Local Economy A Mixed Bag

by Dave on June 5, 2009

As first appeared in Coastal Sussex Weekly, May 14, 2009:

When trying to decipher the state of the local economy, it is difficult to separate what you see from what you hear. For instance, it is not unusual to enter a restaurant here at the beach to find it completely filled with patrons, yet hear that there are a significant amount of restaurants struggling to survive. What is the real story? Where do we stand and what kind of season will we have here at the Delaware beaches?

I put those questions and more to Dr. John Stapleford, a Senior Economist for Moody’s Economy.com, and the go-to expert on the Delaware economy.

Coastal Sussex Weekly: What is the condition of the overall Delaware economy?

Dr. John Stapleford: The Delaware economy moves deeper into recession as total employment continues to decline and the unemployment rate closes the gap with the U.S. Especially hard hit industries include construction, business services and retail trade. The loss of jobs will not stop until the middle of 2010 and it will then take until the middle of 2012 for employment to reach its pre-recession peak. Sussex county unemployment will peak at over 8% during 2010.

CSW: Are there any indicators of what effect the economy as a whole will have on seasonal economies like the Delaware Beaches?

JS: Real personal income is rising only modestly, and combined with large losses in household wealth over the past year, retail sales are in stall that should last until the Christmas season. Higher unemployment, tenuous gains in personal income and the negative wealth effect from falling house values and stock market losses are having a dampening effect on tourism in Delaware and throughout the nation. Leisure and hospitality activity at the beach will slump this summer and then begin a recovery. The slump in the industry statewide is expected to continue through the summer of 2010.

CSW: Since a lot of our local economy hinges on housing, what is the prognosis for the housing sector over the next 12 months?

JS: The median price of existing homes in Delaware is down 16% from the pre-recession peak. This compares well to the 27% drop that has occurred nationwide. The median price will hit bottom in the middle of 2010 at 24% of the peak. This drop will be a bit less severe in Sussex county. With prices down and mortgage rates at long term lows, housing affordability is peaking both in Delaware and Sussex county. As a result, house sales have bottomed out (at 50% from peak) and will climb steadily back to the historical average over the next two years, settling at around 75% of the pre-recession peak. House sales in Sussex county will accelerate in late 2010 and residential construction will then start to revive.

Beach rentals will be a buyers market this summer. Bookings are weaker than average to this point. Households are realizing how precarious their current financial condition is given losses of wealth, uncertainty over jobs and the possibility of future pay decreases. Beach demand should shift toward hotels and motels as tourist stays drop below a one week commitment. And tourists will change plans to avoid weekend rates. Beach house owners have to be prepared for last minute potential renters who will be expecting re-negotiated rents. Retail outlets and restaurants may benefit from an up-tick in day trippers.

CSW: What will be the effect on the economy of both the government stimulus and the massive shortfall the state faces?

JS: State and local government budgets continue to be strained. The recession has significantly reduced state corporate income tax revenue and early information on April personal income tax returns is not heartening. The proposal for an across the board 8% paycut for state employees has hit an impasse. The economy wide impacts are significant as aside from health care, state government has been the remaining growth industry over the past year.

Because its tax base is so dependent upon real estate values and activity, the housing bubble bust has placed Sussex county government in a very tight corner. This comes at a time when demand for county services such as emergency paramedics is rising rapidly due to the surge of retirees relocating into the county. Financial uncertainty and difficulty selling current homes has reduced household mobility, especially among the elderly, but this will be short-lived and the county’s retiree population will resume growing. The county must find alternative sources of revenue that are less tied to the volatile real estate industry.

CSW: Any good news?

JS: Despite all the bad news, the sun is starting to pop over the horizon. Federal stimulus money will provide a positive near term boost to a number of Delaware industries, especially construction. More important for the long term, the turning point in the economy is coming in sight. The rate of decline in employment is easing up. The number of weekly initial claims for unemployment insurance is beginning to drop. Falling prices are stimulating everything from the stock market to housing sales. Manufacturing inventories are being depleted and weekly manufacturing hours are starting to rise. Although it will take three years to reach pre-recession levels of activity, recovery is in sight.

A big thanks to Dr. Stapleford for taking time to share a little bit of his take on the economy. He can be found at Moody’s Economy.com.

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