Category Archives: Economy

The Great Inversion Continues Apace

Renovated house for sale in Church Hill for $310,000. Twenty-five years ago, I purchased a house on the same street about seven blocks away for $28,000, renovated it to comparable condition and sold it a few years later for $110,00. I should have stayed in Church Hill!

Renovated house for sale in Church Hill for $310,000. Source: ZIlllow

by James A. Bacon

The Richmond metropolitan economy has been an also-ran since the 2007-2008 recession, so it came as some surprise to see that Zillow, the online real estate marketplace, listed our burg as the expected 4th hottest housing market in 2016.

The bizarre thing about the ranking is that forecast home value appreciation of 2.2% was half that of the other Top 10 metropolitan regions (Denver, Seattle and Dallas-Fort Worth led the way, with anticipated appreciation of 5% of more). But Zillow included unemployment rate and income growth in its metrics of “hotness,” and by those measures Richmond scored pretty well. Anticipated income growth of 1.2% was the highest of the Top 10 metros by a small margin, and unemployment of 4.4% was in the middle range.

Of greater interest was Zillow’s dive into real estate sub-markets. (I couldn’t find these numbers online, so I quote them from the Richmond Times-Dispatch story.) Despite horrendously bad schools and a lingering crime problem, real estate values are booming in the city. Predicted performance for selected neighborhoods:

Church Hill — + 6.7%
Carytown — +5.3%
Fan — +4.8%
Barton Heights — + 4.7%
Forest Hill Terrace — + 4.6%

If neighborhoods in Richmond’s urban core are hot, values in outlying neighborhoods likely are growing slower than the 2.2% average rate. Thus, despite record low gasoline prices (the lowest in decades, on an inflation-adjusted basis) that reduce the cost of commuting, people still want to live in walkable communities in the metropolitan center.

The Great Inversion — the shift in preferences for walkable communities in urban cores — continues apace.

Update: Speaking of the Great Inversion, how about this news — GE is relocating from the leafy Fairfield, Conn., suburbs to downtown Boston. Quoth the Wall Street Journal: The move to Boston’s waterfront is “a bet that the talent it needs is better recruited and groomed in a city than an office park.”

It didn’t hurt that Boston offered $145 million in incentives, including $25 million break in city taxes and $120 million in state infrastructure spending such as roads and parking. But New York, which recruited GE heavily, reportedly offered even more. The incentives influenced which downtown urban setting GE selected, not whether to stay in the ‘burbs or not.

We’re Not Credit Worthy, We’re Not Credit Worthy

credit_scores1

by James A. Bacon

With apologies to Wayne and Garth, the residents of many Virginia credit_scores2communities are not credit worthy, especially downstate. The low scores suggest major weaknesses in the ability of consumers to sustain spending and prop up local economies.

The numbers come from WalletHub, which has ranked U.S. “cities” by the average credit score of their residents. Credit score is a pretty good proxy for a household’s financial health, which makes aggregate numbers a reasonable proxy for consumer health.

I have extracted the credit scores for all Virginia “cities” (I’m not sure how  WalletHub defines “city.” The definition certainly does not coincide with Virginia municipal boundaries.) Yellow indicates areas in Northern Virginia, green Hampton Roads, rose Richmond-Petersburg, and blue smaller cities and metro areas.

I note a few striking patterns. The first is that the consumer health of Northern Virginia remains remarkably strong despite cutbacks in federal spending and the slowdown of the regional economy. Perhaps that should come as no surprise given the high incomes and education levels of the area. There is one noteworthy exception, however: Dumfries, Manassas and Woodbridge — all centered around Prince William County — rank below the national average.

The second pattern is the weakness of the Hampton Roads consumer economy. Outside of the affluent Williamsburg-Yorktown area, the picture is dismal — every area, even Virginia Beach, is below the national average, with some jurisdictions scraping bottom.

The third is the abysmal consumer weakness of Virginia’s older core cities. The residents of Petersburg have nearly the lowest average credit score in the country, ranking in the bottom 1 percentile. Portsmouth, Norfolk, Newport News, Hampton and Richmond all look grim.

But there is a silver lining for Hokie fans: Blacksburg has higher average credit-worthiness than Wahoo-dominated Charlottesville!

Tracking Virginia’s Quality of Life

Source: 2015 State of the Commonwealth Report

Source: 2015 State of the Commonwealth Report, (Click for larger image)

by James A. Bacon

Virginia’s economy, dependent upon federal spending, has under-performed the national economy since 2010, and will continue to do so in 2016, according to the Virginia Chamber of Commerce’s 2015 State of the Commonwealth Report. But lead author James V. Koch, president emeritus of Old Dominion University, does find a silver lining:

Once we adjust for differences in the cost of living, the spendable “real” income of most Virginians exceeds that earned by typical residents of the cities along the East Coast to whom we are frequently compared. Our dollars go further and our money has more purchasing power than that of our competitors. The moral to the story: If you’re concerned about your standard of living, there’s hardly any better place to live than Virginia.

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

The most common yardstick for standard of living is median household income, in which 50% of households earn more and 50% earn less. But that indicator misses a lot. As Koch points out, it does not take into account the cost of living. Thus, median household incomes in New York City are high — but so is the cost of living, canceling the advantage of higher incomes. As Koch also notes, median household income doesn’t tell us how equally those incomes are distributed. If incomes are hogged by the so-called top “1%,” that’s not much comfort to the other 99% of the population.

The Virginia Chamber and the Strome College of Business at ODU present the report with the idea that “thoughtful discussion of the challenges confronting Virginia can make it even a better place to live.” So, kudos to Koch for contributing to a deeper understanding of how to measure a community’s quality of life.

But the State of the Commonwealth report is only a first step. I would argue that further adjustments to quality-of-life metrics are needed to create a meaningful basis for comparing communities.

  1. Adjust for taxes. We should be looking at disposable income — income after taxes. Higher incomes push households into higher federal income tax brackets. Also, some states and localities soak up a much larger share of personal income than others. Virginia state/local government imposes a moderate-low level of taxation as a percentage of income upon its residents, making more disposable income available. This data is readily available and should be relatively easy to calculate.
  2. Adjust for transportation. Some regions have more efficient land use patterns than other, allowing for more varied transportation options, such as walking, biking and mass transit. As a consequence people in some communities spend a much larger percentage of their income on the cost of owning and operating automobiles without adding to their quality of life. Sprawling development in Virginia detracts from the standard of living. The H&T Index (housing & transportation) attempts to measure this effect. Perhaps there is a way to incorporate it into a more comprehensive quality-of-life measure.
  3. Adjust for time. People assign a monetary value to the time they spend commuting, which is time they could be doing something more productive or enjoyable. Localities vary widely in the amount of time residents burn moving from location to location. The Census Bureau captures this metric and a value assigned to peoples’ time.
  4. Adjust for education. Although government pays for most K-12 education in the United States by means of the public school system, Americans attach a monetary value to the quality of education, as seen by the vast sums they expend on private schools or the premiums they pay to live in better better school districts. Thus, the high quality of schools in, say, Northern Virginia would offset to a significant degree the frustration of longer commutes and higher transportation costs.

The conversation could be expanded even beyond those measures to include quality-of-life metrics relating to arts, entertainment and culture; the affordability and accessibility of higher education; and the comprehensiveness of the social safety net.

As we think about how to build more prosperous, livable and sustainable communities, it is important to expand the conversation beyond maximizing income, as desirable as that is, to moderating taxes, creating more efficient human settlement patterns, and improving the quality of education, with all the complex trade-offs those objectives entail.

A Furniture Industry Renaissance?

Tim Hairston, laid off in 2007 when Bassett Furniture shut down a factory, has regained employment at the company's new Bench Made facility. Photo credit: Roanoke Times.

Tim Hairston, laid off in 2007 when Bassett Furniture shut down a factory, has regained employment at the company’s new Bench Made facility. Photo credit: Roanoke Times.

by James A. Bacon

At its peak in the 1980s, Basset Furniture Industries employed roughly 9,000 people, with the largest concentration in Martinsville and Henry County. One of the largest furniture manufacturers in the world, the company provided jobs not only for machinists and assembly workers on the factory floor, as one would find in any mill town, but middle-class jobs in furniture design, sales & marketing, and administration, as well as high-income executives. Bassett, a census-designated place of little more than 1,000, was surely one of the smallest communities in the United States to boast its own country club and golf course.

The rise of China and the advance of globalization decimated Bassett Furniture and its namesake community. Actually, “decimate” does not come close to describing what happen to the company. The word is derived from the ancient Roman practice of killing one of ten soldiers as punishment for the entire unit. Bassett shed more than nine of ten jobs, hitting bottom around 800 employees early in this century, as it dismantled its manufacturing operations and hung on as a designer, distributor, retailer and importer of mostly Chinese-made furniture.

Today, there are signs that the tide has turned, reports the Roanoke Times. Bassett’s emphasis on custom-built furniture, providing a choice of 1,000 upholstery fabrics, and free in-home design visits seems to be paying off. The company resumed manufacturing in Bassett in January, and announced plans to build an upholstery manufacturing center in Texas to produce sofas, love seats, sectionals and chairs. Total employment, including Zenith Global Logistics, a freight line, has rebounded to 2,400.

Bassett is illustrative of broad economic trends that portend better times for the American manufacturing sector and employment of blue collar workers whose livelihoods have been shattered by globalization and automation.

In the late 1970s, when I was cutting my teeth as a business reporter in Martinsville, furniture manufacturing was a low-wage, semiskilled industry. Bassett and other Virginia and North Carolina furniture manufacturers had gotten their start in the pre-World War II era by tapping cheap labor off the farm. The business strategy worked for decades — until China emerged as a global competitor with even lower cost labor. Furniture companies led the move to “off-shore” manufacturing operations overseas. Since then, American blue collar wages have stagnated while Chinese wages have soared, eliminating much of the labor cost differential. Now furniture companies are participating in the re-shoring” phenomenon — the shifting of manufacturing back to the United States. Fortunately, while the Chinese came to dominate the manufacturing end of the business, they never penetrated the U.S. sales, distribution and retail segments of the business. The preservation of those core functions has allowed American companies to rebound.

Meanwhile, Bassett has developed a mass-customization strategy that requires faster turn-around times than is possible with a 30-day supply chain leading all the way back to China. While some furniture parts still can be machined and shipped from China to the U.S., Bassett needs an operation closer to home that allows final assembly and installation of upholstery fabrics hand-picked by the customer.

The Roanoke Times article alludes to another niche that Bassett is building upon:

The company’s new Bench Made line of high-end dining furniture features pieces handcrafted in red leaf maple by about 25 workers in a 30,000-square-foot space once used as a warehouse in Bassett. The workers carefully antique the Bench Made pieces with wire brushes and add tiny holes that resemble natural wormholes.

There will always be a market for cheap, mass-produced furniture as well as semi-customized furniture for the working class and middle class with limited incomes. But the top 20% of the market increasingly is looking for furniture that is unique and distinctive, and that typically means hand crafted — the trend I described last week in “The Rise of the New Artisan Class.”

Do these trends portend a comeback for Virginia’s furniture sector? I think that’s a reasonable hope, although any enthusiasm must be tempered by the reality that job creation will be modest — advances in automation mean far fewer workers are required on the assembly line than 30 years ago — and far from sufficient to restore the economic fortunes of Southside Virginia. Still, anything that staunches the bleeding of jobs is a positive sign. And anything that actually brings even a few jobs back to the region is cause for celebration.

The Rise of the New Artisan Class

Botanical etching made by oak and mimosa leaves

Botanical etching made from oak and mimosa leaves. Photo credit: Tracery 157

Cathy Vaughn took the big leap a couple of years ago of going into business for herself as an artisan working in copper. While fabricating trellises, tryptics, candelabras and chinoiserie, she developed a new technique, which, as far as she knows, is a first — creating images upon copper plate from the chemicals found in leaves. The result has been a series of extraordinary images, as seen above, that look as if they could have been lifted from a modernist New York art gallery.

She arranges leaves upon the copper, wraps them in cellophane and sets them aside for about two weeks. Leaves from different species of trees have different chemical signatures, which interact with the copper to leave a wide array of colors. Art meets science as Vaughn arranges different species of leaves in varying patterns to create novel effects.

cathy_vaughn

Vaughn in her studio. Photo credit: Tracery 157

It’s too early to tell if the “botanical etchings” will become a big moneymaker, Vaughn told me at a recent arts and crafts exhibit in Richmond, but early signs are encouraging. I’m no art critic, and I’m not even a fan of modernist art, but I found many of her creations visually arresting, even beautiful. Given the fascinating narrative behind her creations, I would venture to predict that she will enjoy considerable success — not just in Richmond but far beyond.

Richmond is hardly unique in having a vibrant arts community — Charlottesville and Staunton craftsmen were well represented at the particular event I attended — but the arts and crafts movement is growing. Many Richmond-area artists have a connection with Virginia Commonwealth University’s school of the arts, while others with a graphic arts background come from the advertising/ marketing sector. Budding artists are supported by a soft infrastructure: numerous art galleries, an artists’ guild, the Art Works and Plant Zero artists’ studios and the Richmond Visual Arts Center.

It’s easy to be dismissive of arts & crafts as an engine of economic growth — the term “artsy fartsy” suggests eccentricity and dilettantism — but a fundamental shift in consumer preference to “mass customization” suggests that artists, craftsmen and the so-called “makers” are a rising economic force. Not only will the revival of artisan create employment opportunities in a slow-growth economy, there is an inherently egalitarian aspect to the movement. Artists, craftsmen and makers are self-employed. They could become the new yeoman class of the post-industrial economy.

An analogy that I draw, and other observers readily accept, is with the beer industry. A couple of decades ago, three or four monster brewing companies dominated the U.S. beer market. The main competition came from major foreign brands. Then the micro-brewery phenomenon took off as consumers revolted against the sameness of the national brands and embraced the individuality of home brews, with their novel tastes, feisty branding and personal connection with consumers. The Brewers Association counted 1,871 microbreweries, 1,412 brewpubs and 135 regional craft breweries in 2014. That year saw the opening of 615 new breweries and only 46 closings. Craft brewers provided 115,469 jobs, an increase of almost 5,000 from the previous year.

The efflorescence of the beer industry is matched, in Virginia at least, with a veritable explosion in the number of wineries, not to mention artisinal producers of meats, cheeses, breads, seafoods, pastas, dressings, sauces, and confections. The Virginia’s Finest website lists 43 categories of made-in-Virginia products from herbs and honeys to soups and nuts.

The revolt against mass standardization is nothing new. The so-called “arts and crafts” movement originated in the late 1800s in reaction to machine production, and it never disappeared. But arts and crafts appear to be undergoing a resurgence, fueled by the growing hunger for unique, hand-crafted products and the rise of the Internet as an inexpensive distribution and marketing channel. In the future, inexpensive 3-D manufacturing will open up new fields for creative expression and the invention of entirely new products.

The rise of the arts-and-crafts economy is something devoutly to be wished for. Politicians will be tempted to jump on the bandwagon and “help” by doling out subsidies of some kind or another. Arguably, the fastest way to kill the movement is to make it dependent upon government largess. However, public policy probably can contribute to the movement by enabling artists, craftsmen, artisans and makers to form co-ops and mutual assistance societies to provide for common needs such as health care, disability insurance and the like. Tax policy should cease discriminating against the self-employed by extending the same tax breaks for health care provided to corporations, labor unions and other large entities.

For the most part, though, we just need to leave the artisans alone. They are creative people, and we should trust them to figure out what’s best for themselves.

Dominion’s Proposed Six-Year, Virginia Infrastructure Spend: $11.7 Billion

dominion_capital_expenditures

Source: Chmura Economics & Analytics

by James A. Bacon

Dominion Resources proposes to expend $11.7 billion over the next six years on energy infrastructure serving Virginia, including new generating plants, electric transmission lines, a gas pipeline and environmental clean-up, the company announced today. Of that amount, an estimated $5.7 billion will be spent in Virginia, producing a direct and indirect economic impact averaging $1.68 billion per year over the six-year period.

“Our growing Commonwealth requires an expanding and reliable energy infrastructure,” said Paul Koonce, CEO of Dominion’s Energy Infrastructure Group and president of Dominion Virginia Power. “Our capital investment program over the next six years is designed to meet that need and achieve environmental goals of the federal Clean Power Plan.”

Governor Terry McAuliffe weighed in with a favorable comment upon the investment program. “In order to build the new Virginia economy, we must have low-cost, diverse and reliable energy resources. These investments not only build upon an already solid foundation for economic growth in Virginia, they also create tens of thousands of jobs and produce billions of dollars in capital that benefits the Commonwealth today.”

Only one project on the list, construction of the Brunswick County gas-fired generating plant, has received regulatory approval. Others are at various stages of development, from being “on the drawing board” to moving through the regulatory process, according to Dominion spokesman David Botkins. Especially controversial are the proposed Atlantic Coast Pipeline, a natural gas pipeline; continued pre-construction development of the proposed North Anna 3 nuclear power plant; and several proposed electric transmission lines; all of which are opposed by landowners and/or environmentalists. Also controversial, because of potential impact on rate payers, is a proposal to put vulnerable electric distribution lines underground.

Assuming all the projects go forward, the economic impact on Virginia would be considerable. According to a study commissioned by Dominion and conducted by Chmura Economics & Analytics, Dominion’s capital investment would inject $771 million directly into Virginia’s economy in the first year, 2015, and would generate an additional $579 million in indirect and induced impact for a total impact of nearly $1.4 billion. Total impact would peak in 2017 at $2.5 billion and then level off around $1 billion annually in subsequent years.

About half the impact would come from construction spending, the press release stated, while “the rest would result from growth in other sectors of the economy as spending spread.”

Frank Rambo senior attorney with the Southern Environmental Law Center, responded in an email communication that Dominion should reallocate its investments from capital-intensive projects, which “produce high shareholder profits at the ratepayers’ expense,” into more labor intensive energy resources such as renewable technologies and energy efficiency. A shift from an over-reliance on natural gas to clean energy, he said, “will not only create more jobs but also help lower electric bills and create healthier communities.”

Bacon’s bottom line: The impact of Dominion’s proposed energy projects on Virginia’s economy would be considerable. More important than the short-term stimulus of the design, engineering and construction work is the necessity of expanding the capacity of Virginia’s energy infrastructure to meet the anticipated growth of Virginia’s population and economy — a critical point made in the press release by Virginia Chamber of Commerce CEO Barry DuVal. That benefit, not captured by the Dominion numbers or the Chmura study, would dwarf the impact of the capital expenditures themselves.

However, not all energy projects are created equal. Some offer a higher risk-adjusted Return on Investment than others. Is it worth $808 million to keep open the option of a third nuclear power unit at the North Anna power station that even Dominion concedes would cost rate payers $19 billion — with no guarantee that the project ever will be built? Is it worth spending $1 billion to bury roughly 20% of Dominion’s local distribution system to reduce the number of electric outages and shorten recovery times during major storm events?

Perhaps more fundamental is the question of what kind of electric grid Virginia wants to build. Dominion’s vision of the energy future is one in which Dominion continues to play a major role, building the power plants (including nuclear, natural gas, solar and wind), the electric grid, and the natural gas pipeline to supply the gas, all embedded in the larger, multistate PJM Interconnection system in which Dominion would swap electric power with out-of-state power producers as needed to meet peak demand and ensure reliability. Dominion’s critics envision a decentralized future with more wind and solar generated by independent, small-scale power producers less dependent upon large-scale transmission lines that shuttle electric power long distances. The costs and benefits of the competing visions are all but impossible to estimate with econometric models.

The Hampton Roads Economy in Two Graphs

Recession recovery in the U.S., Virginia and Hampton Roads, measured by total jobs restored, 2007-2015. Source: "The State of the Region: Hampton Roads 2015."

Recession recovery in the U.S., Virginia and Hampton Roads, measured by total jobs restored, 2007-2015. Source: “The State of the Region: Hampton Roads 2015.”

Hampton Roads didn’t have a bad year in 2014 — its economy grew 1.34%, higher than its growth rate in five of the previous six years. But that growth still didn’t come close to getting the economy back to pre-2007 recession levels, according to the 2015 “State of the Region” report published by Old Dominion University’s Center for Economic Analysis. The region still employs 15,000 fewer employees than in 2007.

The recent decline in defense spending — 3.2% below its 2011 peak — hasn’t helped (although it’s worth noting that defense spending is higher than in 2007).

Estimated direct Department of Defense spending, 2000-2015. Source: "State of the Region."

Estimated direct Department of Defense spending, 2000-2015. Source: “State of the Region.”

Writes lead author James V. Koch, ODU president emeritus:

The upshot of declining DOD spending is that it has forcibly diversified the Hampton Roads economy. We estimate that only 39.3 percent of our regional economic activity could be attributed directly and indirectly to defense spending in 2014. This is down from 44.9 percent in 2011 and our all-time high of 49.5 percent in 1984.

The region’s three other main industries are tourism, shipbuilding and ports. Tourism, as measured by hotel revenues, had yet to recover to 2007 levels by 2014 (although they may do so this year). Within the tourism sector, Virginia Beach has gained market share while the Historic Triangle has lost. Shipbuilding has been a bright spot; industry employment exceeds 2007 levels by 4,600 jobs.

Direct port-related activities account for 6% of the Hampton Roads regional economy. Cargo shipments reached a record level in 2015 at 210,000 twenty-foot equivalent units (TEUs). Despite important advantages such as deep channels, cargo growth lagged that of East Coast ports as a whole. But the ports may represent the region’s best best for diversification from the military, the report suggests. It is well situated to handle the giant super-ships dominating the sea lanes. If the ports can deal with some off-terminal productivity issues, the could see continued growth.

— JAB