Des Moines Register, IA
12-16-07
If recession afflicts U.S., Iowa could bear up well
Business would suffer, to be sure, but experts say state is strongly situated
By DONNELLE ELLER
Register Business Writer
The new year could bring a new threat to Iowa's economy: Economists fear a
growing national housing crisis will drag the U.S. economy into a recession —
and with it state economies like Iowa's.
That would hurt even the largest and most stable Iowa employer, experts say.
Wells Fargo & Co., which has 12,900 workers in Iowa, warned last month the
nation's No. 2 mortgage lender couldn't escape the losses hitting U.S. financial
service companies.
Fallout from housing could reach other major Iowa businesses, said Morgan
McGowan, an assistant economist at Moody's Economy.com. Fewer jobs added
nationally means fewer retirement accounts, insurance policies and investments
sold at places like Principal Financial Group, Allied Insurance and Aviva USA, he
said.
"Housing definitely has a case of pneumonia," said John Geweke, a University of
Iowa economics professor. "The question is: Will the rest of the economy catch a
cold? It's more likely no than yes, but everyone is taking a wait-and-see attitude."
Iowa has ducked many of the troubles hitting other markets: The state's home
sales and building dip is shallower than those elsewhere in the nation. The
numbers of jobs in finance, construction and other industries have grown. And
Iowa retailers expect sluggish holiday spending to pick up as Christmas nears.
Even in the face of a recession, Iowa would have some economic strengths:
diverse industries, strong exporters that benefit from a weak U.S. dollar, and a
growing renewable energy industry.
"If you had to pick a place to ride out a recession, Iowa isn't a bad place to be,"
Geweke said.
In two key sectors, employment on rise
National trends indicate that pressure on home building and finance in Iowa
should be showing up in Iowa's employment.
So far, it's not.
Since 2002, construction employment in the state has grown nearly 20 percent,
to 77,200, and financial services nearly 9 percent, to 102,200, based on annual
averages.
Growth has been strong this year, too: Overall, the state has added 17,700 jobs
over the past year, state data show.
About 2,400 construction jobs have been created in the past year, state records
show, even though the number of building permits is down 17 percent. Ann
Wagner, an Iowa Workforce Development analyst, suspects residential
construction workers have moved to commercial and road building.
About 1,600 financial services jobs have been added in Iowa in the past year.
Wells Fargo is counting on its business servicing mortgages to offset losses in
mortgage lending. Wells Fargo services $1.5 trillion in residential mortgages,
making it the nation's largest servicer.
The company's home mortgage, financial and card service units have their
headquarters in the Des Moines area, with 11,700 employees.
"We have a diversity of businesses, so we're in a position of relative strength,
compared to many of our competitors. But we're not immune to what goes on in
the broader economy," said Mark Oman, senior executive vice president at Wells
Fargo.
Oman said Wells Fargo hopes to avoid layoffs.
"Hopefully, if there are jobs eliminated in one area, we'll have openings in
another area," he said. "It's really why we have a number of businesses here in
Des Moines."
While Wells Fargo might appear well insulated from the subprime turmoil, smaller
finance companies are not, said McGowan of Economy.com.
He said he believes laid-off workers in the financial industry have found
temporary work with lower wages and few benefits. Those workers will begin
showing up in unemployment numbers once their contracts end, McGowan
predicted. Others will follow.
Whether financial services employment changes is the big uncertainty, Wagner
said. It has been a major force in Iowa's economy, she said.
"I don't know the answer to that," Wagner said. "I do know we expect the housing
slowdown to be with us a while."
Indicators: Spending in Iowa tightening
Consumer spending accounts for about 70 percent of the U.S. economy, experts
say. In Iowa, that tallies up to about $73 billion annually, according to calculations
by Michael Lipsman, an economist with the Iowa Department of Revenue.
But sales receipts in Iowa grew a minuscule 1.87 percent in the fiscal year that
ended June 30. Spending on building materials, for example, fell 3 percent after
posting gains of 4 percent to 11 percent annually since fiscal year 2004.
Spending going into Christmas, though, has rebounded, with a 3 percent
increase for July, August and September. That matches a 3 percent increase in
spending predicted nationally this holiday season.
Still, some weakness is evident in Iowa, with consumers buying fewer clothes
and specialty items — sporting goods and jewelry, for example.
The spike of gas prices to $3 per gallon is having a real impact on spending, too,
Lipsman said. For the first nine months of the year, Iowans paid $3.3 billion for
gasoline — nearly double the $1.7 billion they paid the first three quarters in
2000, Lipsman's data show.
A pullback could be connected to the loss of the "wealth effect" that meant rising
home prices in the past couple of years made consumers feel that they could
spend more. With tightening credit, homeowners also are less able to tap equity
in their homes for purchases.
Iowans' average consumer debt, which includes things like credit cards and car
loans but not mortgages, rose 4.1 percent - to $12,981- from June to September,
according to the Experian National Score Index. Over the same period, the
national average rose 2.2 percent, to $16,223.
Feelings of uncertainty about job security and wealth can snowball, Geweke said.
"That's how recessions start," he said.
Insurance, ag give Iowa a sturdy base
Amid the economic worries buffeting the nation, Iowa has several strengths on
which to rely. Insurance and agriculture tend to protect Iowa from recessionary
pressures, Geweke said.
Families continue to buy food and fuel made from Iowa corn and soybeans and
insure their cars, homes and lives, regardless of recessionary pressures.
When the nation slid into a recession from March to November 2001, for
example, employment in finance and insurance climbed by 2,500 while Iowa lost
21,200 jobs. The largest losses were in manufacturing, which dropped 15,900
jobs, state data show.
The recent growth of renewable energy adds stability to Iowa's economy,
Geweke said. Energy demand "is something that is clearly going to grow in the
future, whether there's a recession or not."
With ethanol driving corn prices higher, farmers logged record earnings last year
and likely will this year, said Bruce Babcock, an Iowa State University
economics professor.
That helps farm equipment manufacturing companies like Deere & Co. and seed
companies like Des Moines-based Pioneer Hi-Bred International and St. Louisbased Monsanto Co. with plants across Iowa.
A weak dollar also makes Iowa manufactured products more attractive for export.
Iowa exports, excluding commodities like soybeans and corn, are on pace to hit
$9 billion this year, 7.1 percent higher than last year and 23.3 percent more than
2005, state records show.
"We don't call it a weak dollar. We call it a competitive dollar, especially in
Europe," said Charles Sukup, president of Sukup Manufacturing Co., the maker
of grain storage and drying equipment in Sheffield.
The company added 90 jobs this year to keep up with U.S. and overseas
demand.
Farmers globally are seeing higher prices for commodities, he said. That makes
storage and drying equipment more attractive. "This year is the best year we've
ever had," said Sukup, who expects improved sales next year.
Reporter Donnelle Eller can be reached at (515) 284-8457 or deller@dmreg.com