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20 areas on the brink of economic recovery

Image: Columbus, Ohio
Not only has Columbus, Ohio, emerged as one of the country's strongest performing economies since the downturn — with gross metro product 5.6 percent above the prerecession peak—its recovery has also been better than mostVia Businessweek
/ Source: Business Week

For residents of Buffalo, N.Y., there are few obvious signs that the local economy has been improving. “The Queen City’s” manufacturing base has been gutted and population growth has stagnated. Yet Buffalo is better off than it seems. Along with 20 other metros, it has rebounded to near-prerecession levels in terms of jobs, unemployment, economic output, and house prices.

According to a new report from the Brookings Institution, Buffalo and such rust belt metros as Rochester, N.Y., and Pittsburgh — as well as much-discussed growth zones like Washington — have outperformed many of the nation’s leading economic areas since the recession began. (Other high performers include the McAllen, Tex., and El Paso metros, which despite high unemployment rates have performed well, relative to prerecession levels.) Behind Buffalo’s performance is growth in such areas as health-care and social-assistance jobs, which have grown to about 73,400 in May 2011, from an average of 69,600 in 2007, according to U.S. Bureau of Labor Statistics data. In the same period, employment in leisure and hospitality jumped to 55,200, from 49,100. The Buffalo area’s housing prices did not spike during the real estate bubble, so home prices have been stable, compared with those in many parts of the country.

As Howard Wial, a fellow for the Metropolitan Policy Program at Brookings, points out, many metro areas in the report were not particularly strong before the downturn and haven’t necessarily enjoyed quick recoveries.

Businessweek slideshow: America's economically strongest metros

Metropolitan areas in the Great Lakes region that specialize in autos, auto parts, and durable goods manufacturing are recovering strongly from their lows, although many remain well below prerecession levels, the report states. Weak performers include automaking areas such as Detroit.

“Muddle along” or double dip?
With the U.S. recovery recently losing momentum, says Wial, “we’ll likely muddle along with the painfully slow growth that we’ve seen, without a double dip,” although he warns that too much federal deficit-cutting too soon could push the nation into a double-dip recession.

Brookings analyzed the country’s 100 largest metropolitan areas and selected the 20 best-performing, based on proportional job change, change in economic output (or gross metropolitan product), and change in house prices from the peak quarter to the first quarter of 2011, as well as the difference in unemployment rates from March 2008 to March 2011.

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By this year’s first quarter, U.S. gross domestic product had returned to about the same level as the prerecession peak, while unemployment remained above 9 percent and home prices were down by 23 percent, according to data provided by Brookings.

With local governments slashing jobs, home prices hitting a new low, and Congress focusing on cutting the deficit, the recovery seems to have slowed. In its most recent economic projection, the Federal Reserve lowered its GDP forecast for 2011 to a range of 2.7 percent to 2.9 percent, from 3.1 percent to 3.3 percent.

“Our own view is that this is a temporary soft patch,” states a Morgan Stanley report published on June 24. The authors expect a rebound in the second half of the year if vehicle production spikes in the near term, consumer spending increases because of lower fuel prices, and capital spending accelerates.

Government contraction cuts growth
A key sector that is no longer expected to boost the recovery is government. “The metropolitan areas that suffered least since the beginning of the recession typically had increases in the number of government jobs,” the Brookings report states. Many state and local governments are shedding employees to cope with budget shortfalls.

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Nationally, some 25,000 to 30,000 state and local government jobs are being lost each month, a contraction that subtracted 0.4 percentage point from GDP growth in the first quarter, according to St. Petersburg (Fla.)-based financial services company Raymond James. Already, the number of local government jobs fell to about 14.4 million in 2010, from nearly 14.6 million in 2009, show data from the U.S. Bureau of Labor Statistics.

“Trends in government employment during the recovery don’t bode well for the future of the recovery,” Wial wrote in a New Republic blog. Of the 88 large metropolitan areas whose employment rebounded from lows, 50 lost federal government jobs, 43 lost state government jobs, and 60 lost local government jobs during their recoveries, he stated.

Wial adds: “The current mania in Congress to cut the federal budget deficit immediately, even while nationwide unemployment remains above 9 percent, is a move in the wrong direction. Big deficit cuts in a weak economy will only slow down what’s already — in most metro areas — a tepid recovery.”

Can the private sector offset negatives?
TD Bank Group Senior Economist James Marple says government roster shrinkage will continue to subtract from total job growth and housing will lag. “We will need to see the private sector offset that,” he says.

In a report issued in March, TD Bank called the manufacturing sector the “star of the economic recovery,” as demand for durable goods increased and housing and services underperformed. Still, with manufacturing representing just about 12 percent of economic output, growth in services will become more essential to the recovery.

“You’ve seen positive job growth in professional business services related to health care, scientific consulting, and engineering,” Marple says. For example, the number of education and health-services employees nationwide increased to 19.6 million in 2010, from 17.8 million in 2006, show BLS data. Until the housing market joins in the recovery, job growth will rely more heavily on these kinds of services, he says.

Net job creation, however, will be a challenge. Even strongly performing economies such as those in McAllen, Tex., and El Paso, which are not far below prerecession numbers, continue to struggle to push down unemployment levels, which stood in March at 11.9 percent and 10 percent, respectively. By 2013, the Fed expects the U.S. jobless rate to remain as high as 7.5 percent. So while the economy looks to be improving, the pace seems sluggish in many places.