Moderate Growth in Store for Metro Pittsburgh in 2016

by Stuart Hoffman
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Metropolitan Pittsburgh is a picture of stability entering 2016. Job growth is outpacing the Pennsylvania state average, and the unemployment rate for the seven-​county region is steady near 5 percent. 2015 brought a resurgence in labor force growth, providing local employers a wider pool of talent from which to fill their ever-​expanding payroll needs. Pittsburgh will manage steady gains throughout the coming year thanks to continued consumer spending. Although wage growth stalled over the past year despite a healthy labor market, low gasoline and energy prices will support consumer spending in 2016. Employment is under no threat of decline, which will allow consumer spending trends to continue under an umbrella of consumer confidence, supporting economic health and modest expansion overall.

Service industry employers are carrying the load by a wide margin in terms of supporting hiring across the region. Education & Healthcare is the largest segment across Pittsburgh’s service sector, and arguably its most iconic. And job growth here finished 2015 at a year-​over-​year pace as strong as any since 2001. This pace is a clear improvement versus 2013 and 2014 job growth results. Also ending 2015 on a positive hiring note were Professional & Business Services, and Financial Activities. Both indicate economic sustainability, as they include the intermediate activities that allow companies to do business. Accounting, legal services, engineering services, computer systems design, and business financing are just a subset of the services tallied in this sector. So when these industries are growing, one can be confident that broader business expansion is at hand.

A positive follow-​on result from broad service sector expansion is an apparent uptick in consumer confidence. Pittsburgh’s Leisure & Hospitality employers are hiring at a pace nearly double the year-​over-​year national average (+5.5 percent vs. +3.0 percent), after lagging national and regional averages over the prior two years. In Pittsburgh, where tourism dollars contribute to, but are not a heavy driver of, job creation, Leisure & Hospitality hiring occurs when local earnings are spent at local businesses. The region’s hiring push demonstrates that consumer spending habits will carry plenty of momentum into 2016.

Instilling less optimism regarding Pittsburgh’s economic potential in 2016 is the state of its heavy industry sectors. Manufacturing, Transportation & Warehousing, and Construction sectors all saw flat to lower payrolls than a year ago. The weakness in these relatively high-​paying sectors will limit income gains, and therefore the potential for consumer spending to accelerate from its current healthy pace. This weakness is contrary to national trends, which showed modest growth throughout 2015. Even the Pennsylvania statewide average for Transportation & Warehousing employment was up last year, indicating that there are at least some opportunities for Pittsburgh employers within the industry to push for a greater share of regional business activity in 2016.

The next leg of the U.S. economy’s expansion will occur in an environment of gradually rising interest rates. In December the Federal Reserve began normalizing interest rates from the near-​zero levels that had been in place throughout the nation’s recovery from 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 with credit cards. But this time is different. Even with several more interest rate hikes from the Federal Reserve per year over the next two years, interest rates will remain historically low. Borrowing costs will remain attractive for businesses that have valid expansion opportunities to finance, and the U.S. consumer has weathered far higher interest rates and continued to spend in the past. Pittsburgh will be no different in its ability to continue to grow in this evolving economic environment. Continued decent national economic activity, largely undeterred as interest rates rise, will provide support for local firms which rely upon selling goods and services to customers outside the region, helping to keep Pittsburgh’s expansion intact.

Pittsburgh’s housing market remains driven by healthy demand alongside a clear lack of supply impetus. Single-​family residential permit issuance finished 2015 well below year-​ago levels, which followed modest declines in 2014 as well. A lack of new building is not worrisome from an overall housing balance perspective, as tame price growth clearly indicates that enough homes exist to satisfy Pittsburgh residents’ buying interests. However, a lack of homebuilding leaves the region’s construction industry with a lack of upside potential entering 2016. Regional commercial construction projects will keep the industry from experiencing any dramatic drop-​off in employment levels, but new growth from the residential side seems out of reach in the near term.

Pittsburgh’s long-​time trend of population declines is in the early stages of a turnaround. With new industrial development, housing market stability, and broad urban development ongoing, Pittsburgh is well positioned to attract and retain young workers for years to come. Reliable education, healthcare and financial industry employers are firmly entrenched and will support workforce development for the foreseeable future. Pittsburgh is well positioned to benefit from gas drilling activity in the Marcellus Shale formation over the longer term, once natural gas prices regain some semblance of normality. But in the near-​term, energy employment will continue to decline in our region and nationwide. Skilled workers already experienced in this industry will find Pittsburgh’s low living costs attractive, and migration trends are likely to see a boost over the coming decade as a result.

Stuart Hoffman is PNC’s chief economist.

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