industry that has been slowed
by the economy. (Pilsbury Assoc.)
Federal rate cuts and a federal tax cut may be enough to keep the national — and local — economies from going into a recession, but the threat of recession is real in what economists call “a tricky and risky time.”
“Most analysts feel we’re in a saucer shaped situation, where we will flirt with a recession but not really have one,” said Richard Scott-Ram, chief economist for the London-based World Gold Council in an interview with Providence Business News. The Council was in Newport for a meeting last week.
Frederick J. Kelly, Ph.D., dean of the Gabelli School of Business at Roger Williams University and forecast manager for Rhode Island to the New England Economic Project, and Gary Ciminero, acting executive director of the Rhode Island state House of Representatives Policy Office, both agree that nationally, regionally and locally we’ll likely avoid a recession.
Kelly said the combination of the federal rate cuts and “the economic stimulus of the tax cut will lead to some uptick in spending and resurgence.”
He expects the economy to recover, including a return to technology buying, in the fall or winter. Ciminero says that while Rhode Island will experience “very slow” growth this year, the economy likely won’t resume faster growth until the first quarter of next year.
The uncertainty in the Rhode Island market is evident in this week’s executive poll (page 3). At mid-year we asked about economic expectations, both for Rhode Island and their own companies. And then we compared them to January polls over the last three years. Predictably, the results show less confidence in the economic outlook for Rhode Island and their own companies.
Maybe most evident is the apparent decreasing commitment to Rhode Island. Two and a half years ago, 90.9 percent of those responding to our poll said they were committed to remaining in Rhode Island. In the latest poll that dropped to 75 percent. And in January 1999, some 9.1 percent said they weren’t committed to remaining in Rhode Island. In the latest poll that figure rose to 20 percent.
Even if the companies were committed to Rhode Island, when it comes to expansion they are now more often than not looking out of state. Some 55 percent in the latest poll said they anticipate opening a facility out of state, compared to 27.3 percent in January 1999.
Kelly attributes some of this lack of confidence to the failure of Rhode Island to attract many major corporate headquarters. Those corporations, he said, are discouraged by the state’s tax structure and a negative perception of the political environment.
On the other side, Ciminero said our lack of a significant technology sector has spared Rhode Island some of the impact of the declining economy, and added that the continued high level of consumer buying is keeping the economy, locally and nationally, from falling into a recession.
Ciminero blames much of the slowdown on the “overinvestment in the high tech , dot com sector that caused an investment bubble in the stockmarket.”
Kelly in particular, and Ciminero and Scott-Ram to a lesser degree, believe at least part of that was caused by the increased spending by companies in anticipation of Y2K problems.
Kelly is confident now that companies will begin buying technology later this year.
“Early to late 1999, many corporations just wholesale replaced equipment with new equipment to make sure it was Y2K compatible,” he said. “There was a huge uptick in spending at the time. It’s now about time to replace that equipment. It has a lifecycle of two to four years. It’s going to stimulate the economy.”
Back in the late 1990s every quarterly or annual report from public companies included plans to spend from a few thousand to several million dollars to make computer systems ready for the turn of the century. Predictions ranged from potential widespread blackouts to the opinion that the whole episode was of little consequence.
Possibly the biggest fallout was the enormous expenditures by companies in a short time frame that inflated technology sales, gave birth to computer consulting firms, and virtually established an industry of Y2K specialists. Those same specialists and computer firms were left trying to establish a niche after Y2K, only to find the market not so welcoming.
In the aftermath, many companies that had prospered either because of Y2K or because of the technology explosion in general, fell on difficult times. Dot com companies went out of business and dot com millionaires found their paper profits worth little more than the paper they were written on.
Rhode Island over the last year has seen some technology companies fail, some with relatively long track records like Mesa Systems Guild, a 10-year-old company that in the last few years attracted more than $7 million in venture capital, and closed in April. Network Six announced it was being acquired, eBT announced liquidation plans, and Defendnet was acquired by a Massachusetts firm.
Kelly said he thinks the fallout is also having some impact on tourism, Rhode Island’s leading industry, where the dot com millionaires are no longer planning luxury vacations.
“The real weakness in the Rhode Island economy, in the short term, might be that there is a somewhat slow summer for businesses tied to tourism and water industries,” he said. “Boat sales might be slower. Some of the upscale spending might be less.” But overall, he said, tourism will “hold together.” The cost of gasoline, he said, might mean “people are unwilling to drive from Pennsylvania to Rhode Island for summer vacations.” But conversely, he said, Rhode Islanders and people in New England will tend to stay closer to home for their vacations.
“The real impact is the loss of the dot com kind of wealth,” he said.
Already, there’s anecdotal evidence to support Kelly’s theory. Newport hoteliers are saying business is slower this year, leading them to develop new programs to attract tourists to the city by the sea.
Ciminero sees the tourism market as softening, although offset somewhat by people wanting to vacation closer to home. But nationally, he said, tourism is declining.
“Fewer people are willing to stay overnight,” he said. “There’s more day tripping.”
But more importantly, perhaps, is “a near collapse in business meetings and business related travel,” Ciminero said. “A lot of middle managers are getting fired, getting orders not to go on these conventions, conferences. That’s probably affecting many areas, including businesses that would mount pricey meetings in places like Newport, Martha’s Vineyard or Nantucket.”
For the near term, he said, we can expect more of the same. “Bad news just keeps coming from individual firms,” Ciminero said. There will be more layoff announcements, he predicted, while the Federal Reserve “keeps hammering away to keep the stock market” afloat.
