The Economic Outlook for 2018

tronger hiring last year, rising wages and upcoming tax cuts lead those who read the economic tea leaves to be cautiously optimistic that 2018 could reward southwestern Pennsylvania with the largest increase in job growth in five years, finally shaking the malaise that works to contract the local labor force, send residents packing and stifle the flow of workers into the region.

Construction is one sector poised to make a significant contribution in new jobs with several labor-intensive projects scheduled in the region, while less is expected from manufacturing, which has been bleeding jobs in recent years.

Fueling the 2018 forecast is last year’s national and regional economic momentum and the tax reforms President Donald Trump signed, including a steep cut in corporate rates. PNC economists estimate the national unemployment rate will keep falling to settle around 3.75 percent, although it isn’t likely to drop that far in southwestern Pennsylvania. Wages are projected to rise by 3 percent, better than in recent years. Corporate profits should do well and the stock market should continue a healthy ascent, although not as robustly as last year.

“We think the U.S. economy grows faster this year and next year,” said PNC Senior Economic Advisor Stuart Hoffman. “It has built up a lot of momentum and the tax cut, we think, is going to stimulate more business investment and consumer spending.”

Local jobs wanted

Tepid job growth has been one of the most discouraging features of the regional economy for nearly a decade. And its influence reaches from the local labor force to migration of people into and out of the region.

“Unless Pittsburgh is able to create far more jobs than it has been, this slow, almost stagnant, growth we’ve had will remain in place,” said Kurt Rankin, vice president and economist for PNC Financial Services Group. “That isn’t so bad if you have a job. But it’s not good if Pittsburgh wants to accelerate economic growth and bring in new jobs and industries.”

Job growth has been flat since 2012. At the same time, the local labor force has contracted, while across the United States it has steadily expanded.

And in each of the past three years, the region has experienced an exodus of residents that outnumbered new arrivals. “That’s probably been one of the most disappointing trends over the past couple of years,” said David Ruppersberger, president of the Pittsburgh Regional Alliance.

The trend reversed five consecutive years of positive migration that raised hope the region was gaining traction in attracting more people and holding onto those already living here.

“It’s a chicken-and-egg relationship between demographics and employment,” Rankin said. “But I think it starts with job growth. If you’re creating jobs, you are going to be able to retain people and highly skilled talent that comes out of universities rather than lose them to other parts of the country. Look at Columbus, Indianapolis, Baltimore, Cincinnati—any region with stronger job growth—and the local economies are seeing people come into the market to take advantage of those opportunities.”

Last year signaled improvement. In November, jobs increased 1.4 percent over the previous November, and the region was on course to create as many as 12,000 jobs by year’s end. Local economists caution, however, that encouraging year-end job growth data in recent years may end up being revised sharply downward later.

“I expect that number to be better,” Rankin said. “Even given the possibility of downward revision, I think there’s enough potential with the momentum Pittsburgh has coming in, tax cuts and more money in consumers’ wallets for 2018 to be the best job growth year since 2012.”

Labor force lull

That would be a positive turn for the regional labor force, where good news has been scarce. In 2016, it fell below 1.2 million for the first time since the Great Recession. And it had gained little through the third quarter of last year.

A shrinking labor force is a burden on the economy that the Pittsburgh MSA shares with few other regions. Both Rankin and Hoffman put most of the blame on the lack of meaningful job growth over the better part of a decade.

Retiring baby boomers do not appear to be eroding the labor force as anticipated. Fewer appear to be retiring than anticipated. The labor force participation rate among Americans aged 55 or older has risen 2 percentage points since 2006, according to the Bureau of Labor Statistics. Meanwhile, participation among 25-to-54-year-old “prime working-age” Americans has fallen 1.6 percent.

“The lack of labor force participation among the prime-age working group makes me think that Pittsburgh’s older workers are a bit of an asset, at least temporarily,” Rankin said.

But that is not likely to last, raising longer-term concerns about labor force expansion in a region that is experiencing a downturn in domestic migration and has been unable to attract significant numbers of foreign-born immigrants.

An Allegheny Conference on Community Development report points to several steps that concerned employers could take to help ensure an adequate labor pool. Job postings suggest, for example, that many companies demand candidates have higher credentials or greater experience than the jobs actually require. And fewer than half of local employers offer college internships.

“We also have to do a better job keeping our college graduates,” Ruppersberger said. “We continue to say that, but we are only keeping about 50 percent, which is below our peer regions.”

Wages on the rise

Higher wages could also help address the soft spots in the regional economy by stimulating local spending, helping businesses compete for workers and improving the prospects for job creation and expanding the labor force.

The good news is that wage growth has emerged as a regional strength and economists expect it to continue to fuel the economy in 2018.

Local wages picked up steam in 2017 after slipping the previous year. In the second quarter, for example, the average weekly wage for the Pittsburgh Metropolitan Statistical Area rose 4.1 percent over 2016—the fourth highest increase among the 15 Pittsburgh Today benchmark regions. At $1,004, local wages remained below the benchmark average, but higher than in regions such as Nashville, Cleveland and Cincinnati.

Building boom

While regional economic sectors are expected to thrive this year, manufacturing is not one of them. Once the region’s economic backbone, it been a steady underperformer in regional jobs, bucking the national trend.

“We continue to lose jobs,” said Jim Futrell, vice president, market research for the Pittsburgh Regional Alliance. “But the sector’s percentage of GDP is still holding its own and we still see activity in terms of expansion. The manufacturing sector here is probably using technology to a much greater extent to automate-out employment.”

The region’s technology sector, which has attracted major companies, such as Google and Uber, is expected to continue to grow. In September, the professional, science and technology sector had added 2,600 jobs, up 3.2 percent over the previous year.

A growing local energy industry buoyed by abundant natural gas is awakening after enduring several years of low global energy prices. Job growth is expected, but it won’t necessarily be driven by drilling operations, which have become much more productive with advances in technology and practices. “There’s a lot of infrastructure being built: pipeline, gathering lines, separation facilities,” Ruppersberger said. “Many billions of dollars have been spent in the region and that will continue.”

Although 2017 brought talk of major national infrastructure spending, it was still little more than a topic of discussion in the White House and Congress when 2018 began. But building is booming in southwestern Pennsylvania, spurred by major private-sector capital projects still in their infancy.

The largest is the $6 billion Shell Appalachia ethane cracker complex being built in Beaver County, where 1,000 workers are on the job and an estimated 5,000 are expected to join them soon. A new natural gas-fired power plant is under construction in Westmoreland County. Last year, UPMC, the region’s largest health care provider, announced it plans to spend $2 billion to build three new specialty hospitals, with the first set to open in 2020. And Highmark Health announced $700 million in new building. As Futrell said, “It’s a good time to be in construction.”