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BUFFALO’S BUSINESS: Manufacturing remains surprisingly muscular

The next time someone tells you that manufacturing isn’t a big deal anymore in the Buffalo Niagara region, don’t believe it.

The proof is in the latest figures on economic growth locally, which showed that the Buffalo Niagara region struggled a bit last year, with the economy expanding by just 0.8 percent during 2012.

That’s less than a third of the 2.5 percent growth nationally – a disturbing sign that the region is falling back into its old pattern of recovering far more slowly than the rest of the country following a recession. And it’s not just a one-year trend. In 2011, our 0.9 percent growth rate was almost half the nation’s 1.7 percent expansion, and we lagged the nation in 2010 as well, according to new data from the federal Bureau of Economic Analysis.

But it would be even worse if it weren’t for our factories. In fact, local manufacturers, for the second straight year, accounted for virtually all of the economic growth in the Buffalo Niagara region. If you take the local factories out of the equation, the region’s economy was essentially stagnant, growing by less than 0.1 percent last year.

Gary Keith, M&T Bank’s chief economist, prefers to take a longer-term view. Because the region didn’t get hurt nearly as badly by the Great Recession as the rest of the country, we had a head start entering the recovery that has helped offset our subpar economic growth during the last three years. Since the recession began in 2007, our economy has grown by a total of 2 percent during that five-year span. The country grew only a smidge faster – just under 2.5 percent.

“On a relative basis, our economy has held up pretty well in the worst financial episode in our generation,” Keith said. “We were a little bit weaker in 2012, but in the longer term, we continue to move in a different direction with our economy.”

Our economy has changed a lot since the turn of the century. The service portion of our economy is a lot bigger than it was, growing by almost 8 percent. It’s now more than two-thirds of our private-sector economy.

In contrast, the segment that’s devoted to producing goods has shrunk, now accounting for just under 19 percent of our private-sector economic activity, down from almost 23 percent in 2001.

And it’s that long-term decline in manufacturing – despite the rebound over the past two years – that local economists think could be a key factor in changing the way the Buffalo Niagara rides out economic ups and downs. Because manufacturers tend to endure bigger booms and busts, they think our economy should be more stable as the factory sector takes on a role locally that’s more in line with the national average.

“We’re not always going to outperform the national economy, but if we can keep growing on a nominal basis – and avoid the ups and downs – we’ll keep getting better,” Keith said. “We’re really smoothing out the bumps in our economy with each passing cycle.”

And for local manufacturers, the ups and downs have been severe. The region’s factory sector shrunk by an incredibly painful 20 percent from 2007 to 2010 as the auto industry went through a brutal restructuring. That was more than double the decline nationally. Even with the better than 5 percent rebound over the last two years, our manufacturing sector still is almost 16 percent smaller than it was before the Great Recession hit.

There is a downside to a bigger service economy. Most of the growth in service jobs has been in the lower-paying portions of that market.

The hottest part of the local economy over the last three years has been in leisure and hospitality, which is primarily hotels, bars and restaurants. Those businesses have grown by more than 23 percent since 2009.

Trade has swelled by 12 percent – a testament to the power of the Canadian shoppers who flock here to cash in on our lower prices. That sector now accounts for 14 percent of our overall economy, up from just under 13 percent in 2001

Canisius College economist George Palumbo notes that service jobs in the Buffalo Niagara region pay an average of $736 a week, almost a third less than the $1,095 that workers in goods-producing jobs earn.

“We’re growing in the places where our wages are lower. We’re not growing in the places where our wages are higher,” he said.

Of course, there has been some growth in some better-paying parts of the service economy. The financial services sector, despite softness in the last three years, has grown to 16 percent of the local economy, up from 15 percent in 2001. Education and health services have grown by about 20 percent and now make up almost 13 percent of our economy, up from 11 percent in 2001.

But in some sense, we’re still very much an old school economy. The information sector – the cutting edge of the 21st century economy – accounts for less than 3 percent of our economic activity, half the national level.

That leaves the Buffalo Niagara region as a bit player in the hottest part of the 21st century economy.