As recession fears grow, Massachusetts industries hunker down for a tough '08
As problems in the economy mount and talk of a recession grows louder, Massachusetts companies are looking at tougher business conditions this year across a broad range of industries.
Banks are writing fewer auto and commercial loans. Hospitals are finding it harder to collect reimbursements from patients. And even in the high-tech sector, which many in the state had seen as cushioning the pain of a downturn, there are fears that once reliable customers, such as financial firms, will stop buying software, and services.
There are still bright spots, including life sciences, which is less sensitive to economic cycles, and tourism, which has benefited from an influx of foreigners taking advantage of a weak dollar. But there also are fears the economic contagion that has jumped from the housing market into mortgage and lending arenas and, most recently, into consumer spending, will infect other pockets of state commerce.
"If these things spill over, they can contaminate the entire economy," cautioned Michael Lynch, a New England regional economist for the Lexington research firm Global Insight Inc.
It's too soon to say whether yesterday's emergency interest rate cuts by the Federal Reserve will calm jittery investors and keep the economic slide from accelerating. After plunging nearly 465 points after the opening, the Dow Jones industrial average rebounded in response to the Fed's move. It finished down 128.11, a 1.06 percent drop, at 11,971.19, its first close below 12,000 since November 2006.
The mixed effects of the slowdown so far can be seen in the financial services industry. Mortgage companies have been battered by the subprime market collapse, but mutual fund firms have held up better as people continue to pour money into retirement funds. Many large banks are weighed down by portfolios of mortgage-backed securities, while some smaller banks still have plenty of money to lend to qualified buyers.
Bristol County Savings Bank in Taunton, which never sold subprime mortgages, is doing a brisk business in home loans in its current fiscal year, which began in November. But the business is being offset by the drying up of the bank's commercial and auto loan markets, casualties of the slowing economy. "The demand just isn't there in those areas," said E. Dennis Kelly, the bank's chief executive.
Hospitals, meanwhile, are finding it harder to pass on their rising costs to insurance companies. "We're seeing a tightening in our negotiations with health insurers," said Joe Kirkpatrick, a vice president at the Massachusetts Hospital Association. "We don't think we'll be able to maintain the [profit] margins we've had in recent years."
At the same time, hospitals are spending more time pursuing reimbursements from patients who are out of work or whose employers have cut back on insurance contributions. "We're all concerned there will be more people who are unemployed or will have benefits that are less comprehensive," said Ellen M. Zane, the president of Tufts New England Medical Center. "We'll still have to provide the same healthcare, but we won't get the same level of reimbursements."
Few high-tech companies in Massachusetts have sounded the kind of alarm heard in other sectors, but some troubling signs are emerging in the industry at large. Last week semiconductor giant Intel Corp., which operates a chip plant in Hudson, reported a weaker outlook because of competitive pricing in the flash-memory chip market.
Meanwhile, the chief executive of Symantec Corp., a security software firm with a presence in Massachusetts, warned the slowdown in the US economy could be spreading abroad. And, the Internet giant Yahoo Inc. is reportedly planning hundreds of job cuts as it continues to lose market share to rival Google Inc. The tech-heavy Nasdaq Composite exchange tumbled 47.75 points to 2,292.27 yesterday, losing 2.04 percent, nearly double the Dow's loss in percentage terms.
The market's concerns were echoed in the reaction of venture capitalists to a new MoneyTree report showing a flattening in investing in software firms, traditionally the single largest category for venture outlays. That is especially worrisome to Massachusetts, a hub for business software makers. "Financial services firms may be cutting back on information technology spending," said Deepak Kamra, general partner at the venture firm Canaan Partners. "If you see some softness in the economy, you could see some softness here."
But even as Massachusetts lost 2,700 jobs at the end of last year in sectors like construction, retail, and manufacturing, the most recent report from the state Department of Workforce Development showed employment gains in technology-related sectors such as engineering, scientific research and development, and consulting. One reason: Technology firms, which sell their products and services around the world, are less vulnerable to a slowdown in the US market.
"Everything's connected, but some things are connected more strongly to the local economy," said Yolanda K. Kodrzycki, senior economist and policy adviser at the Federal Reserve Bank of Boston. "The tech industry is connected to the worldwide economy."
Many in the technology world remain upbeat. "I'm not in a state of panic," said Paul F. Deninger, vice chairman at investment bank Jefferies & Co. in Waltham, which focuses on high-tech firms. "If a recession lasts less than a year, the technology sector will be OK. If it lasts more than a year, then of course there'll be some fallout."
Another innovation-heavy business, life sciences, has been even less affected by the slowdown in housing and consumer spending. Biotechnology companies are continuing to invest in novel therapies, and demand for life-saving drugs and medical devices is as high as ever. Biogen Idec and Genzyme Corp., the state's largest biotech firms, expect to post double-digit profit increases in the next few years.
Still, the stock market retreat has hurt share prices of life sciences firms. And the Framingham research firm Health Sciences Insights last week warned the industry could be ripe for consolidation and cost cutting in 2008 as pharmaceutical giants snap up biotechnology firms to help refill depleted drug pipelines, though there has been little indication yet that has hurt Massachusetts.
"I would say we haven't been immune as a sector," said Drew Fromkin, chief executive of Clinical Data Inc., a Newton firm that's developing genetic tests and an experimental antidepressant drug.
The tourism sector, which can be sensitive to economic trends, has been weathering the slowdown - at least so far.
Buoyed by an influx of tourists from abroad and bookings for conferences, conventions, and special events, the Massachusetts Lodging Association projects occupancy rates will remain stable in Boston-area hotels this year while revenue per room will increase.
"It's not a year of huge optimism," said Paul J. Sacco, the association's chief executive. "But the industry is going strong."
Robert Weisman can be reached at weisman@globe.com. Todd Wallack and Nicole C. Wong of the Globe staff contributed to this report. 