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The FDIC’s latest look at our economy
The U.S. Federal Deposit Insurance Corporation recently released its spring 2006 assessment of our economy. Here are highlights from the study:
The economy
• The Massachusetts economy added 15,900 new jobs from fourth quarter 2004 through fourth quarter 2005, a gain of 0.5 percent. Construction employment led growth during the year, increasing by 2.6 percent, followed by professional and business services at 1.8 percent and finance, insurance and real estate at 1.7 percent. Although accounting for only slightly more than 4 percent of non-farm jobs in the state, the construction industry contributed over one-fifth of the increase in jobs during the year.
• Construction employment is highly variable over time and is significantly influenced by the behavior of housing prices. This was especially the case in the 1980s and early 1990s, but somewhat less so now. Given this relationship, the recent slowing in the rate of home price appreciation may portend some decrease in the rapid growth of construction employment.
• Of the construction subsectors, the largest growth rate was in the construction of buildings (2.9 percent) and in specialty trade contracting, which includes plumbing, painting, and electrical work (2.3 percent). The two subsectors accounted for about nine-tenths of all construction employment in Massachusetts.
• Manufacturing lost a significant number of jobs during the period, decreasing by 2.1 percent. Other sectors losing jobs were leisure and hospitality services and trade, transportation and utilities, each declining slightly by 0.2 percent.
Employment and population
• Since reaching a peak monthly average of nearly 47,000 early in 2002, initial unemployment insurance claims have declined to more moderate levels. As of January 2006, the six-month seasonally adjusted monthly average stood at 32,000.
• Massachusetts recorded a 4.8 percent decline in the 25- to 34-year-old cohort from 2000 to 2004, compared to a 0.5 percent gain for the nation. As the only state in the union estimated to have lost total population in both 2004 and 2005, it should not be a surprise that Massachusetts also lost population in the 25- to 34-year-old group. This group can set the pace for economic development as they join the workforce and form households.
• The young adult cohort actually increased from 2000 to 2004 in Suffolk County, which encompasses Boston, despite overall declines in population. The population of young adults in Hampshire County, which includes Springfield and Northampton, grew by 19 percent. In Barnstable and Franklin counties, both decidedly non-urban, the young adult population grew by 6.7 and 7.9 percent, respectively. The suburbs around Boston experienced the largest declines, especially to the west, where rental and affordable housing are in short supply.
Banking and finance
• With fewer low-cost core deposits to fund loan growth, banks are increasingly turning to more expensive non-core funding sources such as borrowings. As of Dec. 31, 2005, Massachusetts insured institutions posted a non-core funding to asset ratio of 24.51 percent, which is the 12th highest in the nation. Non-core funding typically is more sensitive to changes in market interest rates than core funding, and as a result, could further pressure net interest margins should rates continue to rise.
• Net interest margins have been on a general decline and have experienced pressure since the mid-1990s. They showed signs of improvement in 2002 but dropped sharply in 2003 and have exhibited pressure since. During 2005, net interest margins declined another four basis points to 3.46 percent.
• In 2004, the Federal Reserve began a series of increases in short-term interest rates that have continued into the early part of 2006. These increases led to a flattening yield curve as the difference in short-term rates and long-term rates narrowed.1
• A flattening yield curve often causes net interest margin compression as banks tend to borrow short-term and lend longer-term. Massachusetts’ insured institutions saw net interest margins decline slightly as funding costs began to increase late in 2005 in response to rising short-term interest rates.
For more detail, please go to http://www.fdic.gov/bank/analytical/stateprofile/NewYork/Ma/ma.xml.html
AIM’s Business Confidence Index edges off in April
The Associated Industries of Massachusetts Business Confidence Index declined fractionally in April to 57.4, a loss of six-tenths of a point for the month and seven-tenths since last April. “The Index has fluctuated within a five-point range, at modestly positive levels, for more than a year, failing to establish any clear-cut direction,” said Raymond G. Torto, Co-Chairman of AIM’s Board of Economic Advisors and Principal, CBRE Torto Wheaton. “April’s survey results indicate that employers were more positive about the situation of their own operations, and about business conditions within the commonwealth, but less confident about national conditions,” he noted, with rising energy prices a concern for many companies.
State indicator overtakes national counterpart
The sub-indices based on selected questions and characteristics showed a mixture of gains and losses from March to April, and also on a year-to-year basis. For example, said Sara L. Johnson, Managing Director of Global Macroeconomics, Global Insight, Inc., “The Massachusetts Index of conditions within the Commonwealth gained seven-tenths of a point reaching 53.4 in April, while by contrast, the U.S. Index of national conditions was off 3.1 for the month, at 53.0.”
“The state indicator led its national counterpart for the first time since November, and survey respondents expected national conditions to deteriorate further in the six months ahead,” Johnson said.
The Current Index, assessing economic conditions at the time of the survey, lost nine-tenths of a point in April to 56.5, while the Future Index for expected conditions in six months was down six-tenths to 58.2. Nevertheless, Johnson said, “Survey respondents do not foresee an overall decline in business conditions in the near future, as they did in late 2005.”
Mixed results among employers
The three sub-indices assessing the position of respondents’ own firms were likewise mixed in April. The broadest of these, the Company Index, added two-tenths of a point to 60.4, with the Sales Index down 1.1 to 59.7, a second consecutive decline, and the Employment Index added four-tenths to 54.5, recouping March’s loss.
Reviewing the data, Donald J. Barry, Jr., Senior Vice President at Citizens Bank of Massachusetts, said, “Confidence strengthened considerably in April among manufacturers (+4.1 to 61.8) while falling among other employers (-3.9 to 54.9) – over the year confidence moved apart for the two groups, rising 4.7 points among manufacturing employers and declining the same amount among other employers.” Meanwhile, Barry said. “Confidence levels converged statewide in April, falling in Greater Boston (-2.6 to 58.2) while rising in the rest of the state (+2.6 to 57.0).” By size of employer, survey respondents were very mixed, across and within size classifications.
Directionless economy means slow job growth
Commenting on the April survey results, Richard Lord, AIM’s president & CEO, said, “April’s mixed results mirror those for the past year. This directionless situation must be seen as negative, not neutral - because it has come at a time when new business investments and job creation are much needed.”
“During the past 27 months, Massachusetts has regained only one-fifth of the jobs lost in the previous 34 months - for a net employment loss of 4.8 percent since the peak in early 2001. In terms of job creation, this has been a very weak ‘recovery’ in our state.”
Jobs off by 2,400 after rising 8,400 month before
Massachusetts jobs were off 2,400 in March after rising 8,400 in February. The financial activities sector recorded significant gains while small job losses occurred in most other sectors. At 3,209,100, jobs are up 25,000 from one year ago.
The job numbers are the result of a monthly survey that uses U.S. Department of Labor Bureau of Labor Statistics methodology. More than 9,000 Massachusetts employers are surveyed to determine the number of jobs by industry. These estimates are the economic indicator used to gauge employment growth patterns in Massachusetts.
While 8,900 new jobs have been added over the year, over-the-month employment in professional, scientific, and business services was off by 600 in March to 465,900. Professional, scientific, and business services recorded the largest net job increase, and at 1.9 percent, tied with financial activities for the second highest annual growth rate of any industry supersector.
Over-the-year job growth in professional, scientific and business services centered in the professional, scientific and technical area, with management, scientific and technical consulting services (+6.4 percent), accounting and bookkeeping services (+5.5 percent), scientific research and development (+4.0 percent), architectural and engineering services (+3.7 percent), and computer systems design services (+3.0 percent) each increasing at rates well above the sector average of 1.9 percent. The overall super sector has added 27,400 jobs since bottoming out in June 2003, but employment is still off 41,600 or 8.2 percent from its January 2001 peak of 507,500.
Education and health services employment was off 800 from its all-time high in February, with employment essentially returning to January levels. At 593,100, education and health services has added 7,000 jobs from one year ago, with hospitals and ambulatory health care services accounting for most of the gains.
Trade, transportation and utilities employment was down 400 in March to 569,500. Employment is off 1,200 from one year ago with job losses concentrated in general merchandise stores, health and personal care stores, air transportation, and warehousing. Over the year gains were recorded in building material stores, furniture and home furnishings stores, clothing and accessories stores, and transit and ground passenger transportation.
Financial activities employment increased by 900 in March, its largest monthly increase since peaking at 232,000 in February 2002. Monthly gains were concentrated in banking and insurance. At a current level of 223,500, financial activities jobs are up 4,200 or 1.9 percent from one year ago, with banking, real estate, securities and commodities, and insurance all contributing to the gain.
Employment in leisure and hospitality was off by 300 in March. At 290,500, leisure and hospitality jobs are down 1,200 over the year on a seasonally adjusted basis, however, over the year growth is showing up in both food services and accommodation services.
Many small businesses can’t afford implementing environmentally sound practices
Small businesses have largely failed to implement environmentally sound practices that are becoming common at big corporations, an analysis of almost 100 Northeast companies has found.
It’s not about good public relations, but more about saving money. However, financing the initial costs of these practices to save more in the long run is easier for big companies than tiny businesses.
“It’s not to say the smaller firms are violating environmental laws or not doing the right thing. This is all about moving toward improvement. The smaller companies have had a harder time doing it,” said Leo Roy, director of environmental services for Vanasse Hangen Brustlin, an engineering firm that conducted the analysis.
One Massachusetts company, Intel in Hudson, built two treatment plants on its site and reuses 30 percent of its water, leading to a savings of 50 million gallons per year.
Small companies often lack the resources for such conservation projects, Roy said. Big corporations spend large amounts on development to begin with, and have experts who can find ways to save money and help the environment at the same time, one local planning official said.
Another blow to Cape insurance rates
Another hurricane forecasting model will likely mean higher property insurance rates for the Cape.
Strong and frequent hurricanes are predicted for New England over the next five years, necessitating loss insurance increases of up to 30 percent, according to Risk Management Solutions. The other major hurricane modeling company, AIR Worldwide of Boston, takes a more traditional approach, continuing to rely on long-term historical data.
As more private insurers walk away from Cape markets, the state Fair Plan becomes the only alternative. While rates for that plan also are rising, Massachusetts Attorney General Thomas F. Reilly at least decided to discard the Risk Management model for his purposes. If he had used that projection, it would yield a Cape Cod rate increase of nearly 60 percent. Instead, he adjusted the AIR model to yield a 1.2 percent increase.
Several insurance companies have concluded the risk of doing business on Cape Cod and New England’s islands is simply too great and walked away.
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