Every sector of the economy was borrowing more quickly than normal, and the problem is, we woke up one day and figured we had to start making interest payments on that debt and it became difficult," he said.

The government had budget surpluses in 1999, 2000 and 2001, but after that point, more money started going to big-ticket items such as a Medicare prescription drug benefit and conflicts in the Middle East, he said.

While budget surpluses are far from normal for the government, "somebody had to actively do something to stop that trajectory," Strow said.

Government debt can create slower economic growth in the country as a whole, Strow said.

The weak economy can also be tied to the crisis in the housing market, Carey said.

Beginning in 2004, increases in interest rate adjustments in the subprime mortgage market spurred a large number of delinquencies and foreclosures that had a large impact on the banking industry, according to a paper Carey wrote about the housing market in Bowling Green.

That crisis, coupled with factors such as falling home prices, higher interest rates, falling stock market prices and rising energy prices, contributed to a collapse of the housing market, she wrote. That collapse and the subsequent recession led to higher rates of unemployment and slowing income growth nationally and locally.

The recession technically began in December 2007 and ended in June 2009, according to information provided by Carey. Since June 2009, the economy has been in recovery.

Opinions differ on the impact that stimulus spending and bailouts in the auto and banking industries by the federal government have had on the economy, Carey said.

"Economists are divided just like the politicians are on these issues," she said.

Whenever you have such a large stimulus, there are going to be some short-run effects because of the amount of money in question, Carey said. It's unclear what would have happened if bailouts and stimulus hadn't been put into place or if short-run effects will prove to hold true in the long term, she said.

Locally, the city of Bowling Green received about $150,000 in money from federal stimulus funds, which was used to do a stormwater project in the Tax Increment Financing district, DeFebbo said.

"Stimulus funding in Bowling Green was modest at best," he said.

Vitale said stimulus and bailout spending were felt locally through the GM bailout and, most important, in infrastructure spending on roads such as Interstate 65.

Strow said bailouts and large amounts of stimulus spending have simply added to government debt, which in turn slows economic growth.

Instead, the government should take action by doing things such as lowering tax rates, specifically corporate tax rates, getting rid of tax loopholes and deductions and reforming entitlements, he said.

Such suggestions were made by the National Commission on Fiscal Responsibility and Reform, a bipartisan group, Strow said.

"There's agreement from economists on what you need to do, it's just whether or not you can get a politician to bite," he said.

Source: (c)2012 Daily News (Bowling Green, Ky.) Distributed by MCT Information Services

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