An unexpectedly sour jobs report in early September, coupled with suddenly swooning hedge funds, has raised questions whether a recession is on the horizon ”“ and whether Fairfield County”™s economy has grown more vulnerable to a downturn.
As of June, just 3 percent of Connecticut businesses indicated they were preparing for a recession in their industries over the next 12 months, according to a new survey by the Connecticut Business & Industry Association (CBIA) and Blum Shapiro, an accounting firm with offices in Southport and West Hartford. Nearly half of the companies surveyed predicted slow growth over the next year.
With regional banks reporting in late August tightening standards and weaker demand for commercial loans and home mortgages, however, economists at CBIA-sponsored forums in Stamford and Rocky Hill expressed fears that a credit crunch could be under way. The Federal Reserve Bank of Boston reported that primary lenders there stopped lending altogether a few weeks back; while they have resumed lending, observers there expect a “major disturbance” in the near future despite relatively robust underlying fundamentals in the New England commercial market.
“We were anticipating a modest slowdown,” said Rae Rosen, senior economist and assistant vice president of the Federal Reserve Bank of New York. “Now we don”™t know.”
With local and New York City financial firms driving a substantial portion of Fairfield County”™s economic engine, the next few months could be telling both for those financiers and the firms that provide them various professional services.
“We don”™t know where the bad debt lies, who is holding it,” Rosen said. “If it turns out to be the financial institutions in this part of the country, they are going to have to write that debt down.”
That in turn translates to lower profits and lower year-end bonuses, which are a significant part of the compensation of local managers.
“Fairfield County has seen a lot of job growth in financial services, which really is sensitive to the performance of the credit market,” said Steven Lanza, executive editor of The Connecticut Economy, a quarterly journal published by the University of Connecticut.
Even though Fairfield County was the lone area in Connecticut to notch an increase in housing permits in the second quarter, the odds of a recession have been boosted by the subprime mortgage meltdown, according to Daniel Kennedy, senior economist with the Connecticut Department of Labor who writes a quarterly economic forecast for The Connecticut Economy.
Kennedy notes that the out-of-whack housing market is balanced by positive economic trends, including a lower dollar that is boosting foreign demand for U.S. goods; increased productivity; growth in sectors like health care and education; and companies rebuilding their inventories.
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“Most recessions are created by some kind of inventory imbalance,” said Delos Smith, president and chief economist of New York City-based Delos Smith and Associates. “There is none.”
Any financial meltdown would exact a heavy toll on the state”™s economy, Kennedy warns nevertheless, with 19 percent of the state”™s earnings coming from the finance sector, and 40 percent of that total from hedge funds and brokerages.
Hedge funds were off 0.7 percent in August, according to a monthly report published by Hennessee Group L.L.C., though still up 8.1 percent for the year. The New York City-based investment advisor said that while the subprime mortgage debacle has resulted in heavy losses at some hedge funds, many funds predicted the crisis and adjusted their portfolio investments to profit from the changes.
Once known more as a haven for the headquarters of Fortune 500 companies, Fairfield County”™s economy is far more dependent on the financial sector than ever before, notes Michael Freimuth, director of economic development for the city of Stamford.
“As much as we like to say company X, Y or Z is (based) here ”¦ increasingly we are financial (in focus), we are international,” Freimuth said.
Stamford is currently benefiting from the expansions of international finance companies UBS AG and Royal Bank of Scotland. But its opportunity to accommodate additional relocations in the near term is limited ”“ Freimuth said that the city currently has just two blocks of office space available encompassing 100,000 square feet.
In Manhattan, 35 companies are seeking offices that size, and only 19 locations there currently meet their needs, according to Kenneth McCarthy, managing director of research in the New York metro region for Cushman & Wakefield.
While Stamford has a commercial and residential building boom under way, the fact that debt-based transactions drive much of real estate development may give pause to future development, McCarthy said.
“Lenders are getting much more nervous about the outlook, and are not as willing to lend just because the tenant can breathe,” McCarthy said.
For now, the regional economy appears to be holding its breath as it waits for third-quarter earnings reports that will shed light on profitability and earnings projections. Area businesses continue to hire to fill open positions, notes Peter Gioia, CBIA vice president and economist.
Just as important, few have announced layoffs ”“ job separations were down in July from a year ago, according to the U.S. Department of Labor, and flat from June.
“Usually we can tell,” said Carl Johnson, managing partner of Blum Shapiro. “The phones start ringing with people saying we need to lay people off. That hasn”™t happened yet.”
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