Is there light at the end of this recession?
The economy of the Buffalo region continued to experience recession in March. However, after the meltdown of November-December of last year, the region’s manufacturing
activity in the first quarter of 2009 showed some signs of a “controlled” and gradual
Our regional seasonally adjusted PMI index gained nearly 5 points and returned to the levels of November. Improvement was seen virtually in every indicator. Particularly, there was a large jump in the production index which increased by 13.8 points to 55.7. Higher production was reported by 35.5% of responders, more than three times the level of response in February (11.1%). The level of reduced production was reported by 23.5% of responders, down from 27.8% in February. The New Orders index jumped by nearly 10 points, as 29.4% of respondents indicated increased orders, a huge jump relative to a mere 11.1% in February. However, very little improvement was seen in the level of response by those who indicated that the level of orders was on the decline. In March 35.3% of respondents reported lower order, just marginally better than the 38.9% response in February. The employment index increased by nearly 5 points driven by a large decline in the number of respondents indicating reduced employment levels. Commodity prices continued to improve.
Is this reduction in the rate of decline a sign of a possible bottoming in the cycle? Unfortunately, I continue to stand by my earlier forecast, the current gradual slowdown is not yet a sign of an upcoming rebound and any rebound in the region’s economy should not be expected until the second half of the summer. The current improvement in the rate of decline is simply a return to a more typical recessionary behavior after an abnormal November-December period. The same threats to our region’s economy that existed in
the second half of last year still remain with us. These are the general weakness of the US national economy, the Canadian recession, and the less favorable USD/CAD exchange.
In individual comments to our survey we continue to see negative sentiment from the auto parts manufacturers who experience a severe drop in the demand. The US auto industry sales continue to collapse, which presents a real threat to our auto parts manufacturers. The sector’s recession started in November of 2007 and with the exception of a small rebound in January, the sector remains in continuous recession for now more than a year. The rising unemployment does not indicate a quick turnaround for the sector and the sector’s recession is expected to persist into 2010.
The USD/CAD exchange rate coupled with the recession in Ontario does not provide any help to our regional retail sector which in the last three years has become addicted to the spending by Canadian consumers. As long as the current economic downturn persists, any improvement in the USD/CAD exchange rate should not be expected. The Canadian dollar will offer no help to our retailers in 2009.
US Auto and Auto Parts Sales in millions: January 2007 – February 2009 (Seasonally
2007 2008 2009
Source: US Department of the Census
The macroeconomic environment is becoming more interesting with every new day. The budget deficit of the US which is now expected to reach two trillion dollars this year, is being directly financed through the work of the printing press of the Federal Reserve. This enables the Federal Reserve to maintain a low interest rate not only on short-term assets, but also on long-term assets as the FED is now purchasing long-term US treasury bonds in large amounts. This policy should help the economic recovery in the short term, but the long-term implications are not as positive. As I indicated in my earlier reports, during the course of this crisis the US dollar should be expected to remain relatively strong, but after the crisis the support for the dollar will weaken significantly. The recent discussions at the G-20 meetings in London of a possible replacement of the USD with a basket of currencies reinforce this point. Although, it seems that there is no clear alternative currency available at this point to successfully replace the dollar. Furthermore, the dependency of the global economy on the USD cannot be overstated. The Russian government initiative in this direction can be easily understood, but the support recently offered by some in the Chinese government is a more questionable thing. During the course of 2008 the US trade deficit fell to about 669.2 billion dollars, which constitutes about 1.6% of the global economy outside of the US borders. The addiction of the major exporting economies to the US market simply can’t be overemphasized. To see these effects one can simply examine the economy of Ontario see how a US recession gets transmitted to an exporting economy.
Furthermore, given the size of the crisis in those economies and in the European Union,
the Euro presents a low treat to the dollar at this point. The EU economies need to first
weather this storm. However, the long term outlook for the dollar is becoming less
optimistic and that can start to trigger another commodity inflation wave after the end of
this recession in 2010.
Returning back to the local framework, we have recently discovered a new threat to our
economy – the government of the state of New York. The 2009 budget calls for an array of tax increases, including a rise in the income tax! This clearly anti-business strategy is
aimed at chasing businesses out of the state. If we compare an economy to a horse
pushing a carriage, then we can picture a recession as a period of time when the horse
gets tired and the speed of the carriage slows down. A good horse driver would probably
jump of the carriage and let the horse rest, a policy that some people label as
Reaganomics, a policy aimed to reduce the burden on businesses. The state of New York
selects a different approach: if the horse is tired, the speed can still be increased if we
simply use a heavier whip…. This policy is dangerous, as the horse may completely
The state spending continues to remain high relative to other states. For instance, in
December the Governor proposed a 700 million dollar cut in education spending, but that
ended up being thrown out and replaced with a small increase in spending. The state is
increasing educational spending at the time of the budget crisis and an historical deficit.
Granted that most of that funding increase comes from the Federal transfers, but those
could have been used to release more state funding instead. According to the American thFederation of Teachers, the state of New York ranks 4 in teacher pay with the average
salary of $59,557 in 2006-07. It is interesting to also point out the fact that according to
the National Center for Education Statistics, a division of the Federal Department of
Education, the state of New York has the second highest (just below New Jersey) cost of
educating a student, at $15,546/year, way above the national average at $9,683.
With uncontrolled spending the state is forced to raise taxes, but such policies tend to
induce employment movement out of the state.
Below is our forecast for the Buffalo-Niagara Falls area total employment dynamics (not
January February March April May
BLS 534.5(P) Total Employment not-seasonally adjusted FORECAST 535.85 538.61 540.12 538.05 539.79
Year-over-Year Change BLS -4.6(P)
FORECAST -3.25 -2.79 -2.78 -10.35 -15.81
BLS – Bureau of Labor Statistics, currently available data, P – Preliminary, subject to
College of Business