Annual Preview: Stronger N.H. economy continues to defy the odds

This could have been a lousy year for the state’s economy.

Flooding nearly washed out the fall foliage season. Fuel prices appeared likely to choke the economic engine. Consumer confidence was tanking. Interest rates began to creep up. Even the unflappable housing market began to soften.

And yet, on the whole, this was a slightly better year for the New Hampshire economy than last year.

The state’s economy reached its highest level in the last 22 years, according to New Hampshire Business Review Leading Economic Indicators Index. And if it wasn’t for the rush of bankruptcies, partly fueled by change in bankruptcy law, it would have performed even better.

For every Car Component Technologies (a manufacturer with plants in Bedford and Merrimack that shut down unexpectedly earlier this month, suddenly throwing 560 people out of work) there is a Liberty Mutual, which is planning to employ more than 2,000 people in its expanded Dover facility. For every soggy autumn, there was a snow-capped December. The economy seems to be strong enough to keep on going, no matter what is thrown at it.

The state gained more than 10,000 jobs – the largest increase since the boom days of the mid-1990s. It is on track to create a record 19,000 businesses – nearly a 15 percent increase over last year. The holiday shoppers seem just as determined as last year, tourist inquiries are on the increase and the high-tech world is on the rebound.

So what went right?

Job growth

Well for one thing, what had been a jobless recovery has finally started to produce some jobs. Some of the industries hardest hit by recession are showing signs of life. Take the communications industry, one of the hardest hit when the high-tech bubble burst at the end of the century.

George Kassas knew what it was like. That’s precisely when he chose to launch CedarPoint Communications, which developed the technology to allow cable television companies to offer telephone service. It took CedarPoint 14 months to find financing during the dark days of 2000 and 2001.

But it was during those dark days that stable companies were born, Kassas said.

“It really hardens your character,” he said. “You have to believe in yourself if you are going to get investors and customers to believe you have a very compelling product.”

Oddly enough, things started to turn around for CedarPoint after the September 11th terrorist attacks in 2001, but its true growth spurt didn’t occur until 2003, when the company increased sales fivefold and then doubled that growth last year.

The firm now employs 180 people, mostly at its Derry headquarters, though it also has people scattered around the country and overseas, where it garners 25 percent of its sales. And that doesn’t include CedarPoint’s manufacturing jobs, which are all outsourced locally, Kassas said.

Most of the job growth, however has not been in manufacturing, because on the whole manufacturing growth has been flat, and the state has not begun to replace the 20,000 jobs lost in the last decade or so.

The good news is that the state’s economy has stopped bleeding such jobs for the second year in the row.

Still, said economist Russ Thibeault of Applied Economic Research, “I’m concerned about the job quality we are adding. The higher-paying jobs in New Hampshire that we came to know and love are not growing in this state.”

Most of the state’s job growth continues to be seen in the service and retail sectors, though the construction industry still is going strong, particularly the commercial, institutional and highway side, reports Gary Abbott, executive vice president of Associated General Contractors. The construction sector growth is fueled by an injection of federal highway money, a strong push for both schools and elder housing and the continued march of big-box retailers all the way to Littleton.

“In the past, the consumer came to the retailer,” said Michael Monks, a Nashua commercial real estate broker. He said he sees the demand for commercial space – both for retail and restaurants chains – spread way beyond Nashua. “Now the retailer is almost coming to the consumer.”

This retail and service migration is helping to spread job growth throughout the state. In the past, some areas, like Lebanon, had ridiculously low unemployment rates, while others – Salem and the North Country – suffered. This year the unemployment rate is spread rather evenly at the 3 and 4 percent rate.

Wood, high tech rebound

Another reason for the health of the North Country economy (and other rural areas) is the health of the timber industry.

Fueled by international demand for wood (and further fueled by a post-Katrina construction boom), sawmills around the state are investing millions to expand, reported Jasen Stock, executive director of the New Hampshire Timberland Owners Association.

Add that to the resurgence in demand for low-grade wood, used for pulp to feed the growing demand at the Berlin pulp mill and elsewhere, and to burn, not only at various wood-fired generators (soon to grow even more when Public Service of New Hampshire’s new burner on the Seacoast), but at a growing number of homes and businesses, using wood pellet and wood-burning stoves to combat the rising prices of oil and natural gas.

True, rising energy costs are a double-edged sword, and it costs more to haul the wood, particularly given this muddy autumn. But the price has risen so much “that if you can get the wood from the trees to market, you’ve got it licked,” Stock said.

Finally, another reason behind the job growth is the number of new companies launched in the state. (This is partly offset by the record number of bankruptcies, though it is unclear how many of these filings came in the rush to beat the effective date of new, stricter bankruptcy laws in November.)

Much of the growth in new businesses can be seen in the number of trade names registered, primarily for sole proprietorships. But yesterday’s start-up could be tomorrow’s job producer.

Ask Michael DesRochers. He started up a company in the late 1980s – MicroArts, a high-tech advertising firm – and sold it at the height of the market in 2000, just before the bubble burst. At its peak it employed 75 people. The company that bought MicroArts didn’t survive the crash, but Desroacher used the proceeds to fund another company – Bootstrap Software, in Greenland, which is developing an e-mail marketing product called Polite Mail that enables anybody to engage in direct marketing through the Microsoft Outlook e-mail program without running afoul of anti-spam laws.

Interest has grown, he says, as people realize that some high-tech companies – most notably Google – have found a way to actually make money off the Internet.

“It’s like computers. There was the big hype and then things settled down as people found out what is useful,” said DesRochers.

Real estate

Commercial real estate broker Mike Monks sees increasing demand for commercial small-office space, particularly on the outskirts of town, a usual place of choice for many start-ups. And while venture capital funding for high-tech start-ups is still scarce, individual angels are showing renewed interest in high tech, said Jim Cook, a Manchester attorney who specializes in that market.

The only storm cloud on the horizon, agree most economists and others tracking the numbers, is what once was New Hampshire’s economic mainstay.

“The big threat this year is what is going on in the housing market,” said Manchester economist Dennis Delay.

Housing prices have increased in 2005, thus far averaging $264,500 for a single-family home, but that increase of less than 5 percent is considerably smaller than those in the last few years.

Thibeault noted that inventory is up 20 percent, and that houses have lingered several months longer on the market – a significant increase from recent years.

Most of this housing slowdown has been at the high end of the market, a sign that the million-dollar-home market is finally reaching the saturation point.

“What I have been seeing is that inventory is up a little bit and things have slowed down a little bit,” said Jay McGillicuddy, past president of the New Hampshire Association of Realtors.

New-home construction is starting to slow down, according to Kendall Buck, executive vice president of the Home Builders and Remodelers Association of New Hampshire, though that may have more to do with the increasing number of municipal growth ordinances and zoning restrictions than the lack of demand.

Everybody agrees that the demand for lower-priced housing is as acute as ever, even as the gap between income and affordable houses remains wide, especially in light of the growth in interest rate.

Houses in New Hampshire are less affordable now than at any recent time in the past, except for the late ‘80s, when the real estate crash that followed drove the state into a deep recession, said Delay, who worried that a number of floating-interest and other risky mortgages might lead to a rash of foreclosures should interest rates jump.

Still there is no reason to panic, said Paul Griffin, executive vice president of the Realtors association.

“It (the housing market) hasn’t come to a screeching halt. There is no pain and concern among the membership,” said Griffin.

This time around, he said, unlike the real estate boom in the late 1980s, New Hampshire home values are not as inflated as they are in other parts of the country, so there is no real bubble here to burst.

“New Hampshire never had a bubble,” he said.

Some of the softening is in particular regions, like Lebanon, while other markets on their the outskirts are still appreciating rapidly, like Claremont.

“It is like a rolling boom, which is more like a leveling,” Griffin said.

How long this boom will continue to roll, however, is anybody’s guess. But economists’ warnings in the past have failed to pan out, so most say that this years growth will continue into next year.

“I think next year will be another good year,” said Thibeault.

Delay said the same thing – at least he sees the real estate market staying strong through the beginning of 2006, though eventually he said he sees the economy is headed for a fall.

“Eventually,” he joked. “I’ll be right. Economists are always right. It’s just a matter of when.”