Despite Lull, Pittsburgh Poised to Grow Faster

Greater Pittsburgh’s economy is in a precarious situation to start 2017. The seven-county region’s unemployment rate rose sharply through the second half of 2015, nearing 6 percent—a level not seen since 2014 when the recovery was just gaining real momentum. Prior to the 2008–09 recession, Pittsburgh’s unemployment rate mirrored national trends for 20 years. So the current divergence for the worse suggests that Pittsburgh’s employers and employees alike may find the coming year difficult in terms of advancing toward new economic goals.

A critical illustration of Pittsburgh’s downside risk for 2017 is its comparison between labor force growth and hiring. Total 2016 job growth was just shy of 0.5 percent—in the bottom third of the nation’s 381 metropolitan statistical areas. But while not stellar, labor force gains have been stronger, ranking 171st in the nation, and outpacing hiring by a 3-to-1 ratio. This mix of trends implies that workers not able to find positions in Pittsburgh due to a slower pace of hiring may well find themselves relocating to better-performing regions, leaving Pittsburgh businesses with fewer workers for future expansion efforts. Lackluster growth, both currently and over the near-term horizon, may also act to limit wage growth for existing employees. With U.S. average wage growth already well ahead of Pittsburgh’s, the potential exists for a vicious circle of skills drain and lack of labor demand.

Regional consumer spending support will come under fire in 2017 after recovering to match national trends during the prior year. Wage growth is already weak, and without significant job creation the region’s income base cannot support expansion in consumption-oriented industries such as leisure & hospitality services. Further, gasoline prices are moving higher as oil prices have begun to recover after two years of exceptional weakness, and Pennsylvania raised its gasoline taxes to start the year. This all combines to undercut job-creating consumer spending by taking dollars out of consumers’ wallets and dedicating them to necessary commuting costs. There are no indications that regional consumer confidence has suffered, but the limitations on consumption-driven growth are more about spending capacity than spending propensity.

Pittsburgh’s heavy industry sectors—manufacturing, transportation & warehousing, construction, and natural resources development—offer only varying question marks regarding their contributions to 2017 economic growth. Firms across these industries saw flat to lower payrolls to close out 2016. There is, however, the potential for federal infrastructure spending in the second half of the year. Lending credence to that possibility are President Trump’s campaign promises, a Republican-controlled Congress, and nominal bipartisan agreement that the nation’s infrastructure sorely needs improvement. And few metropolitan areas can boast greater disrepair than Pittsburgh. Should funding appear for infrastructure, Pittsburgh’s economy may see more job creation. Even if cyber-infrastructure is the focus of spending efforts, Carnegie Mellon University’s leadership there could lead to the region riding the leading edge of investment dollars. Such developments represent the type of external shock Pittsburgh will need to restart its stalled economic engine.

The natural resources development industry, which means natural gas extraction here, could reach a positive turning point in 2017 as well. Natural gas prices rose through the end of 2016 and will likely hover near levels that brought hiring since Marcellus Shale activity ramped up in the region beginning in 2008. This would be a significant turnaround after the price collapse in late 2014 caused the elimination of more than 25 percent of the sector’s jobs. Even more encouraging is progress of ethane “cracker” operations that will take advantage of low-cost Marcellus Shale gas. Shell Chemicals confirmed that the long-discussed Beaver County plant will indeed be built, creating several thousand interim construction jobs, and eventually 600 permanent positions. This may be just the first of several industries to expand regionally to take advantage of low-cost natural gas as production feedstock. It will take time for these industries to establish a bona fide presence, but Pittsburgh’s long-term economic potential thanks to natural gas extraction operations seems to be a question of “when,” not “if.”

The next leg of the U.S. economy’s expansion will occur in a rising interest rate environment. In December, the Federal Reserve took another step along the path of normalizing rates from the near-zero levels since the Great Recession. Rising interest rates—or “tightening” monetary policy—usually portends slower economic activity as businesses face higher borrowing costs and consumers face higher interest payments on existing debt, especially credit cards.

But this time is different. Even with several more annual Federal Reserve rate hikes over the next two years, interest rates will remain historically low. Borrowing costs will remain attractive for businesses with expansion opportunities to finance, and the U.S. consumer has weathered far higher rates and continued to spend in the past. Pittsburgh will be able to take advantage of this evolving economic environment, but whether local businesses choose to advance beyond their current underwhelming pace remains in question. If new expansion is not sought within the regional economy, there is a reasonable likelihood that opportunities will be seized elsewhere and will attract away investment and labor resources.

Pittsburgh’s nascent demographic turnaround will realize the same fate as its labor market in the next few years. Job growth can keep the existing working-age population in place and attract new residents to the region. Housing market stability and broad urban development are ongoing, positioning Pittsburgh to handle such trends. However, if job seekers continue to outpace hiring, out-migration toward employment opportunities elsewhere will keep demographic gains under wraps.

Reliable employers in education, healthcare and finance are firmly entrenched and can support workforce development within a healthy economic environment. And Pittsburgh is well positioned to benefit from Marcellus Shale activity once natural gas prices normalize. Skilled natural gas workers will find Pittsburgh’s low living costs attractive, and migration trends are likely to see a boost over the coming decade as a result, even if near-term trends remain subdued.

Stuart Hoffman is PNC’s chief economist. Kurt Rankin is VP and Economist for PNC.