Past performance, prospects better for overall state economy
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Pennsylvania's economy continues to expand at a moderate clip. With the exceptions of information services and manufacturing, all major industry groups are adding workers.
A steadier pace of job growth has helped lower the state's jobless rate, though to some extent this is also a function of what has been only meager labor force growth.
Still, the pace of personal income growth is picking up due to recent gains in wage and salary earnings, and the state government has been pleasantly surprised by above-plan growth in tax revenues, indicating a healthy level of economic activity across the Keystone State. In contrast to the period following the 2001 recession, job growth is being driven by broad-based hiring in the state's private sector.
There are, however, some stresses, including the continued decline in factory payrolls due to rapid productivity growth in manufacturing and labor cost differentials with foreign production centers.
As of midyear, manufacturing payrolls are roughly 185,000 below the peak level reached prior to the 2001 recession.
Another source of stress has been retail trade. Over the past few years, retail trade employment in the state has suffered from bankruptcies among discount chains and consolidations among department store chains. While the temptation may be to attribute the mass layoff activity to the ongoing decline in manufacturing, it has actually been retail trade that has contributed more to the mass layoffs seen in Pennsylvania in recent months. Going forward, the number of mass layoffs should drift lower, which will be evident in more stable top-line job growth numbers.
In recent years, housing markets across Pennsylvania have turned in varying performances. Low mortgage rates have led to growth in demand for single family housing, and construction activity has been considerably higher than historical norms.
In the western part of the state, markets such as Erie and Pittsburgh have seen robust home sales with relatively slow rates of price appreciation. This is largely a function of below-average rates of population growth and household formation, which has limited the growth in the overall demand for housing.
Other parts of the state, particularly in south central and Eastern Pennsylvania, have seen more rapid rates of house price appreciation. To some extent, this has been driven by years of dizzying house price growth in neighboring states, including Maryland, New Jersey, and New York, with former residents of these states attracted to what has been vastly more affordable housing in Pennsylvania. Thus, areas such as York, Lancaster, Harrisburg, and Scranton/Wilkes-Barre have only recently seen an accelerating pace of house price growth.
Many of these home buyers continue to work in their former states, facing long -- and now more expensive -- commutes. Even as we expect the overall level of housing market activity to cool into 2007, these metro areas have the potential to turn in above-average gains in house prices, unless of course, elevated gasoline prices negate the trade-off for cheaper housing.
Real personal income growth has suffered the effects of the uptick in inflation since 2005 and what had been a prolonged period of weaker earnings growth to the point where, by the end of 2005, personal income growth was barely keeping pace with inflation. A sharp increase in dividend and interest income, however, helped lift real personal income in 2006. Going forward, sustained job growth will help support earnings gains, and we expect inflation pressures to abate by the end of 2006 and into 2007.
Patterns in personal bankruptcies have been distorted by last year's changes to filing regulations, and as such shed little light on the state of household finances. At least in the near term, trends in mortgage delinquencies may offer a better clue and, in Pennsylvania's case, afford some hope.
Longer term, sturdier income growth should support a gradual improvement in household credit conditions, and by mid-2007 bankruptcies should be clearly drifting lower. One lingering risk will be the added burden of higher interest rates for those households that have taken on large amounts of interest sensitive debt in recent years.
Pennsylvania's economy will remain on course over the coming quarters. Job growth will remain broad-based, led by health care and services. Technology and manufacturing will benefit from solid growth in business capital spending.
Over the longer term, Pennsylvania's life sciences and knowledge-based industries will remain pivotal, but growth will be constrained by below-par, albeit improving, demographics and an aging infrastructure.
First Published March 20, 2007 12:00 am