Recession road trip
Is the economy really on the rocks? We packed our bags and canvassed the country - seven cities in seven days - to find out how America's business owners see it.
(Fortune Magazine) -- We're entering a recession. That's what the power brokers in Washington and Wall Street have recently concluded. Or we will be soon. Or else it started a while ago and we're just now finding out. In any case, the pundits are gloomy, and the politicians all have plans. They trot out some scary numbers. But here's what I was wondering: How are American business owners really coping with all this confusion? What does the economy truly look like? Not when you're staring at a computer screen or studying survey results, but when you actually go someplace that's not a major media market (the farther from those places, the better) and you introduce yourself to a stranger and ask him how he's doing.
During the last full week in January, I did just that, visiting cities from the Pacific Northwest to the desert Southwest, from Texas to the Great Plains, from the Midwest to the Deep South, and all the way up to northern New England. I met a restaurateur in Arizona, a statue manufacturer in South Dakota, and a jewelry wholesaler in Ohio. I touched a broad, if admittedly somewhat arbitrary, cross-section of America. I wasn't looking for a snapshot but rather a kaleidoscope of the $13 trillion American economy, a collection of stories and images that together might offer some insight into what's really going on out there.
What did I learn? A lot about immigrants - how important they are to the economy (even in South Dakota!), but also how little policymakers appreciate the real-life consequences of their actions when they mess with the ebb and flow of people across borders. I learned that all business is local. Gas prices matter, interest rates matter, trade policies matter - it might even matter who's in the White House. Only to a point, though. Success in business is about creativity and flexibility and making the best of what's staring you in the face. Yeah, times are tight here and there. But people find a way. Which brings me to my third lesson: American entrepreneurs, for the most part, are surprisingly, stubbornly optimistic. I'll take that as a positive. You can judge for yourself.
Falling timber and sagging tax revenues
I begin my tour on Interstate 5, driving north from California into southern Oregon, past dormant volcanoes dusted with snow into a green valley filled with swirly-patterned subdivisions and pear trees (Harry & David, the mail-order fruit company, is the biggest local employer). The real estate boom you might have heard about - fueled by equity-rich Californians pleasantly shocked by what their money could buy in southern Oregon - is dead. In Medford, 781 people lost their homes to the bank in 2007, a 164% increase over 2006, according to RealtyTrac, and that's taken a big bite out of tax collections in Jackson County.
So has the long, slow decline of the timber industry - and the spotted owl should not be blamed entirely. For years Washington subsidized timber counties in the region with "O&C receipts," designed to compensate Oregon and California for the loss of logging revenues on federally owned lands. "Last year, when we did not receive those receipts" - locals blame budget cutbacks tied to the war in Iraq - "it was about a $23 million hit to our community," says Brad Hicks, president of the Medford Chamber of Commerce, "which is one of the reasons we closed a 15-branch library system, the largest library closure in the U.S." The branches have since reopened, albeit with reduced hours and under the auspices of LSSI, a for-profit library-management company based in Maryland.
Declining tax receipts were behind the gloomy page-one story in today's Mail Tribune. COUNTY OFFICIALS PLAN TO DEVELOP FIVE-YEAR STRATEGY TO DEAL WITH FALLING REVENUE, one of the headlines read. Among the proposed remedies is an increase in the gas tax, which Brent Moffet, co-owner of Oregon Motorcycle Adventures, won't like at all - he blames higher fuel costs for taking a 20% bite out of his high-margin ATV rental business. There's also discussion of a "public-safety surcharge" - i.e., money for cops - to be levied on property owners. "Additional revenue could also come from a new domestic-partnership law if it ever clears challenges in the courts," the Tribune noted hopefully.
Not everyone is complaining. Victor J. Bloomquist II, the heavily tattooed proprietor of Medical Body Arts in nearby Phoenix, Ore., says his business has never been better. "There are still people out there who will save their money up," he insists. "They'll purchase their skin art before they will their gasoline."
Who has money for a $9 buffet?
I'm standing with Harjit Sodhi in the empty living room of what used to be his family home. He moved to Mesa two years ago and put this house on the market. It has four bedrooms and three baths and sits at the end of a cul-de-sac in what the real estate flier describes as the "quiet, desirable Arcadia neighborhood" of Phoenix. Out back there's a pond with a fountain, an outdoor kitchen, fruit trees sagging with oranges, lemons, and pomegranates, and singing birds. Nice place. I'd live here. But not for $995,000, which was Sodhi's first asking price, or even $825,000, his second. And obviously I'm not alone. Sodhi has yet to receive a single offer. Meanwhile, he gets a tax bill every quarter and a utility bill every month. He can't turn off the air conditioning because he's afraid the wood floors will buckle. "Would you take 750?" I ask him. "I believe I would," he says.
Sodhi has other problems. The lunchtime crowd at Indian Delhi Palace, his restaurant on East McDowell Road, is down dramatically. "I do not believe we are making as much money as in 2002, 2003," says Sodhi, who still speaks in heavily accented English some 20 years after immigrating here from the Punjab region of India. "Costwise, everything is going up, and people's salaries almost stay the same. Look at the gas price - $3 a gallon. We are used to seeing $1.50, $1.65." When people have less money to spend for meals out, he says, they spend it at McDonald's, not on a $9 buffet. And when gas costs more, they're less willing to drive across town.
Sodhi's labor costs are up, thanks to Arizona's draconian anti-immigration law, which took effect Jan. 1. It's influencing the local economy in ways that are just beginning to be understood. Many Mexicans have simply gone home, Sodhi believes. It's much harder now to find reliable kitchen help. ("Americans, they don't want to come to wash the dishes," he says.) And he's also seeing a huge drop in customers at the several convenience stores he owns with members of his extended family. "I check with my cashiers," he says. "I ask, What's the reason for the low sales today? Every gas station I go, same answer I get: 'We don't see any Mexican people anymore.'"
Recession? Not in our town, amigo
One day after the Dow plummets 300 points during trading, only to rally strongly and close up 300, Dee Margo, chairman and CEO of JDW Insurance in El Paso and a Republican candidate for the Texas House of Representatives, just shrugs his shoulders. "To have a 600-point spread in the market in one day," he says - "gimme a break. To me it's all speculation, up and down. I still think we're in pretty good shape."
I hear Margo's attitude echoed all over town. At the H&H Coffee Shop on East Yandell, for example, where one of the owners, Maynard Haddad, 74, informs me laconically, "A lot of things that happen in other parts of the country don't happen here." And later, when I'm talking to Bob Ayoub, president of MIMCO, a shopping center developer with projects all over the Rio Grande Valley. "We're pretty insulated," Ayoub says. "What Wall Street is doing is so far from El Paso, Texas." Put it this way, he says: "None of the stockbrokers are spending their bonus money here in El Paso."
If you want to hear an El Pasoan complain, ask how long it takes to cross the bridge from Ciudad Juárez, Mexico. Haddad says he and his brother Kenny used to go to Juárez on Sundays just to have a few drinks and listen to the mariachi bands. They quit doing that when new procedures instituted by Homeland Security turned a five-minute stroll into a three-hour ordeal. Don't get Haddad started on the lunacy of U.S. immigration policy: "We tore down the Berlin wall, but we want to build a wall in the United States?"
Otherwise, most locals have much to be thankful for. While many military communities around the country were devastated by the Base Realignment and Closure (BRAC) process, El Paso was a big winner. Construction is booming, and jobs are plentiful. According to Margo, who serves on the Regional Economic Development Corp., nearby Fort Bliss already contributes $1.5 billion to the local economy annually. By 2012, when the soldier population (already 14,000) is expected to top 37,000, the economic impact could exceed $6 billion. "Our big issue in El Paso right now is not attracting growth," says Margo. "It's dealing with growth."
Warmly embracing the global economy
I'm happy to be here today, when it's 20 degrees above zero, and not two days ago, when it was 20 below. Sioux Falls actually has a lot going for it right now: extremely low unemployment (2.5%), low cost of living, stable housing market, excellent hospitals, and a growing labor force - just maybe not growing fast enough.
Sioux Falls can't change its climate. But it can do what few U.S. communities seem willing to do: aggressively encourage legal immigration. Today the 621 employees of StarMark Cabinetry, one of the largest manufacturers in Sioux Falls, speak 22 languages and dialects, mostly African and Eastern European. "With the growth we've enjoyed at StarMark," says Mark Clements, whose title is director of continuous improvement, "it's been very difficult to keep up. By being able to capture people of all backgrounds, it's helped us staff the plant."
Banking dominates the service sector in Sioux Falls, mainly credit cards. Citi and Wells Fargo employ thousands, and they're always hiring. Stephanie Wollman, 24, used to work in customer retention at one of the big call centers; you got transferred to her when you tried to cancel your account. Today she and her husband, Clifford, together with their extended family, manage an entrepreneurial miniconglomerate with interests in concrete statuary ("We take 6 cents of material and turn it into a $100 product"), seamless gutters, heavy-equipment rental, three restaurants, 66 acres of farmland, and 140 rental units. She's also raising two kids. Wollman just smiles when I ask her whether she's worried about a recession or if she thinks much about the stock market, currency fluctuations, and the trade deficit with China. It's not that she's unaware; she just has no reason to care.
But some of Wollman's neighbors are pondering the global economic pressures that could one day squeeze this tranquil place. Like Stacey Brook, who teaches economics at the University of Sioux Falls. "Most of the problem right now is in the subprime mortgage market," he says. "My guess is that will spill over eventually into the credit card market. Obviously, with Citi restructuring, my guess is there will be some impact of that here in Sioux Falls."
Which is on my mind at breakfast the following day, when my eye is drawn to an item in the Argus Leader. CITI WILL REDUCE LABOR FORCE IN IOWA, the headline reads. Just 100 jobs for now, and no mention of Sioux Falls. But the tone is ominous. The layoffs, the article goes on to explain, "are part of a review announced in April that would cut costs by $10.4 billion from 2007 to 2009."
Are we breaching the social contract?
John Youkilis owns a $10 million wholesale jewelry business in what he describes, with understatement, as this "reasonably small Midwestern city," but he's always been sensitive to economic forces in the wider world. Thirty years ago, when Youkilis was still in college, his dad was already buying cut and polished diamonds from wholesalers in Bombay. Some of those Indian companies eventually became competitors, eager to do business with independent retailers in the U.S. Now that the dollar is weaker, says Youkilis, "Indian concerns are less interested in certain aspects of the American market. They're withdrawing because they have bigger fish to fry."
That's a positive for him, but other developments beyond his control have hurt. Last year Youkilis dropped a longtime customer in northern Tennessee, an independent jeweler whose business nearly collapsed when the soldiers in Fort Campbell left for Iraq. Another old customer is "suffering terribly" in Fort Myers, Fla., an area that used to be one of the hottest real estate markets in the country but is now overwhelmed by foreclosures. And "just as the ability of the consumer to buy jewelry is being pinched by the recession, the cost of jewelry is going up because of gold," says Youkilis. "When gold went up in 1980, people bought jewelry because it was considered a hedge. I don't know if that will happen this time."
What bothers Youkilis most? "People are making no extra money, but costs are going up - it's as simple as that," he says. "When you see the vast amount of wealth that people have accumulated at the upper levels, I think it breaches the social contract. Is this going to keep going? That's what scares me."
Down on Vine Street in the Over-the-Rhine section of town, Larry Ashford has been cashing checks and selling men's and boy's wear for five decades. Over the past three years, he says, his poor, mostly black customers have been struggling especially hard. But he senses a change. Christmas was still "a little slow," he says, "but the last month has been pretty good. I think we're ready to come out of it."
Biding time and building liquidity
In the 1980s, John Dewberry was a star quarterback at Georgia Tech. He never made it as a pro, but he used his modest signing bonus from the Calgary Stampeders of the Canadian Football League to launch a hugely successful career in commercial real estate. His PR guy says he's worth $400 million today. Among his extensive holdings in the Southeast are Two Peachtree Pointe, a just completed 12-story office building in Atlanta; and the Mendel Rivers Federal Building, "the most significant undeveloped piece of real estate in Charleston," Dewberry says, which he just bought at auction from the General Services Administration for $15 million. Dewberry breeds thoroughbreds, hunts quail (with Georgia, his German shorthaired), flies in his own jet, and spends occasional weekends in a lovingly restored 1772 Charleston townhouse at the preferred end of Meeting Street, inside the old walled city, where I met him and his girlfriend, Cameron, for brunch.
Knowing all that about Dewberry's past, here's what you need to understand about him now: After a couple of years of relative inactivity - "waiting," he says, "for the knife to fall" - he's positioning himself for the next big grab. Not quite yet. The knife's still falling, he believes. But soon, very soon. "I have 10% liquidity right now, and I've got $40 million," he says. "I want to get that to $80 million so I'll have 20%."
Dewberry thinks he can raise the money by selling a mall in Richmond he bought for $1.8 million during the last recession. He says he has a buyer who'll pay $50 million and can close by the end of this year. Which, Dewberry's predicting, is when the knife will stop falling: "On Jan. 5, I called my top guys and said, 'Fellas, it's our time again. We've been sitting on the sidelines watching the other guys play. Br'er Rabbit's getting ready to get out of the briar patch!'"
A slowdown is part of the cycle
The pace eases in Portland in the wintertime. There's not much traffic on Commercial Street. The ice cream shops are closed. Stuart Norton, sole proprietor of Three Sons Lobster & Fish, shifts his focus to overdue maintenance and repairs around the office and filling orders from Canada for last season's frozen catch. Three Sons had an okay summer in '07, he says, maybe down a little from the year before. Retail was solid: He still caught a steady stream of walk-ins coming off the cruise ships that dock up the street. Where he felt pain was in his mail-order business. "If people don't have money to spend," Norton says, "they're not going to spend it on lobster. We've definitely seen a drop in our shipping."
Norton doesn't go out himself anymore, but among the lobstermen he buys from, he's hearing a lot about people's struggles. Fuel prices haven't helped profits. And it turns out that some banks were a little loose with their loans for lobster boats, same as they were for houses. Consequently, "right now is a good time to get in the lobster business," says Norton. "There are lots of cheap boats."
Across Commercial Street at Maine Business Brokers, owner Glen Cooper, like many businesspeople I spoke with, is philosophical about the downturn in the economy. He's been in this business for more than two decades, and last year was one of his best ever - listings were up 85%, profits rose 43%. "You think I'm sitting around worrying about the economy, and I'm really not," he says. "Entrepreneurs are by nature optimistic, and people are still optimistic at the same rate." The housing crisis is a worry - that's true. Home equity is critical to people who buy small businesses. But considering how far home prices rose over the past decade, he says, a 15% decline in the past year doesn't count for much, at least among those who have accumulated some equity. "I just have a lot of faith," he says. "I don't worry too much about the future. America will prosper, the economy will grow."