September 15, 2003
Since there is no crystal ball capable of predicting the future, the concept of composing an article about the financial outlook for Western MA presented an interesting challenge. Upon considering the obvious economic realities and also some more subtle patterns, the local economy appears solid and stable.
Interest rates have been in a steady downward slide for the past couple of years. However, there is little room for further downward movement in the rate at which the government loans money to financial institution, which is currently at 1.00%. When rates hit a 45 year low in June, scores of Western MA residents had already refinanced their mortgages, or were in the process. The once attractive mid 6% 30-year rates of 2001, when refinanced in the low 5% range of June 2003, potentially netted a couple of hundred extra dollars per month to Western MA families. The economic upside of this is that the extra money will likely continue to be spent locally. When people have more, they generally spend more, so this will benefit local business. The refinance boom also contributed to the success of Western MA financial institutions. Although rates have headed in the other direction in the past couple of months, they remain very attractive and historically low.
The less obvious benefit of lower interest rates has been in the business sector. Financial institutions made a lot of money available at lower rates, and business loans became more affordable than ever before. This made expansion and start-up viable for many companies that were without options before. The drop in rates was more sharply seen on the adjustable side of the coin than on the fixed rate side. More conservative businesses locked in at a fixed rate and will enjoy a sustained sure thing. However, many companies gambled on a continuation of low rates, and signed on with rock bottom adjustable rates, which are beginning their inevitable climb. It remains to be seen what will happen to these companies when rates rise to an uncomfortable level.
Business acquisition has also been fed by low interest rates. Troubled, unstable businesses have enjoyed the advantage of available buyers, which might not be the case in times when rates are high. Rather than ceasing operation, an acquired struggling business tends to keep the doors open and maintain employment levels while affecting a turn around plan, which contributes to a stable and thriving local economy.
Bankruptcies are another telltale sign of the times, and can be a good predictor of the immediate future. Personal bankruptcies remain at a steady rate as people amass large quantities of personal debt due to the willingness of credit card issuers to easily extend credit that is easily abused. Corporate bankruptcy, however, remains controlled. An overall strong business climate has sustained, fed by low interest rates. Old corporate loans at high interest rates, some as high as 12%, which threatened many business’ stability, have now been refinanced at rates which make payments much more affordable for companies. In some cases, monthly payments have been cut in half. The few companies here and there which move into insolvency are doing so for reasons other than high debt service.
The ongoing development of the riverfront in Springfield will help bring tourism into the region, while creating additional jobs. Though these new jobs are lower level and typically lower paying, these service personnel have families to support, and they will spend money in the local economy. Western MA is, however, plagued by the announced layoffs of hundreds of call center workers at RCN, healthcare workers at Unicare, and factory workers at Cascades Diamond. These people will have to be absorbed into the regional labor pool in some other capacity, so it is reasonable to assume that competition for employment will be extremely competitive this Fall. This will likely not be a major detriment to our economy though because good people do tend to find their way into gainful employment.
One of the biggest current problems in Western MA seems to be a shortage of qualified people to fill available openings. If bodies were all that was needed, it would be easy, but qualified people with strong backgrounds and solid talent remain elusive. As there seems to be a glut of lower level or inexperienced people and a diminished pool of qualified specialists, the challenge of finding good professionals plagues businesses across many disciplines. This does not seem to be the case in the large financial sector cities where unemployed professionals are abundant.
There is also a discernable connection between the psychology of the stock market and the overall psychology of the economy. Recent gains from the 3-year slump in the market will eventually translate to a boom for area business. The question is whether this boom will offset the reduction of borrowing and expansion, which will be caused by increasing interest rates. Here the crystal ball remains dark.
Overall Western MA is stable. Troubled companies have generally either reduced their debt load by refinancing high interest loans, or they have been acquired by more profitable concerns. Employment is also relatively consistent, and interest rates remain historically low. This is both good and bad news. While no recession looms in the immediate future, there is also no distinct indicator that we will enjoy significant growth. Time will tell the story, but for now things will likely remain status quo.
Valley Business Outlook, September 2003
Paul R. Salvage, Esquire, is a senior partner and co-chair of Bacon & Wilson, PC’s Business Reorganization and Insolvency Department. His law practice deals with sophisticated workout and bankruptcy matters, representing both creditors and individuals or companies facing financial difficulties. His additional specialties include creditor's rights, business law and real estate.
by: Paul R. Salvage, Esq.
Valley Business Outlook