Vermont Business Magazine The Vermont economy will continue to grow for the next several years, according to a report to be presented Thursday, but at a slower rate than for both the rest of New England and the rest of the US. Slow growth in labor and wages and an aging population are contributing factors to this forecast. The closing of the Vermont Yankee nuclear plant in Vernon will have a negative impact on the economy. The possible sale of IBM in Essex Junction and its resultant status creates an unknown. However, the forecast states that Vermont and New England have suffered less than the rest of the nation coming out of the Great Recession (which makes the recovery look relatively less robust coming back up), that innovation has been able to overcome demographic issues, and, given the trend, Vermont will actually be in better shape in the 2014-2018 time frame than it was in the years prior to that downturn, with more jobs, higher wages and a continued low unemployment rate. Housing, construction and hospitality will be better off, while manufacturing will likely be worse off in the coming years compared to today.
Some of the region's top economists will present economic forecasts for the New England region and each of the six New England states at the Fall Economic Outlook Conference hosted by the New England Economic Partnership (NEEP). The conference will be held on Thursday, October 9, from 9 am - 2:30 pm at the Federal Reserve Bank of Boston in Boston, MA. The Vermont analysis was conducted, as it has been for several years, by economists Jeff Carr and Mathew Cooper of Economic and Policy Resources in Williston.
VERMONT ECONOMIC OUTLOOK
- This NEEP forecast for the Vermont economy calls for a continuation of the current economic upturn through calendar year 2018. While geopolitical instability in the Middle East and Eastern Europe remains a concern, at this point it does not reach the level of threatening the current economic expansion-recovery.
o Seasonally adjusted payroll job data from the Vermont Department of Labor through July 2014 indicate that the State has added a total of 1,300 payroll jobs since last December—a 0.4% rate of increase. Throughout calendar year 2014, month-to-month data show the uneven character of month-to-month job changes. Through July, there have been no two consecutive months of seasonally adjusted job increases or declines across the entire calendar year.
- The data also show that Vermont’s labor market recovery from the “Great Recession” is nearly complete. Through July, the State has re-captured 12,700 jobs (or 86.4%) of the 14,700 jobs the State lost during the downturn—despite the well-publicized job reductions at the State’s largest private employer IBM.
o As this forecast update is completed, Vermont is competing with the other states in the New England region to be the second fastest state in the region to complete its labor market recovery (following the lead of the state of Massachusetts).
o There is no doubt that, but for the 410 layoffs at IBM over the mid-2012 to mid-2013 period, the State by now would have easily completed its labor market recovery and numerically re-captured all of the employment ground lost during the last recession.
- State economic activity going forward will be underpinned by the general rising tide of the U.S. economy, and the ability of the State’s businesses to fill their niches in the local, regional, national and global market places.
o The Moody’s Analytics national forecast calls from a strengthening in U.S. economic activity across calendar year 2014 and into calendar years 2015 and 2016. Economic activity in calendar year 2017 and 2018 is expected to continue to increase, but fall back somewhat as the current business cycle ages further. Even though U.S. output and job growth are expected to slow significantly in calendar year 2018, the forward momentum gained through the current economic upturn is expected to continue to overcome these restraining factors.
o For Vermont, forward progress will be found across all but two of the State’s broad employment categories—the exceptions being the Information Sector and the Government Sector.
- Job gains in the goods-producing sector will be paced by the construction sector and food manufacturing sector. The forecast also expects that job growth in the trade, transportation, and utilities sector will be slowed by the closure of the Vermont Yankee nuclear power plant located in Vernon.
o Repairs and restoration activity related to the aftermath of Tropical Storm Irene continue to assist in providing some forward momentum continue through calendar year 2015—as storm recovery activity continues, but tails off through the initial stages of the current forecast update period.
- Compared to last fall’s NEEP forecast, the revised NEEP outlook is again mixed—with slightly lower near-term activity forecasted for calendar years 2014 and 2015 and somewhat higher activity levels forecasted for calendar years 2016 and 2017 versus the NEEP forecast last fall.
o The forecast once again expects that the pace of economic activity will pick up to more typical rates of increase after dealing with the near-term effects of the transitory factors that underpinned the economic “speed bump” that occurred during the first half of calendar year 2014.
- Improvement in the state’s unemployment rate will continue in the near term but flatten over the forecast period, but will occur at a slower pace than either the U.S. or New England regional economies. As mentioned in previous NEEP outlooks, this reflects Vermont’s significantly lower rate of unemployment to begin with, and the state’s aging demographic profile.
o The average annual unemployment rate in Vermont is expected to drop by 1.2 percentage points over the calendar year 2013-2018 forecast period, declining to an average annual rate of 3.2% for calendar year 2018.
- The conference theme of this NEEP outlook update concerns the economic development challenges and opportunities for the New England states as we look to the future.
o Vermont, like her New England sister states, has many of the same economic development advantages and challenges. Chief among the state’s challenges is Vermont’s remote and northern location, its aging population, its higher than average energy costs, its relative lack of available investment capital, and its reputation (whether deserved or undeserved) as a higher than average taxed state in what is viewed as a relatively higher taxed New England region. It is also evident that Vermont is a state with geographic disparities, and this offers a particular challenge to state economic development policy makers.
o In terms of economic development advantages, the state enjoys the advantage of a well-educated work force, strong commitment to K-12 education, a well-developed telecommunications system covering nearly all of the state, small-accessible size that makes business entry, networking, and government officials “accessible,” low crime rates, a reputation for high quality natural and recreation amenities, and a strong brand identity for certain types of products and services.
- Vermont’s collective economic development effort is executed by the State Agency of Commerce and Community Development in cooperation with roughly a dozen regional economic development corporations (of varying sophistication in terms of their services), other partners such as VEDA and the Vermont Technology Council, a system of regional marketing organizations and chambers of commerce, and municipal development departments throughout the state.
- The state recently completed a U.S. Economic Development Administration-funded Comprehensive Economic Development Strategy (CEDS) effort designed to better coordinate the efforts of the Agency of Commerce and Community Development and its partners under one umbrella strategy and to allow the state to more effectively compete for federal infrastructure and other economic development dollars.
o Although it is Vermont’s first statewide CEDS effort, it is the fourth statewide economic development strategy since 1997. The CEDS is part of an effort to become more strategic and to unify current, sometimes widely divergent efforts under the same strategy umbrella.
o The CEDS process had broad support from a number of stakeholders involved in economic development. The broad input process hopefully has resulted in the type of Buy-in needed for full and complete efforts implementation. Only time will tell if this latest effort to leverage federal infrastructure and other dollars in the aftermath of Tropical Storm Irene will ultimately be successful.
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Review of Recent Vermont Economic Developments: In Vermont, the state’s continued low unemployment rate (which has ticked up slightly in recent months to 4.1% in August—but is down from 4.5% a year ago on a seasonally adjusted basis)—continues to track as the lowest in the New England region and among the lowest states (e.g. tied for second lowest in July, and fifth lowest in August, among the 50 states) in the U.S. as a whole. The Vermont Department of Labor (VDOL) in mid-August also reported a seasonally adjusted job increase of 1,100 jobs in July from the revised June labor market data—continuing a one month up-one month down, or “see-saw” pattern to seasonally adjusted month-to-month job changes in the state.
Overall since the end of last calendar year (2013), month-to-month seasonally adjusted nonfarm payroll job changes in Vermont have essentially moved sideways. The data show that Vermont has added 1,300 payroll jobs since last December—corresponding to a 0.4% rate of seasonally-adjusted job additions. The data through the month of July also continued the trend of alternating months of seasonally adjusted employment increases or declines—with no two consecutive months of seasonally adjusted job gains or losses across the entire 2014 calendar year to-date.
Looking at the labor market recovery to-date from the “Great Recession” in Vermont, the data show that the State has re-captured 12,700 jobs, or 86.4% of the 14,700 jobs the State lost during the downturn. Vermont is competing in this area with the other states in the New England region to be the second state to make a full labor market recovery (following the lead of the state of Massachusetts). No doubt, but for the 410 layoffs at IBM over the mid-calendar year 2012 to mid-calendar year 2013 period, the State by now would have very likely re-captured all of the employment ground lost during the last recession.
The year-over-year job change numbers for July 2014 show a similar up and down character reflecting the saw-toothed pattern described above. Vermont’s best year-over-year performance is found in the construction sector with job additions on a year-over-year basis of +5.8%. That performance corresponded to Vermont’s ranking in the highest U.S. (at 12th—along with the government sector at +1.1% year-over-year and 12th nationally) and its highest England ranking (1st—again along with the government sector), and reflected the significant volume of construction projects in the Northeast Kingdom region and in Northwest Vermont. Financial activities at +2.4% year-over-year through July 2014 (ranking Vermont 13th in the U.S. and 2nd in New England) and professional and business services at +2.2% (ranking Vermont 31st in the U.S. and 4th in New England) round out the employment categories making significant gains in July 2014. Among the other categories, the leisure and hospitality sector (at +0.9% year-over-year change—ranking the sector at 44th nationally and 6th in New England) and the education and health services sector (at +0.5% year-over-year—ranking the sector 46th nationally and 5th in the New England region) round out the larger employment sectors.
The weakest year-over-year job changes have come in the information sector (at -10.6% in July of 2014 versus July of 2013) and the manufacturing sector (at -0.3% in July of 2014 versus July of 2013). This is not surprising given the state’s factory sector has had to deal with two significant layoffs at IBM over the last 18 months in this category.
However, looking only at year-over-year job changes can sometimes be misleading since they emphasize only recent job labor market developments. Looking back at the job change numbers of the last three years indicate that progress toward a labor market recovery is still being made in the Vermont economy, with many of the same sectors that have been flat or down over the last year actually experiencing modest job gains over the longer three-year time horizon. Since July of 2011, the Vermont economy has added 7,600 nonfarm payroll jobs overall—including 6,800 private sector nonfarm payroll jobs—corresponding to growth rates of 2.5% and 2.8%, respectively. This is consistent with a Vermont labor market that: (1) did not lose as many jobs as its national or New England regional counterparts did during the “Great Recession,” and (2) made more significant recovery earlier in the labor market recovery process than was the case nationally and in many other states.
The Vermont Economic Outlook
The Vermont near-term economic outlook, which is based on the Moody’s Analytics’ national forecast, assumes a Vermont economy that will follow a path similar to that of the U.S. economy’s through the calendar year 2014-2018 period. A review of the State’s major macro variables under the revised NEEP forecast includes the expectation that current economic upturn will continue through 2018 in: (1) real output (as measured by Gross State Product or GSP), (2) inflation-adjusted or real personal income, and (3) in the labor market. It is also expected that the pace of recovery-expansion will continue to be moderate. As mentioned in previous NEEP outlook revisions, the more moderate rate of recovery-expansion in Vermont is the result of the less than average declines in output, income, and jobs that the State experienced during the “Great Recession”—that is, in comparison to its U.S. and New England counterparts.
For Vermont’s key macro variables, the calendar year 2014-2018 forecast update for Vermont expects an annualized 2.4% increase in output for all of calendar year 2014. Calendar year 2015’s output is then expected to follow a more typical 3.9% annual rate of increase. For calendar year 2016, GSP growth is expected to pull back, increasing at a 3.0% annual rate, followed by a 2.3% GSP growth rate in calendar year 2017 and a 1.8% in calendar year 2018. The forecast reflects an anticipated slowing in GSP growth over the back end of the forecast period as the U.S. economy slows due to the maturing economic cycle.
The rate of payroll job growth is expected to be 1.2% in calendar year 2014, followed by increases of 2.0% in calendar year 2015 and 1.9% in calendar year 2016. The rate of payroll job additions is expected to fall back to 1.5% in calendar year 2017 and 0.9% in calendar year 2018—again as the U.S. economic growth/recovery slows. Even so, payroll job growth is expected to average 1.5% per year over the calendar year 2013-18 period—a healthy uptick versus the -0.1% average for the calendar year 2008-13 period covering the timeline of the last recession, and the 0.5% annual rate of change over the calendar year 2003 to 2008 time period.
Nominal dollar personal income is expected to have a performance similar to GSP and employment growth, posting the strongest rates of growth during the initial years of the forecast horizon then tapering off during the out-years of the forecast as the other macro variables are expected to do. For calendar years 2014 through 2016, nominal dollar personal income growth is expected to increase by more than 4.0% per year. After calendar year 2016, nominal dollar person al income is expected to increase by more restrained rates of 3.1% in calendar year 2017 and 2.3% in calendar year 2018. The final two years of the forecast horizon show this metric perform consistently with the other macro variables discussed above. The state’s unemployment rate is expected to continue in its current position as lowest in New England (as it has for the last 3 years) and to perform consistently superior to U.S. unemployment rate (the State’s unemployment rate has ranked it second lowest in the U.S. in recent times) throughout the calendar year 2014–2018 forecast timeline.
During 2014:Q1, only five states in the country experienced a housing price decline (three other states in New England also experienced a FHFA housing price decline (including Connecticut, Maine and Rhode Island). Although these data are often revised (and since sales volume is typically very low during the Winter, revisions can, at times, be substantial), this was not a price change reading that would ordinarily be thought of as supportive of typical levels of residential construction activity.2
While the Vermont economy is not expected to establish any new records for output, job, and income growth robustness over the 2014-2018 forecast period, the revised forecast calls for the continuation of very “tight” labor market conditions and for a modest recovery in housing prices in the Vermont housing market. The state’s annual average unemployment rate is expected to fall through the entire calendar year 2014-2018 forecast update period. For calendar year 2014, the State unemployment rate is expected to average 3.5%--down roughly 0.8 percentage points versus the annual average for calendar year 2013. Over the calendar year 2015 through 2018 time line, the unemployment rate is expected to decline to an annual average rate of 3.2% by calendar year 2018—corresponding to a forecasted 1.2 percentage point decline in the unemployment rate over the period. If the updated forecast as presented is in fact met, the forecast would result in an average annual Vermont unemployment rate during calendar year 2018 that will be 1.9 percentage points below the U.S. annual average unemployment rate and 1.7 points below the New England annual average unemployment rate in that year.
For the revised forecast, positive job gains are expected in seven of the state’s eight private-sector NAICS supersectors.3
Outside the private sector, the government NAICS supersector is not expected to add jobs overall during the forecast period. The forecasted job gains in the manufacturing NAICS supersector is due to the food sector, and is predicated on no significantly adverse developments at the state’s largest private sector manufacturing employer IBM.4 The rumored sale of IBM’s Microelectronics Division has been discussed on and off since last spring, with rumor after rumor discussed in the financial press and by key players in the union that represents a significant share of the IBM workers. Most recently, discussions have again re-surfaced as this write-up “goes to press” regarding the “on again-off again” discussions with Global Foundries being back on again. The last time negotiations broke down this past summer, the reported transfer of roughly $1.0 billion in cash in terms of a payment that would be made by IBM to Global Foundries to take over IBM’s fabrication facilities was not enough to reach agreement. Should the long-rumored sale actually go through (which certainly is possible at press time), it is likely that the forecast for the state’s manufacturing supersector will very likely need to be re-evaluated.
Among the notable gaining sectors are the construction sector (at a +4.5% per year over the calendar year 2013-2018 period) and the leisure and hospitality sector (at +2.7% per year over the calendar year 2013-2018 period). Activity in the construction sector continues to be bolstered by repairs and restoration activity related to the aftermath of Tropical Storm Irene. Expenditures on Irene-related repairs are expected to contribute some forward momentum through calendar year 2015 but will tail off after the initial stages of the forecast update period. Following the peak of this recovery-related construction activity in 2011 and 2012 was a retrenchment during 2013.
Other positive performances over the forecast period are also expected in the professional and business services sector (at a +2.5% annual average over the calendar year 2013-2018 period) and the education and health sector (at a +1.8% annual average over the calendar year 2013-2018 period). One NAICS supersector that remains slightly positive (at +1.1% per year over the calendar year 2013-2018 time period), but lower than it would otherwise be, is the trade, transportation, and Utilities super sector. This supersector’s job performance would have been somewhat higher but for the expected loss of high paying jobs associated with the closure of the Vermont Yankee electric generating facility. While it is expected that a number of jobs would be needed post-closure, those jobs’ pay levels will be lower than the plant workers that they will partially replace.
With respect to the State’s housing market recovery, the revised NEEP forecast expects the gradual recovery in activity, and prices will continue over the forecast period. Improvement in sales and construction activity in the Vermont housing market will be made at a historically restrained pace—at least early on in the forecast period. Housing prices, as measured by the FHFA Price Index, are expected to build some momentum beginning in calendar year 2015 (after an “up and down” calendar year 2014 which is expected to see an increase of only 0.4 percent versus calendar year 2013). Beyond calendar year 2014, the forecast calls for prices to realize the following schedule of annual increases: a 1.7% increase in calendar year 2015, 2.9% increase in calendar year 2016, a 3.6% increase in calendar year 2017, culminating in a 5.1% increase in calendar year 2018.
While the Vermont housing price performance has generally been superior to the U.S. and New England averages over the calendar year 2008 to calendar year 2012 time frame, the more restrained housing price growth in Vermont over the calendar year 2014 through 2018 time frame (including the first quarter decline in calendar year 2014) is expected given the fact that Vermont housing prices as measured by the FHFA index did not experience nearly the rate of housing price decline as what was experienced by many other states, as well as relative to the New England and U.S. averages during the depth of the housing market recession.
NEEP Fall 2014 Conference Theme: Challenges and Opportunities in Economic Development
The conference theme of this NEEP outlook update concerns the economic development challenges and opportunities for the New England states as we look into the future. Vermont has many of the same economic development advantages and challenges as her New England sister states. Chief among the state’s challenges is Vermont’s remote and northern location, its aging population, its higher than average energy costs (even though they are low in comparison to the New England region), its relative lack of available “early stage” investment capital and other forms of financing, and its reputation (whether deserved or undeserved) as a higher than average taxed state in what is viewed as a relatively higher taxed New England region. In terms of economic development advantages, the state enjoys the advantages of a well-educated work force, strong commitment to K-12 education, a well-developed telecommunications system covering nearly all of the state,5 small-accessible size or scale that facilitates business entry, business networking, and access to government officials, low crime rates, a reputation for high quality natural and recreation amenities, and a strong brand identity for certain types of products and services.
Vermont’s collective economic development effort is executed by the State Agency of Commerce and Community Development6 (ACCD) in cooperation with 12 regional economic development corporations (or RDCs), a system of Chambers of Commerce and regional marketing programs, and development staff at some municipalities (such as the City of Burlington) that are found throughout the state. In addition, the State coordinates job training and work force development efforts through a myriad of organizations (including the Vermont Department of Labor and the ACCD’s own training program) and works cooperatively through the regional development corporations and state educational institutions. Also affiliated with the state as partners are entities such as the Center for Emerging Technologies, a cooperative public-private partnership located at the University of Vermont, the Vermont Economic Development Authority (VEDA), and the Vermont Technology Council, a cooperative effort that focuses on preparing Vermonters to work productively in the technology sector through apprenticeships and STEM7 education programs to boost the State’s competitiveness.
Over the years there have been a number of statewide efforts to develop and implement a statewide economic development strategy. The latest effort was undertaken by the ACCD from mid-2013 through mid- 2014. It was funded by the U.S. Economic Development Administration, where Vermont was invited to undertake a statewide Comprehensive Economic Development Strategy effort—a Vermont CEDS8—in part as a response to the need for building economic resiliency in the wake of Tropical Storm Irene. Following that August 2011 storm, the level of infrastructure damage significantly disrupted the state's economy.
The CEDS process systematically assessed the Vermont economy and identified 4 key components of the State economy to be approached with an array of strategies in a systematic way to achieve the following goals:9
1. Accessible Financing and Capital
2. A Skilled Workforce
3. Sound Infrastructure
4. A Competitive Business Environment
What also is interesting about the state’s CEDS effort, which is characteristic of all CEDS efforts, is the identification of key industry sectors (or “clusters” ala Michael Porter) for the state as a whole. The CEDS document indicated that these key sectors would be where “the deployment of the state's limited capital and human resources on certain economic sectors that can provide the greatest return on those investments in terms of benefits to businesses, workers, and the Vermont economy.”10
The end result of the CEDS selection process was the following 12 key sectors:
1. Advanced Manufacturing
2. Arts and Culture*
3. Biotechnology
4. Education*
5. Financial Services and Insurance (including Captive Insurance)
6. Food Systems*
7. Forest Products
8. Green Businesses
9. Health Care*
10. Renewable Energy and Efficiency*
11. Software Development and IT
12. Tourism
If this latest statewide effort to be strategic about economic development is successful, it will avoid the all-too-common fate of past efforts, where the final strategy was not accepted broadly enough to allow for full, long-term implementation. Only time will tell in this regard with respect to the State’s latest effort to bring a higher level of strategic organization to the economic development effort in Vermont.
1 NEEP refers to the New England Economic Partnership.
2 This has in fact been the case. Residential construction activity which was started during the 12 month period ending in June 2014 totaled approximately $290 million. That total was up by 25% from the 12 months ending in June of 2013, but stood more than 60% below the prior peak level in March 2006 of $697 million in spending. Nonresidential construction, which has benefitted from both strong commercial and public building starts in the past 12 months, in June of 2014 exceeded residential construction by $100 million. That represented the largest differential in these two building types ever recorded in the F.W. Dodge construction expenditures statistics for such a period.
3 NAICS means North American Industry Classification System. Labor data reported by the Bureau of Labor Statistics is classified by NAICS sector. Public and private reporting agencies follow this paradigm.
4 During the late summer, IBM has had “Help Wanted” signs posted on its corporate signposts at each of its street entrances).
5 As of December 31, 2013, the State of Vermont reports that over 99% of Vermonters have access to high speed internet service. The remaining roughly 1% had an identified solution for service. See State of Vermont Comprehensive Economic Development Strategy 2014-2020; Page 52.
6 Which is home to the Vermont Employment Growth Incentive (VEGI) Program.
7 STEM refers to Science, Technology, Engineering, and Math programs.
8 The acronym CEDS refers to Comprehensive Economic Development Strategy.
9 See State of Vermont Comprehensive Economic Development Strategy 2014-2020; Page 5.
10 Ibid; Page 74.
Jeffrey B. Carr, President
Economic & Policy Resources, Inc.
400 Cornerstone Drive, Suite 310
P.O. Box 1660
Williston, Vermont 05495-1660
(800) 765-1377
Mathew L. Cooper, Economist
Economic and Policy Resources
400 Cornerstone Drive, Suite 310
P.O. Box 1660
Williston, Vermont 05495-1660
(800) 765-1377