Glimmers Of Hope For 2012

Oil production should continue to boom, manufacturing is rebounding, international trade is growing, tourism is up, and multi-family housing construction looks promising.

On the negative side, natural gas production should have a tough year, government workers are losing jobs, and continued weakness in the real estate markets will hinder construction recovery and slow growth in some New Mexico financial institutions.

“It’s expected to be a pretty broad-based expansion both in terms of sectors and geographically,” said Lee Reynis, director of the University of New Mexico Bureau of Business and Economic Research.

State tax collections and projected tax collections indicate “steady but moderate growth consistent with a slow economic recovery,” said David Abbey, Legislative Finance Committee director. In the current fiscal year, ending June 30, “pretty strong revenue growth is shaping up.”

What the LFC calls recurring revenue — money like taxes and leases as opposed to money like one-time federal highway grants — fell more than 20 percent from the 2008 fiscal year to fiscal 2010. In the coming fiscal year recurring revenue is expected to be at just about fiscal 2007 levels.

GRT growing

Taxable gross receipts, an indication of the strength of consumer and business spending, has grown 12 percent in the last six months and is less than 1 percent below the peak it reached in fall of 2009, Abbey said.

Jed Fanning, a US Bank executive vice president and group manager of New Mexico, said that statewide consumers and businesses continue to shed debt, and that has reduced the amount of money circulating in the economy. The plus side of that retrenchment, Fanning said, is that balance sheets are getting stronger, and businesses and consumers have become “more disciplined, more creative” and more inclined “to think outside their comfort zone.”

US Bank studies are finding that business use of lines of credit is down throughout its 25-state system, Fanning said.

“There is not a lot that is concrete that we can point to that looks good,” said Pat Dee, community relations executive of US Bank’s community banking division. However, it has never been cheaper to borrow, and consumers and businesses “are getting used to this new normal.” Dee said his “gut-level reaction” is that these factors are generating a cautious optimism about business conditions around the state.

Steve Henke of the New Mexico Oil and Gas Association expects “continued vigorous activity in southeastern New Mexico,” where much of the state’s oil is extracted. “I suspect natural gas (producers) will continue to struggle in northwestern New Mexico.”

Oil looking good

The oil boom “is a matter of price,” Henke said. The natural gas slump “is a supply situation.”

NMOGA expects oil to trade at between $70 and $100 a barrel over the next two years. That price makes it economically sensible to use drilling technologies that squeeze more oil out of older formations of the type found in New Mexico.

“Nationally, we’ve been so successful bringing large supplies of natural gas into the market that the price is very depressed,” Henke said. “We don’t see that changing in the near future.”

Southeastern New Mexico oil producers are once again facing labor shortages that constrain production, Henke said, but the regulatory climate is improving. “We feel good about where we are and the opportunity to have a fair hearing on some of these issues and, hopefully, take some of the politics out of it and get a scientific look at it,” he said.

Reynis expects improved infrastructure at the Santa Teresa border crossing and new power grids that are designed to ease bottlenecks on alternate energy transmission to pay off with more jobs in the coming years.

UP and Mexico boom

Union Pacific Railroad is spending $400 million in Santa Teresa to build what it describes as “an inland port that will serve as a strategic focal point for goods movement” that should result in 600 new permanent jobs. Reynis said New Mexico has gone from an insignificant trading partner with Mexico to one of the country’s biggest partners, and the Union Pacific project should increase that trade. “We need to be better linked to the rest of the country and internationally if our economy is going to do well,” she said.

Reynis said manufacturing, tourism, retail trade and professional services are all expected to grow in the coming year.

Employment has declined at all levels of government, and it should remain depressed in 2012, Reynis said. “When government accounts for 25 percent, which it was in 2009, of your total employment, it’s a substantial hit to have that drag and to have it sustained. That’s the concern as we move forward.”

Reynis said she is concerned about finance in 2012. Some banks need to raise the amount of capital they have on hand while at the same time traditional sources of loan demand are drying up for community banks.

“The problem for community banks is what they have in their portfolios is real estate,” Reynis said. “That is where they are getting hit. Regulators want them to diversify away from it. Some of those assets have lost their value, and there aren’t a lot of other options” for loan demand.

Banks ‘still very leery’

“Banks are still very leery of what is going to come out of (federal) Dodd-Frank regulations, some of which haven’t been written yet,” Pat Dee said. “They’re sitting and waiting for next shoe to fall.”

Residential and commercial builders are expecting another tough year.

“Everyone is saying what you see right now is what you’re going to get for 2012,” said Lynne Andersen, president of NAIOP, a commercial and industrial real estate trade association. “It’s a grind. They see very slow improvement but no driving force that would create overall economic growth. Depending on the federal government and their decreased ability to spend, we could even see a growing negative impact on New Mexico development and the real estate industry.”

Andersen expects no speculative office or industrial activity, and she says bank financing is hard to obtain. Small subcontractors and some suppliers are starting to go out of business, she said.

“In terms of new development, we are seeing an uptick in retail, particularly value retail such as inexpensive fast-food (stores) like Subway … or discount stores like Dollar General or Dollar Tree,” Andersen said. “Multi-family is a bright spot, as are senior care and senior housing.”

Housing turmoil

Residential real estate may never be what it was before the recession began nationally in 2007. About 69 percent of households in 2006 lived in homes they owned, said Jim Folkman, executive vice president of the Home Builders Association of Central New Mexico. He expects that number to drop to perhaps 62 percent and probably stay there for years to come. That means residential construction faces big changes.

“This has already started, especially with younger people in their 20s,” Folkman said. “Usually first-time home buyers are 24 to 32 years old, but a lot of those young people are saddled with huge student loans and they don’t have money for a down payment.”

Homebuyers who once thought of housing as an investment will begin to think of their homes as a cost. The growth in real estate values should be slower, so housing will represent a smaller portion of families’ net worth. That means more people will find that renting makes more sense than buying, Folkman said.

“I see us downsizing in terms of housing,” he said. Households will be smaller. Homebuyers will demand more energy efficiency. Developments will be more dense. Good design and quality will be in demand. “The market is going to be much less forgiving.”