Stimulating talk about the economy

February 27, 2009

As the Executive Director of an organization with Economy in its name, I am asked frequently for insight on the state of both the nation's and the region's economy.  While I am not an official "economist," I have been analyzing and examining regional economies for most of my career. Recently, it seems like every day brings a new opportunity to discuss what is going on in the economy and how it impacts our region.

As we all know, most of the major indicators have been trending downwards. As consumer confidence has fallen, retail sales, new home sales, and existing home sales have all fallen. Unemployment is rising, as companies and governments are retrenching and retooling to meet diminished expectations in anticipation of future economic challenges. Job-cutting in this recession, which is likely to be longer than any recession since World War II, is across the board. Every sector is being hit, and the job cuts are spread across the income and age spectrum as well, depending on the industry.

We are seeing a return to savings among consumers, which is, in general, a good thing. However, over the past decades we have built an economy based on consumer spending, and that slowdown, along with the end of the housing boom and the collapse of the financial system, is leaving us at the bottom of a deep hole looking up and hoping for a glimmer of light.

That's the national overview. How is our region faring?

Our local economy is faring better than many other regions, but we are definitely feeling the impacts of the national recession.  Historically, Greater Philadelphia has grown slower than the nation during good times, and we typically don't fall as far when the economy turns down. We have a highly diversified economy without single industries that can bring down the entire region (witness the Midwest and the auto industry).

Our real estate market did not exhibit the overexuberance seen in places like California, Phoenix, Florida, or Las Vegas, although some of our further out suburbs and newer housing developments are facing some foreclosure challenges, and rising unemployment will exacerbate that problem. The problem we are facing now is that slow growth has become no growth or negative growth, and our major industries are starting to be hurt by the fallout from national and global trends. We are truly in a global economy, and when the world gets the flu, we all will catch some version of it.

On the whole, the region will be helped by our strength in education and health care, but even they are not immune to trouble in the current climate. Our colleges are being hit from multiple sides. Financial aid is squeezed by the credit crisis at the same time that endowments have shrunk, leaving the institutions with shrinking assets with which to deal with increased  demand.

Prior to this downturn, growing endowments fueled construction of new facilities. Now, many of those projects are being put off or cancelled until colleges and hospitals have a better handle on the long term impact. And as unemployment rises, hospitals are also facing concerns about the impact of uncompensated care on their bottom line, although the increased COBRA benefits in the stimulus package will help.

Finally, significant cutbacks are ahead as state and local governments grapple with serious revenue shortfalls. You've heard the Philadelphia, Pennsylvania, New Jersey, and Delaware  stories, and we are also seeing school districts around the region preparing their residents for revenue shortfalls and potential tax increases. Stimulus support may be of assistance here.

So what about the stimulus package? Hot off the presses, the $787 billion "American Recovery and Reinvestment Act" passed by Congress last week was slightly scaled back from the original House and Senate versions but retained most if its spending provisions. While many have billed this most recent round of government spending as "infrastructure stimulus," the reality is that only a small portion of the final package is dedicated to infrastructure, and an even smaller portion to transportation infrastructure.

Two-thirds of the stimulus package will be funneled to individuals, businesses, and states through direct aid or tax cuts. The remaining third will fund government projects, the majority of which will be directed to infrastructure spending.

Transportation infrastructure will receive $48.1 billion, or just over 6% of the total stimulus package. Over half, or $29 billion, will be used for highway improvements. Another $8.4 billion will go towards public transit improvements and $1.3 billion to aviation improvements. The final bill also included a new provision of $8 billion for capital investments in designated high-speed rail corridors.

Highway stimulus funds will be distributed to states by Federal Highway Administration formula. Of the total $29 billion, Pennsylvania will receive $1.026 billion and New Jersey $652 million. If the five counties of southeastern Pennsylvania and four counties of southern New Jersey receive their population-based share of highway dollars, Greater Philadelphia will receive $318 million from Pennsylvania and $120 million from New Jersey for a total of approximately $438 million dedicated to highway capital projects in the region.

For public transit, the majority of stimulus funds will be distributed to states by Federal Transit Administration formula. Pennsylvania will receive $263 million and New Jersey will receive $447 million. While states will have general discretion, formulas allocate 80% of these funds to urban areas. If Greater Philadelphia receives the SEPTA's ridership-based share of Pennsylvania's total, Greater Philadelphia will receive approximately $193 million dedicated to transit capital projects, plus any transit funds received for New Jersey.  Combined, stimulus funds will bring an estimated $631 million to the region for highway and transit projects.

Highway and transit officials across Greater Philadelphia have been working to develop projects that satisfy the stimulus package's "shovel-ready" criteria. Preliminary analysis indicates that the region currently has $1.4 billion dollars of transportation projects that will be ready to break ground within 120 days. The Delaware Valley Regional Planning Commission on February 26 approved $668 million worth of local transportation projects for this stimulus round.

While these dollars are welcome additions, it's important to remember that the one-time influx of stimulus infrastructure funds will not chart a course for the future. The true value of the stimulus is as a jumpstart to something bigger, a new opportunity for the region to move forward on steadier footing. The ultimate impact of each project will depend on the extent to which the region comes together to fuel progress towards broader regional objectives and a shared vision for a world class transportation network in Greater Philadelphia  (For more information, see Economy League's Policy Brief  on this issue).

While most of the stimulus attention has been on tax cuts, government and school aid, and infrastructure, there are some interesting aspects that could have a big impact here in Greater Philadelphia. Lots of folks are looking at the bill and trying to understand where the opportunities may be for our region -- green jobs and health care information technology stand out as potential winners. (To learn more about the opportunities, Sen. Robert Casey (D-PA) has posted a very helpful summary here.) Stay tuned for more information as the impact of stimulus, bailout, and the Obama budget -- three massive programs -- are analyzed and sorted.

Three good sources of information on the stimulus impact include: