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Sunday, November 23, 2008
N.M. Battens Down in Tough Economic Times, But Fares Better Than Most
By Story By Winthrop Quigley
Copyright © 2008 Albuquerque Journal Of the Journal
New Mexico's economy has definitely slowed, with segments of the construction industry comatose, declining prices creating layoffs at copper mines and consumers clearly less willing to spend.
But compared with the rest of the country, and even as state and local governments embark on a fiscal diet of hiring freezes and budget cuts, the Land of Enchantment is faring pretty well.
• The unemployment rate is the envy of other states.
• The state's banks are solvent and lending.
• The oil and gas industries are still cooking.
And, as has been the case for years, New Mexico's national labs and military bases — and the state's tradition of avoiding excesses when others are frantically inflating financial bubbles — have provided some ballast while economic storms batter the nation.
The big picture
At the state level, indicators of economic well-being are employment and spending. Those measures show New Mexico is hanging tough.
"We're staying afloat on the sea of troubles," said Larry Waldman, senior economist with the University of New Mexico Bureau of Business and Economic Research.
October's unemployment rate nationally was 6.8 percent. It was 4 percent in New Mexico in September, the latest month for which state-level data is available.
Unemployment rates are not always reliable because they are based on survey data, so economists look at job growth for better numbers. New Mexico is holding up on that front, too. Employment grew by about 8,000 jobs, or 0.8 percent, between September 2007 to September 2008 in New Mexico. Employment nationwide declined 0.8 percent in the same period.
"Probably a third to a half of the states in the union are showing negative employment in the third quarter," Waldman said. New Mexico gained 5,300 jobs in the third quarter (the three months that ended Sept. 30).
Economists predict very modest state employment growth in 2009, perhaps a half a percentage point.
Data from the New Mexico Taxation and Revenue Department shows the economy is chugging along. "If you look broadly at taxable gross receipts, September was the highest month ever," said Jim Nunns, tax policy director. "It was about $4.4 billion of taxable gross receipts. A year ago they were $4.1 billion."
The weakest segment is retail trade, Nunns said. Taxable gross receipts for the segment declined to $922 million in September from $1.006 billion in September 2007. But construction taxable gross receipts were $700 million in September, up from $627 million a year ago. Taxable gross receipts from services reached $2.9 billion in September, up from $2.5 billion in 2007.
Retail woes are perhaps the most noticeable to consumers. Mervyns and Linens 'n Things are shutting down. American Home and Circuit City have sought bankruptcy protection while they restructure.
Gross receipts collections are expected to be much worse in Albuquerque because of significant reductions in home construction. The Bureau of Business and Economic Research believes the city is in a recession, which means growth is not slowing, it is negative.
Like much of Wall Street, New Mexico's publicly traded stocks have had a dreadful year. PNM Resources traded at a 52-week high of $23.95. It closed Friday at $8.66. Emcore went from a high of $15.90 to $1.13 on Friday, Thornburg Mortgage fell from $14.05 to 28 cents and First State Bancorporation fell from a 52-week high of $15.10 to a close Friday at $1.63.
Even though the state's economy is growing, it is growing slowly, so state tax collectors expect revenues will be almost $280 million short of appropriations by the end of the current fiscal year June 30. Much of that shortfall is because of declining oil and natural gas prices, but forecasters expect gross receipts and income tax revenue growth to slow.
In response, state government has frozen hiring and Cabinet secretaries were ordered to find ways to reduce spending 5 percent.
The state's positive job picture obscures some bad news. Some sectors are seeing some serious job losses.
The state Department of Workforce Solutions reports initial claims for unemployment climbed from 4,796 in October 2007 to 6,816 in October 2008. Department economist Mark Boyd said that, so far this year, major layoffs are running 15 percent higher than the same period in 2007.
According to Waldman, most of the growth in jobs has come in two sectors, health care and government hiring. Much of the government hiring is being done at Indian casinos. Though these are hospitality jobs, because the tribal governments do the hiring, they are classified as government jobs.
Workforce Solutions data show employment shrank 6.6 percent between September 2008 and September 2007 in the manufacturing sector, as companies like Eclipse and Intel shed jobs. Employment grew 5.7 percent in the mining sector, which is dominated by oil and natural gas extraction.
Declining copper prices have cost about 130 people their jobs in Silver City-area mines. Prices are also declining for other mined commodities, including coal, but so far there appear to have been no job cuts, said Mike Bowen of the New Mexico Mining Association.
Tougher times are showing up in the state's safety net. The Human Services Department reports that 15,114 families received temporary cash assistance in September, a 9.6 percent increase from September 2007.
Helping to push the national economy over the cliff was an unprecedented global credit drought. Outside of some real estate deals, that doesn't seem to have happened in New Mexico.
H. Patrick Dee, First Community Bank executive vice president and president of the New Mexico Bankers Association, said loans seem to be flowing to most businesses and consumers statewide.
"It's probably slowing down a little bit," he said. "Maybe not quite as many businesses are expanding as have in the last couple of years, but we're seeing in our bank and in other banks customers are doing the same things they've always done. Maybe not to the same degree in some cases, but they're still actively growing and expanding."
The state's banks are seeing an increase in deposits, which the state's chief banking regulator William J. Verant said is because people who are frightened of other investments are seeking the safety of banks and credit unions.
Car dealers have the credit to buy new inventory and customers are getting the credit necessary to buy cars, said Charles R. Henson of the New Mexico Automotive Dealers Association. The Bureau of Business and Economic Research reports that light vehicle sales (cars, trucks and SUVs) are down 34.4 percent for the year ending in October.
Nationally, sales of cars are down 23.6 percent from October of last year, light truck sales are off 38.9 percent and SUV sales are down 53.8 percent.
Henson said car dealers' biggest problem is "the fear that has been put in place by the national media. We've had ups and downs in our economy and we will continue to have ups and downs, but the national press has absolutely inundated everybody with fear. That is what is different about this."
Peter Lehrman, chief investment officer for Universal Advisory Services, said the bad economic and financial news is "24/7 in your face. You can't get away from it. We need a vacation."
Lehrman's customers "are hanging tough. A few can't take it anymore (and sold their stocks) and went to cash. Ninety percent are hanging tough, but they're tired."
Laura P. Hall, chief trading and operations officer with REDW Stanley Financial Advisors, said that "a handful of clients have instructed us to sell all of their holdings and put them into cash." The rest continue to hold stocks, and some have bought more.
Some optional purchases seem to be on hold for some New Mexicans.
Lovelace Health System said orthopedic surgeries are down about 3 percent from levels the system would expect to see. Pharmacy sales are off about 2 percent.
UNM Hospital has yet to see any increase in charity care, but, according to CEO Steve McKernan, charity cases historically increase from 12 to 18 months after an economic downturn has hit. The hospital has no idea why.
The economic downturn has cut demand for oil, which has brought the price down from nearly $150 a barrel earlier this year to below $50 a barrel last week. That has the state of New Mexico scrambling to overcome what a legislative leader said could be a $500 million shortfall in revenue during this fiscal year. Taxes and royalties from the oil and natural gas industry are major sources of state revenue.
Declining prices, difficulty securing bank loans for big projects and new regulations are starting to slow activity in New Mexico's Permian and San Juan basins, said Bob Gallagher of the New Mexico Oil and Gas Association. He said about a dozen drilling rigs in southeastern New Mexico have been taken out of service or moved to Texas.
"Each rig that doesn't go to work could impact 35, 40 people and their jobs," Gallagher said. "At this point, we're not hearing of any reduction in force, but I think that will come if those rigs remain stacked or are moved for a while." When lower prices are combined with "what we consider to be an overzealous regulatory environment, and I think you can see why rigs are being laid down."
The unpredictable price is hurting some operators' access to bank credit, much of which comes from out of state, Gallagher said. "With the moving target of price, if you had to go with papers to the bank and show them that this well can become profitable after three years of $50-a-barrel oil, I'm not sure the banker's going to buy that now. Three months ago, the bank would have said, go drill 15 of them."
The housing bubble that kicked off the national economic turmoil last year missed New Mexico almost entirely. According to Verant, the state's banking regulatory chief, 1.35 percent of New Mexico's homes are in foreclosure, compared with 2.75 percent of homes nationally. Only about 10 percent of New Mexico's mortgages are subprime loans, and only 15 percent of those are delinquent.
According to New Mexico State University's New Mexico Business Outlook newsletter, 41 states have worse foreclosure rates than New Mexico. There were 45 percent fewer home foreclosures in October 2008 than there were in October 2007.
However, New Mexico's bankers are making very few land development or new home construction loans, and commercial real estate loans are much harder to get. Bankers are requiring commercial developers to put 40 percent and 50 percent down, and they want assurances the finished projects will be occupied by reliable tenants.
In the Albuquerque area, there was a 10-month supply of existing homes for sale. Closed home sales dropped 29 percent year to date from last year.
Other states, again, are much worse off. Florida's unsold inventory is as much as 30 months in some cities. Phoenix and Las Vegas have more than a year's supply of unsold homes.
Median sales price in Albuquerque for existing detached homes was down 5.38 percent in the third quarter compared with the same period a year ago. Price declines in Phoenix and Las Vegas were more than 30 percent, and prices are off more than 25 percent in San Francisco, Los Angeles and San Diego.
But new home construction is way off in Albuquerque. The Bureau of Business and Economic Research expects home building permits will be down 60 percent this year compared with last year.
Office building vacancy rates are about 12.5 percent in Albuquerque, compared with a national rate of 14.3 percent.
Industrial space vacancy rates in Albuquerque are 5.7 percent, far below the 8 percent rate they hit during the 2001 recession. However, changing business conditions have put a significant amount of new space on the market. The Solo Cup factory closure in Belen made 165,000 square feet of space available. American Home's bankruptcy action could put 300,000 square feet on the Albuquerque market.
Industrial vacancy rates are forecast to reach 6.5 percent by year end.
Journal staff writers Tamara Shope and Richard Metcalf, and assistant business editor Autumn Gray contributed to this report.