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Wichita faces slow road to recovery

  • The Wichita Eagle
  • Published Wednesday, Dec. 30, 2009, at 2:01 p.m.
  • Updated Thursday, Dec. 31, 2009, at 7:27 a.m.

The Wichita economy is close to the bottom, and when we get there, it may be a long stay.

Even if the local economy technically starts growing in 2010, it won't feel like a recovery until hiring resumes late next year or in 2011.

The good news is that the nation and world appear to be clawing their way out of the hole. That starts the clock ticking until Wichita's recovery.

The strength of the national recovery has already caused forecasters at Wichita State University to soften their negative job forecast for the year.

The bad news is that the time lag between a national and world recovery and a Wichita recovery may be long, say analysts. Aircraft production in Wichita is actually expected to drift downward for another two years.

In the last recession, Wichita employment fell for two years after it hit a peak in July 2001. If that is repeated this time, the number of jobs in Wichita will keep falling until late 2010.

And the recovery in the last recession was slow. After it hit bottom, it took Wichita from 2003 to 2007 to regain the same number of jobs it had in 2001.

Throw in an uncertain world recovery, a continuing credit crunch and the possibility of increased regulation, taxes and inflation, and a full recovery in employment could be four or five years away.

Manufacturing

Wichita's economic cycle is much sharper both up and down than the national economy — and it lags the U.S. economic cycle by about a year.

The national economy started growing again in the third quarter, and the debate now is how strong 2010 will be. Opinions range from a rosy 3.5 percent surge to another recession.

But the consensus is that U.S. GDP growth will be somewhere in the 2 percent range, which is only enough to bring unemployment down to between 9 and 10 percent, say analysts.

One of the key drivers of Wichita's cycle is corporate profits, because they determine companies' appetite for business jets. About 12 to 18 months after corporate profits start to grow, orders for new jets typically start to pick up.

Corporate profits have been growing since early 2009, and that's why aircraft industry analyst Ray Jaworowski of Forecast International said he expects corporate aircraft orders to pick up in the second half of 2010. That is echoed by local aircraft executives.

But Jaworowski said corporate aircraft manufacturers are in no hurry to ramp up production because of the incredible damage done to their backlog by order cancellations and delays. Hawker Beechcraft lost more than $10 billion in orders in the past year.

Jaworowski expects jetmakers to actually make and deliver fewer aircraft in 2010 and 2011 than in 2009. That means no pressure to add full-time workers, except here and there.

On the commercial side, Boeing's decision to maintain production of the 737 has kept Wichita's unemployment rate from going higher. Spirit AeroSystems, now Wichita's largest employer at about 11,000, hasn't laid off anyone.

But Jaworowski thinks that Boeing will finally trim 737 production in 2010 to 300 jets, or a 14 to 16 percent cut from 2009. He sees smaller production cuts in 2011 and again in 2012.

Business jet demand will finally start to pick up in 2012 and commercial jet production in 2013.

"And when the market starts to come back," he said, "it will be slow and gradual. It won't boom."

More optimistic

Other sectors of the local economy have been less affected by the downturn than the aircraft makers, and therefore have had fewer layoffs.

Even many non-aircraft manufacturers are starting to see a revival in demand as companies restock inventories that have fallen to extremely low levels.

Wichita's health care and government sectors are expected to add more than 1,000 jobs between them in 2010, according to WSU's Center for Economic Development and Business Research, which this month updated its 2010 jobs forecast for the area.

Much of the rest of the economy — the banks, the retailers, the courier services, the commercial contractors — depend directly or indirectly on the wealth generated by the city's manufacturing and health care sectors.

That means their business is down in 2009 and will be again in 2010.

But there are optimists who say Wichita will snap back faster than much of the U.S. The city didn't suffer any of the fallout from the real estate bubble — except that it's now hard to get credit, even in Wichita.

But these optimists say Wichita's connection to more robust international economies through jet and agriculture sales will pull Wichita out.

"I believe that 2010 might be surprisingly good for Wichita," said Dave Strohm, president of local investment company TrueNorth. "Right now, people are negative about the economy, but Wichita will benefit because of the strong international economic recovery, and, to a lesser extent, the national economy."

Agriculture

What happened in 2009

Nationally, corn and soybeans hit record levels, and wheat had a good crop. "It was also a very challenging year" for Kansas farmers because of a wet spring that delayed planting and a cool July that pushed the harvest back, said Arlan Suderman, a Wichita-based analyst for Farm Futures.

The nation's net farm income was expected to be down by more than a third from near-record levels in 2008, the U.S. Department of Agriculture said. Economic conditions worldwide lessened demand for exports, with the result being lower prices.

The Environmental Protection Agency put off its ruling on whether to increase the ethanol blend level.

Opportunities in 2010

Late in 2009, exports for corn and grain sorghum started to pick up, Suderman said, largely because of demand from Mexico.

An increase in the ethanol blend level would be good news for corn and grain sorghum prices, which could be bad for end users.

An emerging middle class, especially in Asia, could increase the demand for pork and beef exports and for the grains needed to provide those meats.

Challenges in 2010 Prices, especially grain prices, increasingly are driven by whether the dollar is up or down. "Our commodities, particularly the grains, corn, soybeans and wheat, are being traded as global currencies," Suderman said. That produces a volatile market and more risk for crop and livestock producers.

EPA restrictions on ethanol blends could create havoc in the fuel distribution network.

Cap-and-trade legislation could increase energy, fertilizer and chemical costs.

Bottom line

The weather, the global economy and legislation will continue to make agriculture highly volatile.

-- Karen Shideler

Health care

What happened in 2009

Health care continued to be a strong segment of the Wichita economy.

Exclusive insurance contracts with area hospitals came to an end. Galichia Heart Hospital's contract with Preferred Health Systems is in place; others take effect Jan. 1.

Wichita State University launched its graduate dentistry program, work started on a Wichita campus for the University of Kansas School of Pharmacy, and the KU School of Medicine-Wichita got a new dean. Those three programs train some of the highest-paid health professionals.

Opportunities in 2010

Via Christi Health's new west-side hospital is to open in August.

The end of exclusive insurance contracts gives employers and customers new choices and hospitals a new way to compete. Coventry Health Care should complete its acquisition of Preferred Health Systems; the sale was approved late this month.

Those developments will present "a whole new set of dynamics to drive our behavior and buying in health care," predicted Ron Whiting, executive directory of the Wichita Business Coalition on Health Care.

Challenges in 2010

Employers will continue to look for ways to hold the line on health insurance costs, and the open insurance market and PHS-Coventry deal may provide challenges as well as opportunities. Health care reform efforts will continue at the national level.

"There's got to be something that shows innovation in the way that care is delivered," Whiting said.

Bottom line

Both the open insurance market and the continuing national debate make it clear that the health landscape will change in 2010.

-- Karen Shideler

Retail/restaurant

What happened in 2009

It was a difficult year for retailers and restaurants in 2009, marked by a stream of aviation layoffs that drove the Wichita unemployment rate up.

But industry attitudes perked up at the end of the year as shoppers and diners began filtering back into their favorite stops.

And some segments of both sectors prospered in the economic downturn, sharing a common theme: There's still a market for customer service and value.

"It was a tough year on the industry .. ," said Don Sayler, president of the Kansas Restaurant and Hospitality Association. "The economy, although we've flattened out, we're not recovering. Once we start climbing, it'll take people a while to get their finances back in order to eat out."

Opportunities in 2010

To the savvy retail and restaurant marketers will go the spoils in 2010, which promises to be another difficult economic year unless aviation employment bounces back.

Bargains, targeted marketing and careful inventory management will be key, retailers say.

And the story's not a whole lot different in the restaurant world, either, where chain operators like Dale Steven of Spangles and the Simon family of Freddy's Frozen Custard have melded good prices and customer service into sales growth during the downturn.

"I'm impressed and amazed that we continue to have operators expanding and growing," Sayler said.

Challenges in 2010

Two words: The economy. The challenge for retailers and restaurateurs is to accurately guess how much disposable income Wichitans will have, and then market to lure it into their stores.

Bottom line

It will be another tough year for retailers and restaurant operators, but there are growth opportunities for those who can blend value and customer service into a successful business plan.

-- Bill Wilson

Small business

What happened in 2009

Depending on the industry, small businesses survived or thrived in 2009 as the effects of a national recession began to be felt in Wichita and across the state. In addition, many changes in government policy were enacted in 2009 but have until next year to take effect. "As you can imagine, the overarching issue facing small business was the economy," said Dan Murray, Kansas state director for the National Federation of Independent Business.

Opportunities in 2010

The opportunities for small business in 2010 depend on the industry sector in which they operate, said Tim Witsman, president of the Wichita Independent Business Association, a small-business advocacy group.

The good news is a lot of WIBA member businesses don't carry a lot of debt, Witsman said. But they don't have a lot of cash to spend, either. "If you're in plumbing it's not that bad," Witsman said. "But if you're in executive recruitment it's brutal."

Challenges in 2010

The challenges for small businesses in 2010 are plenty, Witsman said. Higher unemployment compensation rates won't bode well for small businesses already trying to cut costs. Nor will health care reform, which

Witsman expects to mean some additional costs for businesses. Small business groups also are concerned about the threat of higher taxes and cuts to existing incentives for businesses in light of falling tax revenue.

"We're very concerned about what direction the state goes," said NFIB's Murray.

Bottom line

Small businesses will continue to wrestle with the effects of recession while working in Topeka to keep their costs down.

-- Jerry Siebenmark

Commercial real estate

What happened in 2009 The commercial real estate industry took a huge economic hit in Wichita in 2009 as deals dried up in a commercial credit crunch.

The year ended with few or no commissions for even the city's biggest brokers as the market froze, paralyzed by the lack of available loan capital.

"Commercial credit was available in 2009 and will continue to be for projects that cash flow and have sufficient equity," said Brad Saville, president of Wichita's Landmark Commercial Real Estate.

Saville's company did deals during the downturn, most notably a new 8,960-square-foot retail center in front of Lowe's on North Maize Road anchored by Long John Silver's, Five Guys Burgers and Cinnamon's Deli.

Opportunities in 2010

Downtown revitalization will move ahead dramatically in 2010, and city officials believe that local entrepreneurs will be the first to begin snapping up available commercial space downtown.

Some national tenants are continuing expansion plans in the economic downturn, Saville said.

Downtown developers are targeting well-capitalized local businesses as they search for the first new retailing near Intrust Bank Arena, which opens Jan. 9.

In addition, properties in default and foreclosure will be good opportunities for investors sitting on the sidelines, Saville said.

Challenges in 2010

Without a thaw in the commercial credit markets, projects will be reduced in 2010 to those funded by significant cash down payments, as much as 40 percent of property value.

Bottom line

Next year will be a slow one for commercial real estate, with projects likely limited to well-capitalized investors able to put significant money into new projects. Speculative deals will be few and far between.

-- Bill Wilson

Residential real estate

What happened in 2009

The year was marked by a significant early downturn in home sales as buyers and sellers reacted to the economic collapse by heading for the sidelines.

But equally quickly, the local market rebounded when Congress passed an $8,000 tax credit for first-time homebuyers. Sales numbers rallied after the credit to pre-collapse levels.

"I think it was huge," said Roger Weast, president of J.P. Weigand & Sons, about the tax credit. "It kept a lot of real estate companies in business this year nationwide, and we certainly were happy to be able to benefit from it."

The credit's expansion, plus its extension at $6,500 to existing homeowners, has created some immediate optimism that the traditional winter sales lag can be overcome.

"It will depend a little bit on the weather," Weast said. "That's a factor in early January."

Opportunities in 2010

With the tax credit still in place and residential credit available, the first six months of 2010 look promising, Weast said.

"I think a lot of the same opportunities exist," he said. "We're very optimistic that business will pick back up after the holiday season."

One reason is the relative ease with which good-credit customers can obtain home loans in the Wichita area.

"I don't think we have a tremendous problem in residential credit like we do in the commercial side," Weast said.

"Loans are readily available and rates are at all-time lows or in that general area. Good chances for people with good credit."

Challenges in 2010

The residential market will rise or fall in 2010 based on what happens in the second half of the year.

Will the tax credits be extended again? Many analysts say no. If not, will Wichita employment have rebounded enough to help the market rebound continue?

"That's where our concerns lie — the second half of the year," Weast said. "Will the credits be extended? Will we hopefully get enough employment up so we won't need the tax credits?

"The credits have been huge for us here locally and throughout the nation, but we recognize that we need to get everyone back to work so they're feeling good."

Bottom line

The year 2010 in residential real estate will likely depend on Wichita employment. If aviation doesn't bounce back, sales might fall off in the second half of the year.

-- Bill Wilson

Banking

What happened in 2009

A deep national recession punctuated by a near collapse of the financial system found its way to Wichita in 2009.

Among the 135 bank failures across the country, Wichita saw its first bank closure in 20 years when the Office of the Comptroller of the Currency closed First National Bank of Anthony, which operated a branch on the city's west side.

Three area bank holding companies — Wichita's Fidelity Financial and Equity Bancshares and Argonia-based Farmers & Merchants Financial — were among hundreds of banks across the country to receive funding from the Treasury Department's Capital Purchase Program, part of the Troubled Assets Relief Program, a $700 billion fund aimed at shoring up capital for healthy banks.

The failure of so many banks also prompted the Federal Deposit Insurance Corp., which insures banks' deposits, to impose assessments on banks to replenish a drained insurance fund.

Banks struggled to keep their earnings up as the recession locally affected loan repayments and demand for new loans.

Opportunities in 2010

Bankers said they see few opportunities in the new year.

"I guess it's for us to be creative and look for new customers and be able to continue to provide good, solid financial services," said Lyndon Wells, executive vice president at Intrust Bank.

David Harris, CEO of RelianzBank, said the only opportunities he sees are for banks to acquire customers who are unhappy with their current bank.

"Volatility creates opportunity," Harris said. "After going through this, frankly, people either feel better about where they bank or they make a change."

Challenges in 2010

Heightened regulatory scrutiny, managing profits in a low-interest-rate environment and the effect of a new federal regulatory agency — the Consumer Financial Protection Agency — are among the challenges banks will face in 2010, Intrust's Wells said. From a legislative perspective, the banking industry will also be looking to protect its state regulator, the Kansas Office of the State Banking Commissioner, said Chuck Stones, president of the Kansas Bankers Association. The concern is that with lower tax revenue, the state will "sweep" funds earned by the bank commissioner's office through fees it collects from banks into the general fund, Stones said. That would in effect cut the bank commissioner office's funding and could lead to fewer examiners to examine the state's banks.

Bottom line

For the Kansas banking industry, 2010 will be a year of little growth and managing expenses.

-- Jerry Siebenmark

Energy

What happened in 2009

A plunging economy at the start of 2009 drove oil prices down, pushing Kansas Common crude into the $30 range. As the world economy started to recover, oil prices rose and by November Kansas Common was in the $60s.

Natural gas followed a similar trajectory, hitting a seven-year low in mid-2009 before recovering.

The building boom in alternative energy, particularly wind, slowed to a crawl as the credit crunch slowed construction projects of all kinds. The demand for ethanol also slowed in 2009 because of falling gasoline prices.

Opportunities in 2010

Oil prices could rise if the world economy continues its rebound and demand and speculation pick up. James Williams of WTRG Economics, in London, Ark., said that if Asian economies grow well and the U.S. and Europe remain sluggish, 2010 oil prices should remain about where they are now, in the $70 to $80 a barrel range.

Political or environmental situations that could raise the price of oil: civil war in Yemen spilling over into Saudi Arabia, more civil unrest in Venezuela or Nigeria, Western retaliation against Iran or a bad hurricane in the Gulf of Mexico. OPEC could always cut production, but Williams thinks that is unlikely.

Williams expects natural gas prices will average what they are now, about $4 to $4.50 per thousand cubic feet, with prices lower in the spring and summer and higher in the fall and winter.

New government mandates and subsidies enacted in 2009 may restart construction on wind and, perhaps, ethanol.

Challenges in 2010

Oil and gas prices could drop if the U.S. falls back into recession, Williams said.

Other risk factors for oil include increased conservation and use of alternative fuels. Political risk factors include a reduction in violence in Iraq leading to greater production.

Near record amounts of natural gas in storage will likely keep gas prices from rising too high, he said.

Credit woes continue to weigh down projects.

Bottom line

If the world economy continues its slow revival, oil and gas prices will remain about the same. A faster recovery will push prices up, while another recession will push prices down.

-- Dan Voorhis

Aviation

What happened in 2009

In Wichita, the business jet industry was hit the hardest by 2009's recession. As the year began, Cessna Aircraft, Hawker Beechcraft and Bombardier Learjet were coming off of their third year of record deliveries.

During 2009, the three planemakers cut production rates and laid off thousands of workers as customers canceled and deferred orders. Work on two new aircraft programs was halted.

Since November 2008, the three Wichita companies have cut about 13,000 jobs. That doesn't count the jobs lost with local suppliers and contractors who support the industry.

Going in to 2009, Cessna, for example, was planning to deliver a record 535 jets this year. It now expects to deliver around 275 and fewer still in 2010.

"Where we've been has been traumatic," Cessna Aircraft CEO Jack Pelton said recently.

Spirit AeroSystems was a bright spot, however. The jet transport business wasn't hit to the extent that other segments of aviation were hit. And business has been strong in a down cycle. While Spirit has wage and job freezes in place, it has not had to lay off workers, despite Boeing's slowing production rates of 777 jetliners. Boeing has held steady its production rates of 737 narrow-body jets, which was good news for the company.

Boeing Wichita is in the midst of cutting 800 positions as work on some programs winds down. It won't hit the 800 figure until sometime next year, however.

Opportunities in 2010

Looking ahead, Wichita's general aviation manufacturers say they aren't ready to call the bottom of the cycle, but there are signs that things are stabilizing.

Nearly all of the CEOs of Wichita's aircraft manufacturers said they think employment at their companies will stabilize in 2010, although they don't foresee growth in their businesses in the new year. They're also keeping a close tab on costs.

"We've taken this opportunity to get our production capacity in balance with the market," Hawker Beechcraft CEO Bill Boisture said recently. "We hope we have our employee base stabilized."

Hawker Beechcraft's military business will be a bright spot.

And Spirit AeroSystems will be ramping up for Boeing's 787 nose section in the new year.

Challenges in 2010

A big question mark will be whether Boeing will cut 737 single-aisle production rates. If it does, as analysts predict, that would mean less work for Spirit AeroSystems. If a downturn doesn't hit the company too steeply, Spirit wants to keep people employed, even if it means adopting a shortened workweek. It's too soon to tell what will happen.

None of Wichita's business jetmakers are planning for growth in 2010. Deliveries, in fact, are expected to be lower next year than in 2009, followed by a moderate improvement in 2011. But it may be 2012 before things start to look better.

Bottom line

The aviation industry over the long haul will make a comeback. The fundamentals are in place. But it will be a long, slow recovery.

-- Molly McMillin

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