Dean's Perspective
Evansville Economic Outlook - 2008
Dr. Mohammed Khayum
Some of you may recall that last year I used the analogy of a medical checkup to talk about the annual checkup of the Evansville metro economy. Considering the health of the local economy by taking stock of its vital signs, evaluating how well we feel about current conditions, and looking at indicators that impact our future quality of life, the conclusion was that the Evansville metro’s vital signs were stable with evidence of good circulation based on current and projected (2007) economic activity. It was argued that there was no need for major surgery, but that there is some evident pain that had to be dealt with, particularly, the job declines in the manufacturing sector as the economy continues to diversify away from the manufacturing sector. This year I would like to further explore the health of the metro economy in terms of the mind versus the body considerations that we look at when we consider own health.
Obviously, good health means both a sound mind and body. As individuals, with the foundation of a sound body we are in the fortunate position of being able to keep exercising and developing our minds – to build our intellectual capabilities, to be imaginative, to be creative and innovative. As we strive to maintain our health we look at our cholesterol, we pay attention to what we eat and how much we exercise and we understand that we are not completely immune to what happens around us, which explains why some of us decide to take a flu shot at this time of the year. However, we also pay attention to our mind – at our ability to recall things as easily as in the past, and our ability to be creative and effective problem solvers.
Similarly, the Evansville economy can be examined for signs of good health, identifying symptoms of concern, with an awareness that our local economy is not immune from what is happening elsewhere in the national economy, or in the global economy. In terms of its “body” the area’s economy is stable, it has been adapting well to change such as the movement towards a service economy, and it shows signs of ongoing positive developments.
With regard to the mind dimension of the area economy we have some catching up to do. We have a healthy economic body and increasingly we will be pressed to continue developing the mind of the metro economy in terms of measures of innovation, entrepreneurship, and creativity.
Let’s examine some of the available evidence. In the midst of increasing concern about the emergence of economic slowdown in the U.S. economy it is useful to start with an update on three economic indicators that were projected last year for the Evansville metro area. As the slide shows, at this stage the results for 2007 are below projections and while much depends on what happens in the last few months of the year it is likely that actual performance will be below the forecasts that were made a year ago.
Economic performance in 2007 was influenced by job creation in construction as well as service-producing industries, which offset weakness in manufacturing and retail trade. In addition, within the past 10 months there has been a slowdown in the housing market, deteriorating credit quality, and higher delinquency rates.
Compared to a year ago, single-family housing starts have declined by more than 20 percent, existing home prices have declined from an average of $100,300 to $98,300, mortgage originations have dropped from $1.56 billion in 2006 to $1.49 billion in 2007 and personal bankruptcies have increased from 3.1 to 5.7 per thousand individuals in the Evansville metro area. (In comparison the national average for personal bankruptcies in 2007 is 3.24 per thousand individuals).
While growth has slowed, as some of the information in the middle panels of your program indicate the area economy compares favorably with other metro economies. And as we look ahead, undoubtedly, there will be some additional impacts arising from announcements that occurred this year such as: the $77 million expansion by Berry Plastics and Toyota, construction activities by American General and educational institutions, as well as the payroll impact of the new AT&T call center.
In this context, the likely performance of the Evansville metro economy in the next year will be impacted by the following strengths and challenges.
One strength is the low living costs relative to per capita income as can be seen from the data on the cost of living index and per capita income particularly in comparison to other metro areas.
Another is the stable economic environment which has prevailed for so many years. As a result the economic strength ranking of the Evansville metro compared to 361 other metro areas has improved from 169 to 88 between 2004 and 2007. (this ranking is based on 20 years of data on the size, growth, and poverty indicators)
A third strength is the presence of a sizable and dynamic manufacturing sector. 19 % of total jobs are in manufacturing in the Evansville metro compared to 10.4 percent for the U.S. economy. In the last five years manufacturing earnings as a share of total earnings continues to hold steady at about 28 percent. The vitality of Evansville’s manufacturing sector is explained in part by performance in the auto industry headed by a major employer like Toyota as well as to the demand for primary metals, which keeps Alcoa among the largest local employers.
A fourth strength is the presence of robust logistics infrastructure. Among metro areas, the Evansville metro is ranked fifth for the best transportation and warehousing work force.
Emerging challenges are linked to external influences at the level of the national and global economies, the slowing housing market, rise in personal bankruptcies, low population growth and limited net migration.
More fundamental challenges include a relatively low innovation index proxied by the number of patents per 10,000 employees, and a ranking of 154th among metro areas with regard to a creativity index (based on the size of the creative work force, innovation, high-tech activity, and diversity), an educational attainment level (percent to those over 25 years with a bachelor’s degree) that is several percentage points below the national average, a sizable elderly age cohort, and a trend in the labor market composition from high paying manufacturing jobs to lower paying service positions.
Current efforts to attract future high-tech related industry via the creation of a downtown technology park - Innovation Pointe, an emphasis on workforce development, the results of economic development initiatives supported by the state such as fostering biofuel production, and relatively low office rents below the national average are sources of momentum for economic expansion in the next few years.
Looking ahead, critical challenges facing the Evansville metro area include the staying competitive through innovation while coping with demographic changes in the labor force, the continued decline in the relative importance of the manufacturing sector.
In summary, using the metaphor of body versus the mind, the Evansville metro’s vital signs indicate that we have a relatively robust and healthy economy based on recent economic activity. There are symptoms that we should be concerned about such as personal bankruptcies and the level of innovation. Through focused, persistent, and collective action we can continue to take advantage of our relatively solid economic base and sound performance to strengthen the region’s intellectual capital, its creative workforce, its entrepreneurial talent, and its innovation landscape.
For the long term this means ongoing and increased attention to enhancing aspects of a creative economy such as growing the creative talent pool (within and through attraction (not just attracting new firms per se but knowing the creative work force component that is associated with these firms) while at the same time developing the capacity to absorb and retain the talent pool within the region.
Now to end where I started I will share projections for 2008 which we will consider at next year’s economic outlook luncheon.
Based on information that is available at this time, the outlook is for continued growth but at slightly lower levels: As the slide shows output is forecasted to increase by 2.1 percent, the number of jobs is projected to increase by 1,600 and the forecast for personal income growth is 4.3 percent. Additional forecasts can be seen in the accompanying slide and a year form now we will get another opportunity to examine how well the metro economy has maintained a healthy mind and body.
