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With recession over, region still awaits recovery

More than a year after the recession ended, the Buffalo Niagara region still is waiting for the recovery to begin.

For the first time in decades, the Buffalo Niagara region didn't fall into a recession first and fall harder than the rest of the country, thanks in part to a stable housing market that never had the big price jumps other regions experienced in the years leading up to the Great Recession.

"This may reflect the changing nature of the upstate economies, where goods producing employment has been declining for the last two decades. It may also be due to the role of housing markets in the economic downturn," Canisius College economists George Palumbo and Mark Zaporowski said in a recent report on the local economy.

But the question remains whether the Buffalo Niagara region will be able to break from its past history of lackluster recoveries that have left the area without much growth even when times are good.

"We're still plugging along the bottom of this curve. We haven't recovered," said John Slenker, the regional economist for the state Labor Department in Buffalo.

"There remains a lot of uncertainty at this point," said Mikhail Melnik, a Niagara University economist. "It still remains to be seen if the trend we have seen in the past months is a sign of cementing the U.S. economic recovery or just a temporary rebound, to be followed by a cooling period as the recovery runs out of energy."

Jaison Abel, a Buffalo-based economist with the Federal Reserve Bank of New York, noted that the recession's less severe impact on the region is a big change from previous downturns.

In past recessions, the Buffalo Niagara region was among the first to feel the decline, fell harder than most places and took longer to recover.

"None of that happened this time," said Howard Wial, a Brookings Institution economist.

This time, the region didn't begin to feel the effects of the recession, which began nationally in December 2007, until the late summer of 2008. And once the decline began, it wasn't as severe as it was elsewhere, Abel noted.

This time, our jobless rate didn't spike as high as the rest of the country. Our job losses were less severe. And our housing market came through the downturn relatively unscathed.

Indeed, the local unemployment rate, which stood at 8 percent in November, is a little better than the statewide jobless rate of 8.3 percent and far better than the seasonally unadjusted national rate of 9.2 percent.

"We're not the old economy. It's entirely new," said Thomas Kucharski, president of the Buffalo Niagara Enterprise business development and marketing group.

"Manufacturing is no longer dominant," with all of the area's job growth now coming from service firms, said Kathryn Foster, director of the UB Regional Institute.

The result is a less cyclical economy that is shaped more like the rest of the country.

"We should expect to move in lockstep with the rest of the country, and we should expect less of a boom and bust cycle," Foster said.

Part of the reason for that, Abel said, is that the region didn't grow nearly as fast as the rest of the country before the recession hit. In fact, the region never recovered all the jobs it lost during the 2001 recession, and home prices here grew by an average of just 4.8 percent a year from 2000 to 2006, far less than the 8.1 percent annual gain nationally.

Of course, home prices here have continued to climb, even during the recession, while the housing market has collapsed in many other parts of the country. But home prices here remain far below the national average, making affordability far less of an issue in the Buffalo Niagara region than it is elsewhere.

"Buffalo has continued to stand out" with its housing market, Abel said.

The less severe decline locally also has left the Buffalo Niagara economy in a better position than it historically has been in coming out of a recession.

Ten quarters after the start of the 1990 recession, the Buffalo Niagara job market still was 3.9 percent below where it was before the downturn. At the same point following the 2001 downturn, the local job market was 2.3 percent smaller than it was at its pre-recession peak.

This time, the gap is 2.2 percent, and unlike the previous recessions, the Buffalo Niagara region's shortfall is less than the national gap, which stands at more than 5 percent.

"You're ahead of the previous three recessions," Wial said.

But so far, that hasn't pushed the Buffalo Niagara region into the growth mode, now that the recession has officially ended.

The region has added jobs in four of the last seven months after snapping a 17-month skid of consecutive job losses. But the job growth has been tepid even during the good months, averaging only two-tenths to three-tenths of a percent. That means the Buffalo Niagara region still has a long way to go to make up the roughly 19,000 jobs that vanished during the recession.

Because of the region's long-struggling economy and the prolonged decline in the higher-paying manufacturing sector, wages in the Buffalo Niagara region now are more than 10 percent lower than the national average. Those lower wages and the availability of willing workers has helped the region become a magnet for back office financial services operations for companies ranging from Citigroup to GEICO.

"It is possible that it is this earnings gap that is helping to attract new employers to Western New York, to take advantage of a labor force that is less costly to employ than it is nationally," Palumbo and Zaporowski wrote.

"If this leads to a break in the pattern of recovering less fully than the national average once the current recession is over, it would be a long-awaited positive development for a region that is starved for good news," the professors wrote.

Alan Berube, a senior fellow and research director of the Brookings Metropolitan Policy Program, said export growth, especially to faster-growing emerging markets in the Far East and elsewhere, will be an important element going forward for developed economies like Buffalo.

"It's about emphasizing exports," Berube said. "Going forward, the places that are going to rebound strongly are the places that have strong relationships with these places that are experiencing high growth rates" and where the middle class is beginning to emerge.

Local consumer confidence, while up slightly from its recession lows, has stagnated for the last year and remains tepid, according to researchers at the Siena Research Institute.

Even the local housing market, the Buffalo Niagara region's economic bright spot during the downturn, has lost some of its luster lately, with home sales plunging and the supply of homes for sale rising to a level where it could begin to depress housing prices.

The median price of homes sold last year rose by nearly 7 percent to $114,500, ranking Buffalo Niagara among the nation's strongest markets for home-price appreciation in 2010.

But the pace of home sales slowed to a crawl after the $8,000 new home buyers tax credit expired in the spring. The number of homes sold was down by 22 percent, and on pace to make 2010 the worst year for home sales since 1997, the Buffalo Niagara Association of Realtors reported.

Another price survey that uses repeat home sales and mortgage refinancing data showed that the average home price here grew by 1.5 percent during the 12-month period that ended in September. That was far better than the 3.2 percent drop nationally and kept Buffalo Niagara in the top 20 percent of the 287 metro areas studied by the Office of Federal Housing Enterprise Oversight for the third straight year.

The one cautionary flag hanging over the local housing market was the growing supply of homes for sale, which rose by 8 percent last year. With the pace of home sales slowing, that left the market with a better than 7-month supply of homes on the market -- the highest since 1999.