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After plunge, Massachusetts takes stock

As effects of financial crisis reverberate, investors and leaders in fields from technology to tourism worry about issues from loss of federal aid to discretionary spending

Airline traffic, which is up nearly 3 percent over last year, is expected to be flat by the end of the year as stock market losses affect business and personal travel choices. Airline traffic, which is up nearly 3 percent over last year, is expected to be flat by the end of the year as stock market losses affect business and personal travel choices. (David L. Ryan/Globe Staff/File 2010)
By Casey Ross, Todd Wallack, and Katie Johnston
Globe Staff / August 9, 2011

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From Boston boardrooms to factory floors to kitchen tables across the state, a constant drumbeat of negative news is deepening financial anxiety, threatening to curb business development and consumer spending, and undermining an already weak economy.

As the Dow Jones industrial average plunged 634.76 points yesterday, negative sentiment emanated from many sectors of the Massachusetts economy. A leading housing researcher reported a sharp increase in home foreclosures, financial companies scrambled to calm skittish investors, and several business leaders said the stock market losses and US and European debt woes are combining to sap the frail recovery.

“The wheels could fall off,’’ said Andre Mayer, an executive vice president for Associated Industries of Massachusetts, a business advocacy group. “There’s obviously increasing uncertainty, and that’s very disruptive to economic activity.’’

While many business leaders said it is too early to gauge the effect of the recent events, some fretted that even raising the question will cause companies to postpone hiring decisions and other investments until they have a better sense of where the economy is heading.

Biotechnology firms and research organizations worried about a drop in federal funding as congressional leaders promise to slash spending; real estate developers voiced concerns that falling consumer and business confidence will cut demand for new stores, homes, and offices; and people in the financial world are trying explain the US credit downgrade to nervous customers.

“We’re trying to figure out exactly what to say,’’ said Tom Luster, a head of investment grade bond investments for Eaton Vance Corp.

Financial Services and Investment While Boston’s financial firms dealt with another day of heavy trading and steep stock losses, federal regulators moved to halt another selling stampede by reassuring investors they can continue to own US Treasurys after the downgrade by Standard & Poor’s Friday. The Federal Deposit Insurance Corp. has told banks it will still consider US Treasurys and other securities backed by the government just as safe as it had before the downgrade. And on Sunday, the National Association of Insurance Commissioners said the downgrade will have “no impact on insurer investments’’ in US bonds.

Boston-based Silver Bridge Advisors LLC predicted the S&P downgrade would increase volatility, particularly since it comes as investors are already skittish about the economy and various debt crises. But Silver Bridge said its research of similar downgrades in the past found there was no consistent trend in how stocks reacted.

“While the downgrade is disappointing, it is unlikely in and of itself to have a meaningful impact on US markets,’’ R. Thomas Manning Jr., Silver Bridge’s chief investment officer, said in a note to clients.

Even Standard & Poor’s yesterday downplayed the difference between its old AAA rating for US Treasurys, and the AA+ rating yesterday. “It’s like going from indigo to navy blue,’’ said John Chambers, who oversees S&P’s sovereign rating committee, in a conference call yesterday morning.

However, the credit agency yesterday also downgraded a number of other entities with strong connections to US government finances, including the Federal Home Loan Bank of Boston, which provides credit to community banks throughout New England. The bank declined to comment.

After the downgrade, Massachusetts Mutual Life Insurance Co., the large Springfield insurer and investment manager, said it ramped up staffing at its call centers to handle the surge it experienced yesterday. And it also recorded new messages with additional information about the situation for callers as they waited on hold.

“We have a strong capital position with more than $10 billion in surplus,’’ said spokesman Mark Cybulski.

Boston-based Fidelity Investments also increased its communication with customers, distributing both an article and video about the US debt downgrade and what it means. The company also reported a surge in call volume from anxious investors.

If Fidelity and other firms have less money to manage, that will lead to lower profits and may cause some to hold off new hires or other business expansions.

Members of Boston’s large venture capital community are already girding for a sharp slowdown of start-up companies going public, which is a key source of capital for business expansion as well as investment profit for the original funders.

Right now the funding climate has been good: Deals in Massachusetts topped $1.1 billion during the second quarter - the highest in a decade. Adam Marcus, managing director of Boston-based OpenView Venture Partners, which invests in late-stage technology companies, predicted that in the near term deals such as mergers and acquisitions will continue to get done.

“It’s not feast yet, but it’s certainly not famine,’’ he said.

Over the longer term, say six to 12 months, IPOs will be much rarer, said Michael Greeley, general partner at Flybridge Capital Partners, which backs early-stage tech companies, save for major names such as Groupon and Facebook.

Greeley said he is trying to look beyond the current turmoil to the day he knows will come, when financial markets will calm, just as they did after the crisis of 2008.

“Three years ago we thought the world was coming to an end, and yet since then we have had some extraordinary success stories,’’ Greeley said. “I think the fundamentals are still fine, and the US will be fine.’’

Biotechnology and health care The growth of pharmaceutical companies and medical firms has remained a bright spot in the Massachusetts economy during the past several years. But industry representatives said the federal debt-ceiling battle and promised spending reductions could cut critical funding needed to support research and growth.

“If National Institutes of Health funding gets cut, it will negatively impact the technologies coming out of our academic centers,’’ said Robert K. Coughlin, president of the Massachusetts Biotechnology Council. “That means growth will not continue to happen. That’s where the new ideas and cures come from. That’s where the jobs come from.’’

Massachusetts is home to five of the top eight National Institutes of Health funded hospitals in the country, so any loss of federal aid would have an immediate impact.

On a broader level, Coughlin said, the sharp declines in the stock market and falling investor confidence could undermine the shaky IPO market, which small- to mid-sized companies use to finance expansions.

An index that tracks the performance of the state’s biotechnology companies has dropped more than 22 percent since July 15.

Meanwhile, the state’s largest health insurer, Blue Cross Blue Shield of Massachusetts, said it is not likely to be significantly hurt by the market’s sharp decline.

“About two-thirds of our concerns are in cash and bonds, the remaining third are in commercial real estate and stocks and a variety of things,’’ chief financial officer Allen Maltz said, “so the ups and downs of the Dow Industrial may make for a good proxy of what’s going on in the economy, but it’s not the most important for us.’’

One potential long-term concern for Blue Cross if the economy worsens: More people will be out of work, Maltz said, meaning fewer would have health insurance, and that could affect Blue Cross earnings.

Commercial real estate After a surviving virtual shutdown of development activity during the last three years, real estate and construction companies are now bracing for another retrenchment that could stall projects and undermine property values.

Their most immediate concern: Companies and consumers that would fill the offices, stores, and residences of their new buildings will cut back spending, leaving them unable to finance construction.

“We’re all holding our breath to try to get through this,’’ said David Begelfer, head of NAIOP Massachusetts, a commercial real estate association. “But the recovery is moving at a much slower pace than many people expected, and I don’t see any major increase in job creation, which has a direct impact on commercial real estate.’’

Slow hiring by local businesses blocks construction of new office towers, while continued sluggishness in the state’s housing market will hurt demand for new condominiums and houses. About the only sector that remains strong is rental housing, which has already been supporting the bulk of commercial development for the past 18 months.

Tim Love, principal at Utile Inc., a Boston architectural and planning firm, said he’s worried that many institutions and real estate developers could put construction projects on hold.

“It spooks people,’’ Love said. “They suddenly get nervous about their endowments or financing and decide not to follow through on projects that are already in the middle of the design process.’’

The implications could be felt throughout the region: In downtown Boston, the redevelopment of the former Filene’s store is still showing no signs of life as its work stoppage enters its fourth year. In communities along routes 128 and 495, already high vacancy rates in commercial properties are almost certain to jump higher in the near term, further undermining property values. Even development hot spots in Cambridge and Boston’s Seaport District could feel the pinch, since many of the new developments in those neighborhoods are tied to expansions by technology and medical companies, and local and national retailers.

Housing market By some measures it doesn’t appear the recession has even ended in the state’s housing sector: Sales and demand for new mortgages are at 20-year lows, so not only is there little demand for new homes, but many people have either already availed themselves of low rates and don’t need to refinance, or they can’t qualify and are out of the spending picture for now.

Warren Group, a Boston publisher of real estate data, reported yesterday that foreclosures by lenders rose 42 percent in June, to 931, the highest monthly amount since August 2010.

So the accumulation of dour economic news, some housing market specialists said, threatens to make a bad situation worse.

“The overall situation cannot do anything but hurt the housing market,’’ said Vincent Valvo, editor in chief of Banker & Tradesman, which is published by Warren Group.

For now mortgage rates seem caught between conflicting events. On the one hand, S&P yesterday downgraded the credit of housing lenders Freddie Mac and Fannie Mae, which should drive up their borrowing costs and make mortgages more expensive. However, the weak economy and strong demand for still-safe government bonds is keeping loan rates low.

Technology For Massachusetts’ technology industry, the damage may be limited, because so many local companies provide high-end hardware and software to businesses, rather than consumers.

Joseph Pucciarelli, program manager for technology financing and executive strategies at IDC Corp., said many large companies have been buying tech products right through the end of the recession. He predicted that the trend would continue, because equipment upgrades often deliver productivity improvements at relatively low cost.

“In spite of all the volatility, I don’t think we’re going to see a significant change in terms of enterprise IT spending,’’ Pucciarelli said, noting that many technology products remain in high demand outside the United States.

Terry Waters, chief executive of the Yankee Group, a technology consulting firm in Boston, said that the financial crisis could mean trouble for makers of consumer electronics, such as tablet computers and smartphones if cash-strapped consumers elect to hold off buying the latest gadgets.

“The consumer side tends to be more volatile, and has deeper ups and downs,’’ Waters said. By contrast, he said, businesses develop long-term plans for their technology purchases. Many equipment purchases have already been budgeted and he doesn’t expect companies to quickly change plans.

Restaurants and retail Some local retailers had already noticed business was off in recent days as fears of another recession intensified. Fewer families and international tourists are shopping at the Newbury Street Johnny Cupcakes T-shirt store, said Lucas Dunn, the company’s business director. The company is adjusting by focusing on its core market in this region: 16- to 24-year-olds.

“We definitely have to be more cautious,’’ Dunn said. “In the past two to three years, we have become aware of what we need to concentrate on.’’

Bernie Rubin, owner of Bernie & Phyl’s furniture chain, said talk of a US debt crisis has turned consumers off.

“The news that it created for the last two weeks was total insanity and scared the living daylights out of every person,’’ he said.

Rubin, like other Massachusetts merchants, is hoping this weekend’s sales-tax holiday will entice people to shop. “If it isn’t that well received,’’ he said. “I’ll blame the economy.’’

Restaurants also rely on discretionary spending, and some could feel the impact if the economy slows further.

“I’ll be very concerned if people are laid off in droves,’’ said Michael Wang, owner of Fóumami Asian Sandwich Bar, a Financial District eatery that serves office workers.

Wang also worries about the catering side of his business. “We are slowly building corporate clients, though with the [possible] recession, companies may be cutting back on catered luncheons,’’ he said.

Travel and Tourism With stock market losses hitting companies and family savings accounts, travel industry specialists said expensive vacations and business trips may begin to fall off. Airline traffic is up nearly 3 percent over last year, but given the recent turn of events, analysts predict it will be flat by the end of the year.

“If the stock market travails continue, say, through this month, then you’ll see people responding strongly on reducing business travel to save the third quarter,’’ said Harlan Platt, a professor of finance at Northeastern University who follows the aviation industry.

Leisure travel will also probably take a hit, said Patrick Moscaritolo, president of the Greater Boston Convention & Visitors Bureau, who said he no longer thinks tourist visits this year will top prerecession levels.

“If people are nervous about what’s around the corner, whether it’s a company or a consumer, you’re going to hold onto your dollars and not spend them,’’ he said.

For the flying public, passengers may see significant air fare sales to make up for an expected dip in fall travel, but analysts don’t see lower prices sticking. In the first quarter of this year, the average one-way fare in the US, including fees and taxes, was $208, said aviation consultant Michael Boyd - the first time in history the average fare has been more than $200.

Erin Ailworth, Hiawatha Bray, and Kay Lazar of the Globe staff and Globe correspondents Taryn Luna, Kaivan Mangouri, and Christina Reinwald contributed to this report. Casey Ross can be reached at cross@globe.com.