Presented by Dr. Ken Troske, University of Kentucky Sturgill Professor of Economics and Director, Center for Business and Economic Research, the overview wasn’t nearly as gloomy as one year ago. To quote Dickens, “Marley was dead: to begin with. There is no doubt whatever about that.” Or at least the recession is dead, and everyone on the panel of experts was in agreement that, economically speaking, we are in the recovery phase. Unfortunately, during the recovery phase, unemployment can still be quite high and output growth can still be minimal.

As we start to look back and review some of the data from last year’s recession, a few things stand out and were noted by most, if not all, of the presenters. First, Kentucky was hit pretty hard. Our GDP declined more and our unemployment as a commonwealth is higher than the rest of the country. Second, manufacturing and communities that rely heavily on manufacturing have been hit extra hard. Kentucky has lost close to 50,000 manufacturing jobs since January 2008, which is 17% of the total manufacturing industry in our commonwealth. This doesn’t necessarily mean that all of our manufacturing is leaving Kentucky, just that a lot of companies may also not be employing nearly as many people as they used to.

The third concept that came up again and again was how well Lexington and its metro area is doing compared to the Louisville and Cincinnati/Northern KY metro areas. Not only has Lexington had lower unemployment between these three metros, it also had the lowest decline in Metro GDP, the best score on the Federal Housing Finance Agency’s Housing Price Index, and the best retention of manufacturing jobs. In short, if you had to weather the recession in one of three places in Kentucky’s Golden Triangle, Lexington was the place to be. Dr. Troske mentions in his report that, “while the growth in the Lexington area has slowed recently, the Lexington economy continued to grow throughout 2008 and appears to be the most dynamic of the three regions.”

So what is in store for 2010?

High unemployment. The fact is that unemployment is one of the most persistent effects of a recession and it takes a great deal of growth to help start pushing that number down. Even in the recovery phase, employers have a significant number of people who still aren’t working at full capacity. Getting these workers up to full capacity is a positive thing, but won’t be reflected in the unemployment rate, as they are already employed. Further still, firms that have learned how to get by with fewer employees will not be in a rush to hire new people. Eventually, however, employment will grow as the economy grows.

Overall, Dr. Troske is pessimistic about Kentucky’s economy in 2010. Persistent unemployment and slow growth won’t have the feel of a strong recovery for many people all over the commonwealth. However, my opinion is that places and firms that have positioned themselves properly throughout the chaos will be in a position to take advantage of the growing economy. My personal belief is that Lexington will lead the charge for Kentucky in this regard due to its diverse economy and resilient manufacturing sector. The problems facing the commonwealth of Kentucky and the nation as a whole will continue to affect the Lexington economy, but I believe that Lexington has the pieces in place to be a leader in returning our economy to its normal vibrancy.

For the full report from CBER, visit their website.

Although I’m a couple months shy of having a complete data set for 2009, the first ten months should be enough to paint a good picture for Lexington. I’m going to focus on three specific data sources: residential unemployment, establishment employment, and construction. Coincidentally, these also happen to be three of the best monthly sources of readily available data to help us understand what is going on around Lexington in numerical, as opposed to anecdotal, terms.

I’ll start with one of my favorite discussion points, residential unemployment. It is over-publicized and often misunderstood, but residential unemployment does provide us with a good, monthly indicator of the workforce for a given geographical area – in this case, Fayette County. As a reminder, this is a monthly survey of the labor force. In essence, you have to be employed or unemployed and looking for work to be counted as part of the labor force. The unemployment rate is simply the number of unemployed in the labor force divided by the total labor force.

(Source: Kentucky Office of Employment and Training)

As you can see in the chart above, Lexington is trending about 3% to 4% above our normal unemployment rates in this decade. Another thing that is apparent from the chart above is that we are not alone. Both Kentucky and the United States as a whole are suffering from larger than normal unemployment rates in 2009. The key to remember here is that although Lexington’s unemployment rates are only loosely correlated with the United States’, they are highly correlated with the state of Kentucky’s. Part of the reason for this is the movement of the labor force. Just because you live in Lexington doesn’t necessarily mean you work in Lexington and vice versa. It is also not uncommon for large companies with a presence in Lexington to have offices in Louisville, Northern Kentucky, or a variety of other areas in Kentucky.

The bright spot of all this rampant unemployment in the United States in 2009 is that Lexington emerged as the least affected of all 120 of Kentucky’s counties. To be sure, times have been rough for a lot of people and businesses in Lexington. However, my personal opinion is that in times of national economic malaise, survival can be considered a small dose of victory.

Measuring unemployment for the residents of Fayette County is a blunt tool because of Lexington’s diverse economy. We know that Lexington was affected by the recession in 2009, but what industries took the largest hit? Thankfully, there is also data on the number of employed persons by industry for our metropolitan area.

(Source: Kentucky Office of Employment and Training)

As you can see, manufacturing has been hit the hardest in a direct comparison from a year ago. Because these data come from our entire metro area, and not just Lexington, you can see the effect of the variety of manufacturers in the automotive industry that have closed or experienced mass layoffs over the past year. Also hit hard is the trade, transportation, and utilities industry. This industry segment includes retail trade, which corresponds with a large number of retail closings in and around Lexington as well as a general slowdown in consumer spending that is evident throughout the United States.

Though still down 5% from this time last year, the professional and business services sector showed signs of growing employment after being down 10% on average for the first nine months of the year. My hope is that this trend will continue. In a very rough sense, it appears the traditional “blue collar” industries were much more vulnerable during 2009.

One of these industries is construction. The last of my reliable monthly data sets is building permits. You can see in the table below that building permits in Lexington peaked in 2007 and aren’t really significantly changed from 2008 to 2009.

(Source: Lexington-Fayette Urban County Government)

Single family home permits are essentially unchanged at this point compared to 2008. The real difference is in the construction costs. This tells me that the homes that were built in 2009 were considerably less expensive than in 2008 and especially compared to 2007. This also means that despite the quantity of homes being built, they are contributing significantly less to the local economy.

Overall, 2009 has been challenging on many fronts for the local economy and the business community. Most signs of optimism have been tempered by the fact that success in 2009 can only be measured against what could have been. I still stand by Lexington’s diverse economy and educated workforce for hope that 2010 will bring a return to growth and prosperity.

While I try very hard not to explicitly link data to real-world conditions (correlation does not imply causation), it is still sloppy because I was only looking at the denominator in the equation, not the numerator. If there were simply a drop in the labor force, it would have made unemployment go up, not down. Let’s take a little deeper look at what constitutes the unemployment rate.

The unemployment number reported monthly is from the LAUS or Local Area Unemployment Statistics. It is an offshoot of the CPS or Current Population Survey. The CPS essentially functions to place people into one of three groups on a monthly basis. So for the civilian (i.e., non-military) non-institutionalized (i.e., non-incarcerated/committed) population, you can be either employed, unemployed, or not in the labor force.

Employed means that during the week that includes the 12th day of the month being surveyed, you did any work as a paid employee, worked in your own business or on your farm, or worked 15 hours or more as an unpaid worker in a family business. You also qualify as being employed if you were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute job training, or other family or personal reasons, whether or not you were paid for the time off or were seeking other jobs. Oh, and if you have more than one job, you only have to be employed at one of them to count.

Many people assume that the remainder of people who aren’t employed are classified as unemployed. But to be counted as unemployed, you have to, of course, not be employed, not be on disability, and you have to have been specifically looking for work at some point during previous month. For clarification, if you have been laid off and are awaiting a recall to that job, you don’t have to look for work in order to be counted in the unemployed group. If you think about it, these conditions eliminate kids (who can’t look for work legally), a lot of older people (who aren’t looking for work), and a great deal of students (specifically, the ones that aren’t looking for work or employed while in school).

If you are neither employed nor unemployed according to the above definitions, then you just don’t exist in the unemployment rate. It is that simple. The number of employed people gets added to the number of people who are unemployed. This sum is the total labor force. The unemployment rate is the simple division of the number of unemployed by the total labor force.

So the kicker is: if someone drops out of the unemployed group for anything other than getting a job, then they will also drop out of the labor force total as well. This has the effect of taking one person out of the numerator and denominator of the unemployment rate calculation, which has no discernable effect on the first few decimal places unless it is seriously happening en masse.

So, for example, when the unemployment rate in Fayette County dropped from 8.2% in August to 7.7% in September this year, we can assume that the drop was partially seasonal (it is, Fayette County has averaged a .2% drop at this time every year in this decade), but also that any other positive effects could actually be more people moving from the unemployed to the employed category and not just discouraged workers. As always, one month is never enough of a time period to evaluate the economy as a whole, but I have my fingers crossed for more positive news in the future.

From February when we were about 3% above normal, to June/July/August when we were about 4% above normal, Lexington still managed to follow it’s normal seasonal trends. From the averages of the rest of the years in this decade, one would expect September unemployment to drop around .2%. So it is definitely good news that it dropped farther than that.

So you may be asking yourself, “Self, what about the labor force? Is this drop in unemployment due to a large number of people dropping out of the labor force (i.e., no longer looking for work)?”

Well I’m glad you asked, because I did the same thing with the labor force that I did with the unemployment rate – with one caveat. Because Lexington is a population growth city, the labor force naturally grows as well. So I had to normalize it by using the average percent change instead of the raw number. Here is what I found:

It does look like that a contraction in the labor force may have played a role in the greater than anticipated drop in the unemployment rate. The average percent change from August to September is a positive .08%, whereas this year, it was a negative .26%. I still stand by my statement that a drop in the unemployment rate is a good thing. However, like most things, it has to be taken with the grain of salt that the labor force contracted. I’ll continue to keep an eye on the trends and keep my fingers crossed that our nagging unemployment problem will eventually subside.

Pretty easy sell, isn’t it? Great place to start a business, then raise a family.

“Lexington puts a unique spin on 4-H: Horses, health care, high-tech and higher education make up its diversified economy.

Known as the Thoroughbred Capital of the World, Lexington is home to horse farms that handle more than $750 million in horse sales annually. The region is expected to reap another $150 million in economic activity when hundreds of thousands of visitors come to town for the 2010 World Equestrian Games in September 2010. The city’s revitalization efforts have reached warp speed in preparation for the event: New music venues and restaurants are sprouting, along with fresh parks and biking and walking trails.

Even in the absence of major events, Lexington knows how to draw a crowd. Residents throughout the eastern third of Kentucky travel miles to reach its retail stores and three major hospitals, all of which have begun major expansion projects.

The University of Kentucky, Transylvania University and another dozen colleges, universities and technical colleges educate workers for Lexington’s growing tech sector, which includes strong Lexmark, IBM and Hewlett-Packard presences.

Local businesspeople say the municipal government is undergoing a vast restructuring to eliminate redundancies and improve communication, which promises an even more welcoming environment for business owners.”

The article also profiles Commerce Lexington’s 2008 Minority Business of the Year, TCG America, on why they chose Lexington as the place to start their business.

Probably the most interesting parts of the above chart are the July spikes in unemployment returning to normal. Still not entirely sure what they represent, but something happened in Scott County in late summer that I really would like to have some more information on. The funny thing is that despite the spikes from a few counties, overall, unemployment for the region was relatively unaffected overall. This would be due to the 800lb gorilla in the room, Lexington. With just under half of the labor force residing in Fayette County, large changes in Lexington’s unemployment will have a much more pronounced effect on the region than the smaller counties. Here is what that looks like visually for August:

A more comprehensive breakdown for the statistical table geeks like me looks like this:

As you can see, there is a pull between Fayette and Woodford counties and the rest of the region’s counties. Fayette and Woodford are contributing more labor force than unemployed persons, the rest of the counties, the opposite.

Big word of caution here: the program that these statistics come from, the Local Area Unemployment Survey (LAUS), measures unemployment based on residence, not place of work. Many of the unemployed in the surrounding counties could have lost a job in Lexington and vice-versa. I’ll try to dig up some way to flesh that out in a later post.

For the record, in 2008, Lexington’s MSA (metropolitan statistical area, more on this later) churned out $22.7 billion dollars in nominal output. This was divided between $13.7 billion in service-producing industries, $5.8 billion in goods-producing industries, and $3.3 billion in government activities.

In order to compare these numbers to past years, you need real GDP, or for inflation to be taken out of the picture. Adjusted for inflation and chained in 2001 dollars, you get the numbers in the chart below. As you can see, overall, Lexington’s output grew slightly from 2007 to 2008. Slightly equates to .8% to be exact. The closest comparison is between 2002 and 2003, when output only grew by .6%.

The biggest question mark in all this analysis is what 2009’s numbers will end up showing. My inclination is to think that if one quarter of serious recession was enough to drag down growth to .8%, then a full year of recession will show no growth or contraction. Notice the decrease in goods-producing output. This category is 5/6 manufacturing, with construction, mining, and agriculture making up the remainder. While service-producing and government activities both grew or were flat in 2008, the overall output was dragged down by goods production. It will be interesting to see if there is as serious of a reduction in services as I predict there will be in goods. If both services and goods decrease significantly, it could make for some uncomfortable numbers in 2009.

Just a note: Lexington’s MSA includes the counties of Bourbon, Clark, Fayette, Jessamine, Scott, and Woodford. Illustrating the point that governmental and political distinctions don’t always accurately describe economic activity, both Madison (Richmond and Berea) and Franklin (Frankfort) are not technically part of our MSA. Instead they are designated as distinct micropolitan areas, which (in my world at least) means that they don’t exist in BEA figures, which are only released at the national, state, and MSA level. I think it is a pretty easy assumption that both Madison and Franklin counties are part of our local economy, so it is also a safe assumption that Lexington’s economy is larger than the stated $22.7 billion.

The arrows point to the three counties (Bourbon, Scott, and Woodford) where unemployment rose instead of dropped in July. While the spikes (Woodford and Scott) can be scary, their number of unemployed really didn’t change by more than a few hundred, probably due to manufacturing closures that were announced earlier in the year actually taking affect. We’ll have to keep an eye on these counties and see if the unemployment has continued to grow or leveled off.

Because every city is different, some criteria had to be established on which cities would be included. Rather than use a definite criteria, such as population, we chose the cities that are picked yearly for Commerce Lexington’s Leadership Visit. Each of the cities contain some attributes that Lexington aspires to have and most of them also contain some common thread with Lexington, such as being a college town. Going back 20 years, there were 19 different cities at our disposal (CLX visited Austin twice). Of the group, only one, Greenville, SC couldn’t be included. The technical boundary of Greenville city is actually pretty small, only about 55,000 people live there, 5,000 people short of the threshold the US Census Bureau uses for being included in yearly updates. That left 18 Leadership Visit cities plus Lexington, so we included Pittsburgh, the site of next year’s Leadership Visit to make an even group of 20.

The next hurdle was picking out the criteria to rate each city on. we settled on three commonly available measures that could be found from a single source: the US Government. Often, city governments, chambers of commerce, and economic development organizations use numbers in marketing materials. More often than not, the way these numbers are assembled varies greatly from place to place. For instance, some organizations only report the jobs they had a hand in attracting (such as Commerce Lexington), while others report the entirety of jobs created in a certain area (such as Opportunity Austin). Neither of these approaches is any more correct than another, but it makes it extremely difficult to compare apples to apples. By using a single source, we can be assured that the differences between the cities will not simply be differences in reporting methods.

The three measures we chose to use are: population growth, employment growth, and median household income growth. These are three high-level measures that should give some good indication as to the differences between the cities. Note that we calculated the Compound Annual Growth Rate (CAGR) for each city over a consistent time period. Calculating the total growth over a time period (e.g., 10% overall from 2000 to 2007) really only tells you about that specific time period. Whereas calculating the CAGR will give us a sense of what is happening on a yearly basis for each of the cities.

Without further ado, the results of our research:

Lexington and Leadership Cities: A Comparison

Lexington and Leadership Cities: Data Table

*Note that no adjustments were made to income figures to account for cost of living differences in different cities. As of now, there are no reliable sources that calculate these differences for the entire population of the size cities included in this research. The closest, ACCRA, measures the cost of living in most of our target cities, however, their index is specifically designed to measure a certain segment of the population. Their target is the top 20% of young professional earners. Attempting to adjust a measure of an entire population (i.e., median household income) with an index derived from much smaller and non-representative subset (i.e. ACCRA) doesn’t pass statistical muster.