Commerce Lexington

Throughout the economic crisis, which some have taken to calling “The Great Recession,” interest in things such as monthly unemployment figures, obtuse analysis by economic number crunchers, and complicated PowerPoint charts has been at an all time high. Though the recession seems to be over, attendance at the recent 21st annual Economic Outlook Conference continued this trend of economic excitement. The always-engaging speakers presented on a variety of topics, including tax reform and monetary policy, but the one that will probably garner the majority of interest was the outlook for Kentucky’s economy in 2010.

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.

This has been a year of firsts for a lot of individuals in the business community. Those of us on the younger side of life have certainly never seen an economic collapse like this one and even the older population will probably struggle to remember anything comparable this side of the Great Depression. As I tracked the numbers during the start of the recession late last year, I had a cautious optimism that Lexington wouldn’t be affected as badly as the rest of the state or the country. I don’t think I’m going out on a limb in saying that the recession didn’t stay away from Lexington entirely, but there are also some bright spots that have made themselves apparent as the year has progressed.

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.

Lexington was recently ranked as one of 10 Best Places To Live The Simple Life by AARP Magazine.

“…residents, who are just as likely to be beer-drinking college basketball fans as julep-swigging Derby lovers, say this is one of those rare southern towns that offers four distinct seasons, and the relaxed graciousness of the Old South. In the heart of bluegrass music country, Lexington also boasts rich African American roots, an impressive history—Mary Todd Lincoln was born here, husband Abe about 80 miles to the southwest—and distilleries that produce some of the world’s best bourbon.”

Now, I know what you are thinking, I don’t really have much in common with your average AARP reader, but let’s take a look at their methodology. They took 324 metro areas across the United States and ranked them on the following categories: housing appreciation (or depreciation) and affordability, the employment picture, education, health, low cost of living, less congestion/traffic, more open space, numbers of farmers’ markets, outdoor amenities, hiking and biking trails, state parks, green values (number of food co-ops, farmer’s markets, and LEED-certified buildings and homes; possibilities for alternative commuting (walk, bike, ride); energy efficiency and renewable-energy policies), alternative energy sources, energy efficiency programs, stress index (divorce, crime, suicide, unemployment, rates of depression, and other social measures), healthy living (the number of fruits, vegetables, and whole grains the average resident consumes, and the number of residents who get regular exercise, from an annual survey by the Centers for Disease Control and Prevention), and percentage who commute by bike or by walking.

I’m nowhere near retirement age, but having Lexington ranked in the top ten of 324 metro areas based on this criteria is something to celebrate.

The unemployment rates for December were released recently. I expected a spike in the non-adjusted unemployment rate due to both the expected loss of many holiday retail jobs as well as the current recession. What I saw truly surprised me. As you can see below, the unemployment rates for both Louisville (up 1.1%) and the state of Kentucky (up .9%) showed a rapid rise from November to December. In contrast, Lexington unemployment (up .1%) remained relatively flat.

I would never advocate that Lexington is immune to any type of national or state economic crisis. However, Lexington is proving to be surprisingly resilient to the violent economic sturm und drang that is devastating many communities. State governments already facing budget shortfalls are having to cope with the rising costs of providing unemployment insurance. It is an unfortunate reality of a poor economic climate that the very organizations or entities that people turn to in times of crisis are less capable of helping due to their own financial circumstances.

There are many possible explanations as to why Lexington is largely avoiding the state and national chaos surrounding the current recession. A highly educated workforce and a diverse economy are two pillars that are often mentioned in the same sentence as Lexington’s economic health. In reality, with the variety of factors that have kept us treading water thus far, I can honestly say that even if Lexington does start to show more serious signs of economic shutdown, I’d rather be weathering the storm in Lexington’s ship than just about any other boat out on the economic horizon.