Commerce Lexington Research Update

In case you weren’t reachable by Commerce Lexington last Thursday or were on vacation, like I was, a new ranking for Lexington was announced by Forbes.com for the Best Places for Business and Careers. Press release excerpt as follows:

Lexington, Kentucky has been named the 9th Best Place for Business and Careers among the 200 largest metro areas by Forbes. The metrics included costs (business and living), job growth (past and projected), income growth, educational attainment and projected economic growth, as well as quality of life issues like crime, cultural and recreational opportunities as well as net migration patterns, and finally the percentage of subprime mortgages handed out over a three-year stretch and the number of highly ranked four-year colleges in the area.

VIEW THE FULL RANKINGS LIST HERE

LEXINGTON’S METRICS PAGE

People love rankings, and we here at Commerce Lexington are no exception. It isn’t every day that Lexington is rated more highly than everyone’s favorite go-to model city, Austin, TX. I’ll admit to just a little bit of pride in that regard. Austin, TX has a lot going for it and a lot of great people and businesses as well that contribute to its reputation. Unfortunately, the grass is often greener on the other side, and those of us in Lexington tend to forget that we have a lot going for us as well – not in the least our fantastic people and businesses.

I know that rankings can be a cause for joy and also skepticism. Lexington has racked up its fair share of rankings in the short time I’ve been Research Director. Some of these rankings are more than a little eyebrow raising (Best Metros to Test New Products anyone?), but in general, what they sometimes lack in statistical rigor, they often make up for in free publicity and chances to reflect positively on how great Lexington truly is.

Speaking of statistical rigor, I’ll formally introduce the research portion of the ranking story. A little history: Lexington was rated the #5 Best Place for Business and Careers by Forbes in 2008. Lexington was also rated the #33 Best Place for Business and Careers by Forbes in 2009. So how does Lexington go from #5 down to #33, back up to #9? Forbes doesn’t publish the recipe to their ranking secret sauce on the website, but they do give us a bit of insight on what makes up the overall ranking:

I’ve highlighted a couple boxes in green because I think they provide the most insight as to what happened from 2008 to 2010. We’ll get to that in a second. First, I noticed that Forbes has been changing their formula slightly, adding two new categories in 2009, Job Growth Projected and Subprime Mortgages. We did well in the Subprime Mortgage category, not well at all in the Job Growth Projected category. Our poor rank in projected job growth (one of the green boxes) and a poorer than average score in the Income Growth category (the other green box) are probably the key factors that dragged our overall rank down in 2009.
Forbes also added a new category in 2010, Economic Growth Projected. We didn’t do as well in this category either, which probably kept us out of the top five. You’ll notice that our income growth and projected job growth rebounded quite nicely, especially the projected job growth. So how does Lexington go from #151 to #32 in the course of a year?

The answer (in my humble opinion) is the “Projected” in Job Growth Projected. To quote a famous economist, “The only function of economic forecasting is to make astrology look respectable.” Our metro region sustained some heavy job losses in a few critical areas in late 2008 and early 2009, most memorably in the automotive supplier industry. I think the uncertainty of the mounting recession along with the uncertainty of the automotive industry made job growth projections more than a bit daunting. As you can tell, however they projected the job growth for our metro region, they took the worst case scenario.

A year later, albeit with high unemployment, Lexington never truly saw the sky fall. In fact, in a lot of instances, we are a metro region that is poised for growth in the recovery phase of the economy due to our diversity of industry, the presence of the University of Kentucky, and our highly educated population (among many other attributes).

It is certainly difficult to predict what next year will bring, but my core belief is that the things that make Lexington great will continue to shine through for years to come, no matter what ranking we get from Forbes or anyone else.

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.