An economy in limbo
Amid uncertainty, some fear inaction will feed on itself
By Kimberly Blanton
The Boston Globe
1/26/2003
CAMBRIDGE - It is one more 19th-century farmhouse, but its interior has been restored with minimalist flair. Bookshelves made from the wood of French pear trees, hallways paved in Oregon pine, a kitchen outfitted with a Sub-Zero refrigerator and Thermador stove - the house tucked into a side street near Cambridge Common is an architectural jewel.
It has been on the market 146 days, and Kurt and Laure-Anne Brown would like very much to get rid of it.
The Browns first listed the house in August for $3.45 million, after buying a Greenwich Village condominium nearer to their teaching posts at Sarah Lawrence College in Bronxville. Even though they quickly knocked the price down to $2.95 million, the house hasn't sold.
Why not reduce the price again? ''I haven't thought about it a lot because we're not at that point yet financially,'' Kurt Brown explains. ''The market will come back at some point.''
From owners of multimillion-dollar homes to unemployed single parents, we are a nation in waiting, grappling to come to terms with a new economic reality. While low mortgage rates are fueling a housing market that remains remarkably hot in a cool US economy, high-end homes are taking longer to sell by owners who are skeptical of those who contend a bubble may be bursting. Investors are abandoning the stock market, waiting on the sidelines for a rebound. Business owners are canceling investments in plants and new equipment. Even tourists are delaying weekend trips to see Broadway plays. And the victims of these delayed decisions, the nation's unemployed, are also waiting: The number of people who have been without work for 26 weeks or more is at its highest level since 1993.
The economy ''is right at the edge. We're right at the stall speed,'' says Nicholas Perna, an economic consultant in Ridgefield, Conn. ''You put everything on hold,'' he says, and ''it's unsustainable.''
That may be because the waiting itself is the problem.
While it makes sense for any individual or business to pull in their horns when economic uncertainty arrives, this collective inaction only feeds on itself. ''Whenever there is uncertainty in the environment, the tendency is to hold back and see where the dust settles,'' says Robert Frank, a Cornell University economist who studies human behavior. ''There's a self-fulfilling aspect: If you're concerned demand won't develop, you don't build your plant, and if you and others don't build plants, there's less spending, and that's going to choke things off.''
So far, consumers have almost single-handedly pushed the economy forward in the face of war and uncertainty. Enticed by low interest rates, they have continued to spend, on cars, houses, and furnishings. But economists predict that the federal report on the economy, which will be released this week, could show growth slowed in the fourth quarter of last year to a 1 percent annual rate; some have forecast a contraction. If the most pessimistic forecasts prove right, consumer spending may no longer be enough.
''I'm not at all confident,'' David Wyss, an economist for Standard & Poor's in New York, says about his forecast for 3 percent growth this year. Around the world, he sees ''big downside risks,'' namely, potential war with Iraq. While the US economy grew last year, Europe was sluggish, and Japan has been in trouble for 15 years. ''There's a risk we'll get sucked down into that morass,'' he says. ''Japan and Europe are waiting for the United States to pull them out. US industrialists want to wait for consumers to pull them out. Consumers are waiting for the government to pull them out. So there's a lot of buck passing going on.''
Last year, MassDevelopment, a state authority that helps companies obtain financing, guaranteed 33 bond sales on behalf of Massachusetts manufacturers. There would have been one more had Worcester manufacturer Komtek Inc. not postponed a planned deal.
As chief financial officer Steven Dasaro sat in Komtek's conference room and watched terrorists crash into the World Trade Center, a slowdown in the aerospace industry was not on his mind. Six months later, the downturn came. Orders for the company's forged-steel engine parts slowed, and revenues dropped by a third, to $17 million in 2002. ''We're taking it on the chin,'' says Dasaro.
Prior to Sept. 11, Komtek executives had felt optimistic. Despite the 2001 recession, demand for jet-engine parts remained good. Komtek made plans to expand into a new product line: giant turbines for electric power plants. The company applied for $3 million in financing to renovate a building and install a furnace hot enough to produce the strong metals required in turbines.
By the time the deal was approved, in May 2002, the risks were deemed too great. Rather than expand, Komtek idled some forging machines and laid off 93 steelworkers and office staff - more than half its Worcester work force. Dasaro doesn't see much to be optimistic about in the near future. Airline traffic is still down, and aircraft manufacturers have slashed engine orders.
The family-owned business is now seeking investors to keep afloat, he says. ''We believe we're going to manage through it,'' he says. But, he asks, ''When is the recovery, or signs things are starting to improve, actually going to happen? You wish you knew.''
Fallout in the state's telecommunications sector drove down financings last year by the state's manufacturing firms, says Michael Hogan, president of MassDevelopment. While remarkably low interest rates were appealing, uncertainty bred caution, and firms ''went on the sidelines.''
Due to the high-technology slump, the downturn in Massachusetts is deeper than in many parts of the country. But, investment nationwide in plant and equipment has declined eight consecutive quarters. Investment in equipment alone - servers, machine tools, trucks, airplanes - began picking up in the third quarter of last year, but not at the pace of past recoveries. The economy ''ought to be bouncing back but we're bobbling along the bottom,'' says Standard & Poor's Wyss.
The downward spiral that results from delayed investment is as evident in the downward spiral of a manfacturing industry carrying too much capacity as it is in a stock market struggling to lift itself out of a protracted decline.
Investors have left the stock market in droves. Ken Peng, an economist for Citigroup's Salomon Smith Barney brokerage unit, estimates that assets in short-term money-market funds - a haven - are now 25 percent of the value of the Wilshire 5000 stock index. That is an all-time high. While Peng blames three years of back-to-back market declines, investors are also ''on the sidelines.''
''There's a lot of uncertainty hanging out there, and until [things] clear up, people aren't going to make any decisions,'' he says.
The problem is that until the uncertainy lifts, people like Mel Bernstein won't be putting any more money into the market. The owner of a Boston-area advertising firm that bears his name, he was never shy about investing in stocks. After the 1987 crash, he stayed in. But a 30 percent decline in his stock portfolios since the market peak has shaken Bernstein, who diverted his entire payroll deduction, $500 to $1,000 per month, from stocks into more conservative bond funds. ''I'm waiting for it to turn around,'' Bernstein says. But, ''it's like a roller-coaster ride - one week it's up and one week it's down. I'm just hoping the economy's going to improve.''
Last year, homebuyers were the only ones who were not waiting: Sales of new homes surged in December, making 2002 a record year. Strong housing demand, in the midst of a general slowdown, perplexes economists, who attribute the buying frenzy mainly to low mortgage rates. Buried in those glowing real estate reports, however, was evidence of pockets around the country - Boston is one - where sales of expensive homes have slowed.
The middle-class buys homes to live in. Wealthy people view theirs as investments, and more are staying put. Despite dropping rates, it now takes 82 days, on average, to sell a house priced at $1 million or more in the Boston area, up from about 63 days a year ago, according to the MLS Property Information Network.
''High-tech people are losing their jobs, so they're certainly not going to spend $750,000 to $1 million on a house they're not even sure they're going to be able to afford in six months,'' says Kathy Condon, president of MLS Property. More people are selling, ''because they've lost their jobs and are downsizing or relocating.''
Maryann Roos Taylor, a LandVest broker sporting a Louis Vuitton bag, is helping the Browns sell their Cambridge farmhouse on Follen Street. She acknowledges the high-end market is soft but predicts a brisk turnaround. She points to a house down the street that sold for $5.1 million last fall. ''The spring market's going to be great,'' she says.
Housing - all price ranges - is key to the economy's future, says Karl Case, Wellesley College economics professor. He suspects one reason high-end houses sit unsold may be ''denial'' by sellers. ''We worry about lower prices crashing the economy, but in fact what would hurt the economy more is if the volume [of home sales] trailed off,'' he says. When people buy a house, ''they buy furniture and rugs. The big danger is not prices falling. The big danger, in my judgment, is that these holdouts stall the market, and you don't get the turnover that's generating the consumer expenditures.''
Consumer spending generates two-thirds of the nation's economic activity. Americans have responded with gusto to zero-percent car financing. Last month was the best December ever for car sales. But if the jobless rate continues to rise, the unemployed - and workers worried about their own employment prospects - would put the brakes on spending, analysts say.
Free financing won't help Paula Carnese, a single mother who has been unemployed for 30 weeks. The clutch blew on her 1990 Geo Prizm, but she can't afford to replace it. Having run up her credit cards, she stays within her means and buys only necessities. When her $512 bimonthly unemployment check comes, she treats herself and 7-year-old Gabrielle to a trip to the grocery store. On a bitter-cold night last week, their refrigerator was stocked, putting an end to too many recent meals of breakfast cereal. Gabrielle, having feasted on chicken, rice pilaf, peas, and beans, was eating plump strawberries.
A US unemployment rate of 6 percent, while up from a year ago, remains moderate by historic standards. Over 104,000 people were thrown out of work in December, according to a federal jobs report that was more grim than analysts had expected. Many economists view it as the tail-end of layoffs before the 2003 upturn begins.
Until someone hires her, Carnese will spend her days at the library, searching the Web for job openings and e-mailing applications ''into cyberspace.'' Although she polished her resume and learned Excel, Word and PowerPoint during a 19-week training program at Operation A.B.L.E., Carnese, who is 45, does not remember ever having so much trouble finding work.
No amount of activity keeps at bay that dreadful feeling of limbo. ''How long,'' she wonders, ''is it going to take? That's when the fear sets in.''
boston.com |
