Annual Preview: Economy rebounds throughout N.H.

You wouldn’t think that such small start-up software firm in the North Country town of Jackson would be indicative of the state’s long-awaited and much-delayed climb out of the economic doldrums of the last three years. But in many ways it is.

Last year Animetrics, a 3-D facial recognition firm blessed with angel financing and homeland security applications, opened up shop in Jackson, hiring via Monster.com 10 people from around the country who weren’t just interested in high wages, but a higher quality of life.

“We attracted the kind of programmers, fresh out of college, who want to enjoy the mountains and what New Hampshire has to offer,” said Paul Schuepp, Animetrics’ CEO.

The state’s recovery, and its continuation into the future, is dependent on such niche firms, particularly high-tech firms tied into homeland security or other government contracts – in out-of-the-way places that foster a high quality of life and provide at least an adequate infrastructure.

The fact that New Hampshire is finally leaving the recession behind is no longer in doubt. The New Hampshire Business Review’s index of the state’s leading economic indicators has reached a two-decade high of 73 — a sharp climb out of the mid- and low-60s, where we have languished ever since the economy tanked in 2001 in the wake of the September 11th terrorist attacks.

Not that the economy doesn’t have any weaknesses: Job creation, particularly in the manufacturing sector, is still sluggish, and there has been an alarming increase in bankruptcies and a nagging lack of confidence among consumers. There also is uncertainty over how long the recovery will continue.

“We are truly coming out of the recession, but the growth rate is near peaking,” said Ross Gittell, an economist and associate professor at the Whittemore School of Business and Economics at the University of New Hampshire. “We won’t be going back to the rooftops. There are too many mitigating factors — rising interest rates, up and down energy prices and the growth of real wages being so slow.”

Dennis Delay, an economist and special projects director for the Workforce Opportunity Council, noting the slow growth in job and real wages, worried, “Is this as good as it gets?”

Still, as far as the numbers go, the state’s economy has seen great strength in construction activity, rooms and meals revenues, home prices and personal income, and nearly the best year ever when it comes to the number of people employed.

Perhaps the sharpest jump of all was the growth of new businesses, from less than 15,000 in 2003 to a projected near-17,000 by the end of 2004 — the largest number in 21 years, and perhaps the state’s history.

You don’t have to go to the secretary of state’s office to find out what is going on. Talk to Michael Monks, a commercial real estate broker in the Nashua area, who has noticed that leasing small office space in southern New Hampshire is suddenly on the rise in the last four months. That’s usually an indication of start-up firms finally moving out of their homes and virtual offices in order to rent real space, he said.

Many of the firms are high-tech companies that are finally getting the capital they need to get off the ground.

But venture capital is still scarce, and the state’s high-tech community isn’t exactly celebrating. New Hampshire used to have the highest percentage of high-tech employees in the nation, but it has since dropped to 10th, according to attorney Jim Cook of the Manchester law firm Cook, Little, Rosenblatt & Manson.

But most of the high-tech job losses have come in hardware-manufacturing jobs, such as Flextronics’ layoff of 300 employees earlier this year.

The state has lost 40 percent of those types of jobs, jobs that will probably never come back to the country, much less this state, and they are just among the 20,000 manufacturing jobs that the state lost since 2001.

But there’s good news — the bleeding of manufacturing jobs stopped last year, and you can thank federal spending in defense and homeland security for some of that.

BAE Systems Information and Electronic Warfare Systems keeps announcing contract after contract and the creation of new jobs, joined by mid-size firms like Insight Technology, a Londonderry firm that makes night vision goggles used in combat (a gain of 200 jobs in 2004) and Lewis & Saunders, an aerospace metal fabrication firm in Laconia (100 jobs).

Still, the job growth (and the state has gained some 9,000 jobs in 2004) has been primarily in the service sector – in business services, such as Fidelity Investments (which added 375 jobs in 2004) and health services.

Many of these jobs don’t pay as well as manufacturing jobs, hence the barely perceptible increase in personal income despite the drop of unemployment.

In the high-tech industry, the motor of the last recovery from the recession of the early ‘90s, the good-paying jobs will be in software and systems design firms, said Gittell. But if these jobs are not to be outsourced, they have to be unique and creative or in security or privacy-sensitive industries – such as health, finance and defense.

North Country rebound

During the last recovery, much of the high-tech boom was in the southern part of the state. This year, thanks to high-speed Internet connections, they are blossoming all over the state. Which brings us to another way Animetrics’ experience is indicative of the state’s economy in that it chose to locate in the North Country.

Only a few years ago, the North Country, sparked by the paper mill shutdowns in Berlin and Gorham, was in sad shape. Now, it has the lowest unemployment rate in the state. In October, the unemployment rates in the areas surrounding Littleton, Lancaster, Plymouth and Conway were less than 2 percent. In Colebrook, the rate is 2.2 percent — half the rate in the areas surrounding cities like Nashua and Salem.

The low rates are impressive because they reflect the employment rates after the peak tourism season, although the state’s tourism industry suffered in 2004 because of untimely weather, including cold snaps during the winter vacation weeks and rain during the summer weekends.

The industry is expecting a better year in 2005. The weak dollar should attract foreign tourists, and the ski industry is hoping that low-priced season passes will bring more people to the slopes.

The reopening of the Berlin pulp mill and the anticipation of Public Service of New Hampshire’s wood-fired burner in Portsmouth has created a strong demand for scrap wood, which has had a ripple effect throughout the forest industry, reports Jasen Stock, executive director of the New Hampshire Timberland Owners Association.

The increasing price of lumber has added to the growing demand for skilled labor at the small mills and a surge of interest among timber harvesters.

The demand for timber reflects the demand for housing, which continues to grow, although some say the numbers may reflect the large cost of housing and labor rather than increased activity.

“It hasn’t been a banner year,” said Gary Abbott, executive vice president of Associated General Contractors. “It actually might be off a little.”

Two factors might slow things even more. First, Abbott predicts a debt-ridden federal government will begin to cut down on highway projects, which will stretch out the state’s 10-year plan to 15 or 20 years. Second, increasing municipal building restrictions could slow residential construction, particularly larger developments on smaller lots – affordable housing, according to Kendall L. Buck, executive vice president of the Home Builders & Remodelers Association of New Hampshire.

Still, even in an off year, most construction firms have their hands full. In fact, the main limit to the growth of the construction industry still isn’t the lack of work, but the lack of workers, particularly in the North Country and Lakes Region, where second homes are going up at an increasing pace.

In Laconia for instance, housing starts have climbed to 1,200 — more than 10 times the amount in previous years, reports economist Russ Thibeault of Applied Economic Research in Laconia. The building – much of it speculative — is aimed at retiring baby boomers, he said.

Even in the North County home values – still the best bargain in the state – also have jumped in value. According to the New Hampshire Association of Realtors, the price of homes in the far North Country increased more than 15 percent, compared to a statewide increase of 9 percent. Statewide, the increase was the same as 2003, pushing the average price of a New Hampshire home to $250,000, with the Seacoast leading the way with an average of $346,000. (There are some negative trends: Sales of higher-priced homes – those above $600,000 – are beginning to slow down.)

Other bright spots

Another engine of growth is in the Lebanon area, which has led the state in low unemployment for years. (In October, it had a ridiculously low jobless rate of 1 percent.) Spin-offs from Dartmouth College, plus the expansion of various hospital and medical centers have begun to radiate throughout the area.

Nearby Claremont – certainly not a poster community for wealth, thanks to its status as lead plaintiff in the education-funding lawsuit – had an October unemployment rate of 1.7 percent. And cheap Claremont area homes (the area has the lowest average selling price in the state, $135,000) are being snapped up by those who can’t find an affordable home in Hanover.

That’s why Claremont’s sales volume increase led the state at 16 percent, said Paul Griffin, executive vice president of the New Hampshire Association of Realtors.

Conway may never have the educational powerhouse that Dartmouth provides to the Upper Valley or that the University of New Hampshire provides to the Seacoast, but it is moving more in that direction.

The Mt. Washington Valley Economic Council purchased an 81-acre site to build an office park with the goal of containing campuses of the College for Lifelong Learning, New Hampshire Community Technical College and Plymouth State University. The park also would house the council’s incubator project, which has already hatched seven businesses and some 15 jobs.

It’s hoped the project will help anchor an economy that depends so much on the weather and even larger cycles created by the worldwide paper market, said Jac Cuddy, the economic council’s executive director.

“We realize that our economy is driven by tourism and retail, but this provides some diversification,” said Cuddy.

On the horizon

Will the North Country, or the rest of the state, continue to grow? After all, every silver cloud has a dark lining.

The big concern is interest rates, which could dampen the housing boom, if not shut it down completely, said Thibeault. If mortgage rates pass 7 percent, he said, “we really should feel some pain.”

Higher interest rates won’t just affect housing either. They could affect business start-ups, which thrive on cheap money. They could aggravate a growing debt problem — already the number of bankruptcies this year, an estimated 4,670, are approaching the peek levels of 1997-1998. What happens when all of those variable-rate home equity loans start rising?

All of which could slow down retail spending.

Despite the improved economy, consumer confidence – while better than last year – is still pretty shaky, and sales seem to be showing signs of stagnation, if post-Thanksgiving reports are to be believed. But the lack of a sales tax seems to have isolated New Hampshire a bit, and most New Hampshire retailers look for that spending to continue through the holidays and into the first quarter of next year. Three-quarters of those surveyed by the Retail Merchants Association of New Hampshire predict a better quarter than last year.

But will that continue when people start paying more in debt payments? Already there has been a fall-off in auto sales, but Dan McLeod, president of the New Hampshire Auto Dealers Association, said 2004 “was still a very, very good year. It’s not crashing or anything. It just slowed down a little bit.”

The slowing sales can be attributed to a few factors: Many people already have taken advantage of zero percent financing and have a relatively new car; most cars last longer than they used to and there is little need to replace them; and auto dealers are unable to offer such favorable financing as interest rates start to climb.

The nation’s trade deficit may further complicate things, according to economist Delay. While the falling dollar might help exporters and the tourist industry, it also raises the prices of foreign currency. If a major powerhouse like China, for instance, decides to let its currency float, the prices at major retailers like Wal-Mart won’t be so affordable anymore.

Finally there are rising production costs – whether it be food, fuel or health insurance – that is threatening everyone’s bottom line, be it a meal in a restaurant or the cost of a new home.

But that’s all in the future – now is the time to look back and be grateful for what we have.

“In a nutshell, the economy is strong, and we are outperforming other states,” said Thibeault.