February 1, 2009

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The Big Squeeze

Utah’s economy has long been The Little Engine That Could—merrily puffing alo...Read More

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Article

The Big Squeeze

Economic Fallout Hits Utah Employers

Heather Stewart

February 1, 2009


Utah’s economy has long been The Little Engine That Could—merrily puffing along while other regions faltered. Compared with the national situation, our economy remained remarkably robust. Now, however, larger economic forces are starting to take a toll. The state hit a grim milestone in October: the economy not only stopped growing, it actually started to contract and shed jobs. Employers are feeling the squeeze, as are the growing ranks of unemployed workers. The number of unemployed people in Utah grew by more than 20,000 from December 2007 to December 2008, according to Mark Knold, senior economist for the Utah Department of Workforce Services (DWS). Most of this job loss came in what Knold describes as “round one,” the downturn in residential construction and manufacturing. “Round two, now, is going to move into other sectors because of the broadness of the national downturn and how rapidly it’s come on,” he says. In fact, Knold is predicting an overall employment drop of 1.5 percent—or 19,000 jobs—for 2009. “It’s going to continue to hit construction. It started out in the residential market, but it’s going to move into non-residential construction as we move forward. That was inevitable anyway, but its quickness could accelerate because of the downturn,” Knold predicts. Many other industries are also sending employees to the jobless rolls: manufacturing, financial activities, information, leisure and hospitality, professional and business services and other services. “We’re seeing big rises in calls into the unemployment system; our food stamps are up quite a bit,” says Knold. “The announcements we get on closures and layoffs have really started to kick up in the last few weeks. So there are all these leading indicators that are just starting to flash red.” Building the American Dream A house with a white picket fence is probably the most potent symbol of the American Dream. So it’s all the more painful that this symbol—this dream—is at the heart of the economic meltdown. In many ways, the housing market is “the backbone of our economy,” says Brad Wilson, CEO of Destination Homes. “For the majority of the recessions that we’ve had in the United States, real estate has led us into them.” While the crunch in the financial and credit markets was, for many, the first indicator that the economy had taken a nosedive, residential builders have been feeling the pain since at least early 2007. Destination Homes built 12 percent fewer homes in 2007 than in 2006, says Wilson, and 2008 brought an additional 25 percent reduction in the number of newly constructed homes. “We’re forecasting another 15 percent drop in 2009,” he says. And fewer homes translate directly into fewer jobs. “Through either layoffs or just natural attrition, we’re down about 60 percent from the [staff] overhead that we had a year and a half ago,” says Wilson, “and that’s not uncommon. I think most builders have had layoffs. I’m sure all of them have, actually.” To be sure, the Utah construction industry has dumped a pile of jobs. Year over year, the building construction sector fell from 21,600 jobs to 16,200, and specialty contractors dropped from 67,300 to 55,600 jobs, according to December figures from DWS. The good news, says Wilson, is that the residential construction industry doesn’t seem to be in free-fall anymore. “We’re not going to see things turn around overnight. But we’ve been pretty consistent in our sales in the last four to six months. At least in our company, we feel like we’ve hit bottom and hopefully we’ll start to see things improve in 2009.” But if residential builders are finally seeing some stabilization, commercial builders are on the cusp of a downturn that will produce fresh job losses. “We boomed in non-residential permit values in 2008,” with $2.1 billion of approved non-residential construction activity, says Knold. But he explains that industry insiders are projecting permit values at $1.6 billion for this year and $1.3 billion for 2010. With such a drastic reduction in commercial building, Knold says to watch for an additional loss of 15,000 construction jobs this year. Collateral Damage A slump in the construction industry is like an avalanche: it takes everything in its path down with it. Skilled workers—plumbers, electricians, interior designers—have run out of work. Building materials suppliers can’t sell their inventory. Manufacturers of cabinets or garage doors or refrigerators watch their production lines screech to a halt. One such collateral victim is the title industry. The demand for title services “literally just turned off. It didn’t gradually slow down, it just stopped,” says Glen Roberts, vice president of Title West Title Company and president of the Utah Land Title Association (ULTA). “There are a number of companies that have already closed, or have simply closed their doors because they are working out of their homes.” The title insurance and escrow process is fundamental to completing a mortgage contract—but the industry is gasping for air as the pool of qualified buyers dries up. Roberts says that virtually every title company in the state has tried to reduce labor costs by cutting salaries, hours or benefits—or, more often, by letting people go. “It’s easy to think about layoffs on weekends when you just look at numbers and you don’t see the faces,” says Roberts. “But then you go in on Monday and see the people, and then you think, ‘Oh man, I don’t want to do this.’” But title companies all across the state have been forced to take this painful step. The state’s financial activities industry—which encompasses real estate and insurance—has eliminated more than 1,200 jobs over the past year. And Roberts sees very little hope for an improvement in the near future. “I don’t think we’re going to see much of a change through this year at all,” he says. “I don’t think we’ll see anything really good until 2010.” This grim outlook is forcing laid-off title workers to re-evaluate their career goals. Brent Lee, for example, spent six weeks searching for a new job after he was laid off in early October from his job as a title officer with a local firm. “I called a bunch of companies, and no one was hiring,” Lee says. After spending more than 12 years in the title industry, Lee—a father of three with a fourth on the way—found himself starting from scratch. “I was trying to figure out what skills and what knowledge would transfer into a new industry,” he says. In fact, Lee didn’t have to look too far to find a natural fit: he now earns a living processing foreclosures—one segment of the financial services industry that is still booming. Nevertheless, he is ready to get out of the volatile industry altogether by heading back to school for a bachelor’s degree in computer science. Foreclosure work, paradoxically, may be the one silver lining in the storm cloud over the financial services industry. “If you are in the title business and you have foreclosure clientele, you’re busy and you’re doing okay,” says Roberts. Another bright spot may be falling home prices, which could lure buyers into the market. “It’s a great time to buy because you can get great value for your money, and your interest rate on a long-term loan is going to be low. It is a really nice time to buy,” says Roberts, who can’t resist pointing out the one snag: “It’s hard to qualify. You’ve got to have to have a lot of money down and super-duper credit.” The Factory Line Utah’s manufacturing industry has been feeling the pressure from both the financial crisis and the long-simmering housing slump. Large manufacturing companies, like KraftMaid, laid off hundreds of workers in 2008, and La-Z-Boy completely closed its Tremonton facility, leaving more than 600 workers without jobs. Over the past year, the manufacturing industry has lost nearly 2,000 jobs overall. But these headline-grabbing layoffs obscure the hundreds of small-scale layoffs that have just as much impact. “Utah manufacturers are primarily small manufacturers,” explains Thomas Bingham, president of the Utah Manufacturers Association (UMA). “The average manufacturer in Utah has fewer than 40 employees. When a small manufacturer lays off five employees, that doesn’t make the news, but for them that’s as big a layoff as KraftMaid. The smaller cabinet makers, who are manufacturing for the local market, have probably had layoffs of the same percentage as KraftMaid.” However, manufacturing in Utah is a very diverse industry—and some sectors are fairly recession proof, according to Bingham. Medical manufacturers, for example, have not yet felt the pinch. Aerospace companies are also healthy. It’s the manufacturers of consumer goods, automotive parts and home-building products that are being crushed by the shrinking economy. And many local manufacturers are part of a much larger supply chain, producing just one component of the eventual finished product. If they can’t get materials from lower in the supply chain, or are not getting orders from higher in chain, the factory comes to a standstill. “I talked to a foundry operator the other day,” says Bingham. “He said he was busy now, but he knows that is going to change. He said, ‘I’m draining the pipeline of jobs and there’s nothing coming back into the pipeline. It’s going to be empty one of these days.’” The housing slump has put the brakes on manufacturing for the residential market, and the financial crisis has made it more difficult for small producers to get credit to purchase materials—and all of this has come on top of high fuel prices that have increased the cost of supplies. “It all ties together. You really don’t realize how intricately it’s all tied together,” Bingham reflects. “We’re just starting to see the effects—and the layoffs.” But if this is just the start of a slowdown, the upcoming year will put an even tighter squeeze on manu-facturing employers. “David Martin has owned Martin Door since 1951, and he has never seen the market so soft for so long,” says Antone Clark, chief communications officer for Martin Door Manufacturing. The locally owned manufacturer of garage doors sells to national markets—particularly in the West—and internationally to 87 countries. “We’ve had a 66 percent drop in sales overall through big-box retailers in the West,” Clark says. The declining housing market has definitely taken a bite out of sales for Martin Door, and the company reluctantly has begun cutting back its workforce. “We cut back over the year, until now we are at 2003 employment levels,” Clark explains. In total, the company has eliminated around 40 positions, and it has also contracted out some work instead of keeping people in-house. In the not-so-distant past, Utah’s low unemployment rate (at times as low as 2.8 percent) made it difficult for the company to find and keep employees. But now, Clark says there is a definite perception that workers are grateful just to have a job. “The whole industry is struggling,” he says. “We know we have to sell garage doors to keep people employed.” To some extent, the company’s international clients are bolstering sales. Also, says Clark, “We have new products that are innovative in the market—these products have given us a niche in the market to soften the blow.” Although company leaders were not happy about being forced to let employees go, Clark says the tightening will be good for Martin Door in the long run. The company already practices lean manufacturing and is ISO registered. But operating with a skeleton crew has helped the company further refine its processes. “When we hit bottom, we’ll be more efficient than ever before in our history,” he says. Despite the country’s economic woes, and despite the relatively high cost of labor in the states, Clark says Martin Door is “committed to building the world’s best garage doors right here in Utah.” While Martin Door seems to be exuding confidence, other companies are starting to sweat. “The most difficult thing for manufacturers to deal with is the uncertainty in the economy. They have a hard time budgeting for that. How much do I produce for my usual markets if there’s a cloud of uncertainty hanging over the market?” says UMA’s Bingham. Finding Equilibrium With uncertainty about the future, it can be hard for manufacturers and other companies to forecast needed staffing levels. “In turbulent economic times, it is crucial to use staffing services to add incrementally to your staff,” says Joel Steadman, regional vice president of SOS Staffing Services. Using temporary labor is a smart strategy “if you don’t know the ebb and flow of your needs.” The majority of business for SOS Staffing Services is now temp-to-hire arrangements, says Steadman, rather than purely temporary work. Temp-to-hire plans give companies the flexibility to hang on to top talent, but “if business fluctuates, there is no need to make the permanent hire.” And here’s another nugget of wisdom: the rising unemployment rate is creating a great environment to snap up qualified, experienced workers. “Employers should be aware that there is top talent available in the market,” says Steadman. The higher unemployment rate has broadened the pool of job seekers, and Steadman says companies no longer have to be satisfied with mediocre employees. SOS Staffing is also benefiting from the increased number of job seekers. “It’s always nice to have top talent to send to our clients,” says Steadman. The company is still doing well, despite the unstable economy. SOS Staffing has seen “a modest reduction in demand,” according to Steadman, who explains that more people are seeking work, but fewer companies are looking for workers. Regional staffing agencies—like SOS—are doing better than large, national companies, says Steadman. “We’re definitely being hit much less than the big national agencies.” And he is predicting growth for SOS Staffing this year. Steadman says it will be slower growth than in the past couple of years—but growth nonetheless. “We’re still loving this environment. People who want a job can find a job,” he says. The state’s unemployment rate is hovering at around 4.3 percent, and a rate of 4 percent is traditionally considered “full employment.” To some extent, the state’s economy still seems able to absorb laid off workers. For example, employment in the construction industry fell by more than 18 percent, but the state as a whole contracted by less than 2 percent. “So there’s churn and turnover, and it just takes time,” says Knold of DWS. This worker absorption is consistent with the experience of Brad Wilson of Destination Homes. “We’ve been really lucky that the folks who have left us have been able to find jobs relatively quickly,” Wilson says. “While it’s unfortunate that this has happened—because this industry has lost some good people—most of them have gone to other industries. They’ve all been able to find work, or pretty much everybody has.” Furthermore, some industries are still faring well in Utah’s economy. “Three sectors should hang on through this: health care, education and government,” says Knold. The demand for health care services generally does not wane during a recession. And the demand for higher education usually increases. “When the economy turns bad, the higher education rolls go up, because people go back to school until the economy gets better. It benefits them to increase their skill base, their portfolio, and their résumé with more education,” says Knold. “When the economy gets better, the rolls go down.” Laid-off title officer Brent Lee began thinking about going back to school nearly a year ago, when first realized the industry was hitting a serious slump. And although he has a new job, it pays less than his former profession. Lee hopes that a degree will enable him to provide a more stable future for his family. The industry that tends to be the most stable is government, because the demand for government services never wanes. “In our office, unemployment claims have gone up quite a bit and the phones have been ringing heavily, so we have to hire workers to handle the volume of calls. So some government activities actually have to hire workers during an economic downturn,” says Knold. Workers and employers alike will be closely following economic reports for the foreseeable future. For now, the state seems to be holding steady in the face of a national recession. “It’s really important to know that Utah is sheltered somewhat from the immediacy of downturns in the economy. Unlike both coasts, we tend to be slower in going into downturns and losing jobs. We’re beyond that. This is a deep enough recession that we’re starting to really feel it now,” says UMA’s Thomas Bingham. “We’re in for a ride, I’m afraid, and it’s going to take some time to get through this.” “As challenging as it’s been here, it honestly is the case that we’re doing better than most places. We didn’t have the steep run-ups that a lot of places had, and I don’t expect that our challenges are going to be nearly as difficult as a lot of markets have had. So I’m really grateful that I’m doing business in Utah,” says Brad Wilson, CEO of Destination Homes.
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