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Upbeat year in store for Rochester's businesses, consumers

Rochester Business Journal
December 28, 2012

Rochester-area businesses and consumers can look forward to an upbeat year in 2013, economists and pundits say, with job growth in several areas and continued rise in incomes.
 
"As a percentage, we're leading the charge in private-sector job growth, and I would expect to see that continue in the coming year, barring any catastrophic changes in the national economy," says Mark Peterson, president and CEO of Greater Rochester Enterprise Inc.
 
Indeed, in 2012 the Rochester metro area continually ranked among the top private-sector and non-farm job gainers in New York and often outperformed the statewide job growth percentage, according to state Department of Labor data. In addition, from October 2011 to October 2012 the number of people employed here rose from 484,100 to 489,600.
 
That likely will continue in 2013, Peterson says.
 
Besides having job growth, Rochester is one of a handful of regions that have had income and wage growth from 2008 to 2011, he says. Among the nation's top 102 metro areas, 81 regions had declining income from 2007 to 2011, according to a recent report by the Bureau of Economic Analysis. Rochester's average income, however, rose more than 3 percent in that time, making it the fastest mover nationwide.
 
Kent Gardner, chief economist at the Center for Governmental Research Inc., also points to Rochester's personal income growth as a key factor in the future of the local economy.
 
"We moved from 89 percent of the national average in 2006 and we closed the gap by 2011, at 97 percent of the national average," he says. "The question to ask as you look down the individual categories is which sector."
 
Gardner points to three sectors in the Rochester area that have traditionally had a make-or-break effect on the economy: manufacturing, construction and health care and education.
 
While jobs and income in the manufacturing sector declined during the period of the BEA report, they did so modestly, he notes. That could signal a leveling off of the sector here and an end to the drastic decline that the manufacturing sector has had over the past decade.
 
Per capita personal income in construction grew at more than the rate of inflation, Gardner says.
 
"The fact that Rochester's construction sector basically held its own during this period is significant," he says. "The rest of the country, or many parts of the country, the construction sector really took it on the chin."
 
Finally, personal income in health and education grew by 25 percent during the period, and per capita personal income grew 15 percent, again outpacing inflation.
 
"The surprising strength down the list is that there were a lot of sectors that did reasonably well," Gardner says. "I think one of the most important characteristics of the Rochester economy right now is that we're seeing growth that is balanced across a number of sectors, rather than having all of our eggs in one basket."
 
That may bode well for Rochester's economic outlook.
 
"We've got a lot of baskets and a lot of eggs and a lot of good companies that have grown," Gardner explains. "On the one hand, I think that's really a great thing. On the other hand, it makes it a little more difficult to predict the future."
 
When Eastman Kodak Co., Xerox Corp. and Bausch & Lomb Inc. were the major players here, it was easier to forecast what Rochester's economic landscape would look like in a year or five years, Gardner says. That is not necessarily the case anymore.
 
As a result of Rochester's economic reliance on many businesses rather than the traditional Big Three, the local economy has become more resilient, he says.
 
Peterson agrees: "I'm bullish on this economy, but it's with good reason. We have such a diverse economy now. We have so many sectors that are growing and doing well that we have done very well in this downturn."
 
Here is a closer look at prospects for Rochester's major sectors.

Health care and education
Peterson expects the health care and higher education sector to be stable or have modest growth in the coming year.
 
"Those are our foundations," he explains.
 
Gardner, however, is more cautious.
 
"Over the next two years I think higher education will not be the source of the kind of growth we've seen recently," he says. "Because the undergraduate entering class is shrinking, their market is getting smaller."
 
If universities and colleges can maintain enrollment in the coming year or so, Gardner says, that will be an important accomplishment.
 
"The high school graduating class will be shrinking, I think, until 2020," he explains. "So for this period they're going to have to be very careful to hold their own."
 
Gardner notes that many area universities are aggressively pursuing new programs to attract students, in particular the University of Rochester and Rochester Institute of Technology.
 
"I'm still optimistic about that, but at the same time we have to remember that a lot of the money that goes to RIT and University of Rochester comes from federal (sources), to the extent that if the federal government cuts back, that would cut funding to a lot of the programs at the institutions," he says. "Research dollars are disproportionately fickle, to the extent that if the federal government cuts its total spending, we're going to be fishing in a smaller pool."
 
Ronald Paprocki, chief financial officer and senior vice president for administration and finance at UR, acknowledges that funding available for grants has been on the decline.
 
"We've done about $400 million worth of sponsored research activity or sponsored research project activity a year," he says. "The growth has flattened out there. Not only are those important from a public policy standpoint for the country, but they are very important for this region's economy. They are a big part of what we do."
 
What happens with the federal budgets will have an impact on the direction of research in the future, Paprocki says.
 
"The university is in solid condition in terms of economic health of the institution," he says. "I think there are these issues going forward that have to do with federal and state spending levels and the potential impact on research and also in patient care. So this institution is focused a lot on that."
 
Paprocki does not expect any material change in UR's employment in the coming year. A big factor in the university's focus will be the lingering effects of high unemployment and the economic environment.
 
"So what that means is that there will be a focus on affordability," Paprocki says. "The consumers-families and their students-are going to be more savvy as consumers, and they'll be equating value with the cost in making those decisions."
 
What that means for higher education is that the level of need for financial aid will remain high, he adds.
 
But if high school graduating classes are diminishing, UR has not seen evidence of that yet, Paprocki says.
 
"We're having a banner year with undergraduate applications," he says. "What we've seen is we're still growing enrollment in the college of engineering, and we see student demand is very strong."
 
Paprocki does not foresee any major changes in enrollment in the coming year, but where UR will have an appreciable impact on the Rochester economy will be in construction. Paprocki notes that a $145 million construction project is under way at Golisano Children's Hospital that will affect construction jobs locally, as well as the $100 million College Town project. A $13 million project to house the school's new programs in digital media studies also is under way.
 
"This adds up, and all of that means work in the contractor, construction and service sectors," Paprocki notes.
 
Peter Robinson, chief operating officer for the University of Rochester Medical Center, says he expects health care demand to grow.
 
"The population in the Greater Rochester area is not likely to grow a whole lot, but it continues to age," he says. "As people get older, they will tend to need and access health care services more often. As a result of that we do see a modest uptick in demand."
 
Robinson predicts a continued shift from inpatient hospital care to outpatient hospital and other ambulatory settings, and he expects that to contribute slightly to job growth in the Rochester region.
 
The Finger Lakes Regional Economic Development Council has established a goal of increasing the job count by 50,000 over five years in this region, Robinson notes, and he expects health care to be an important contributor to that.
 
Robinson forecasts small growth in the physician category but a growing demand for nurses, including registered nurses and nurse practitioners, in the coming year. Employment for physical therapists, occupational therapists and those who work on the analytical end of the health care sector also will be on the rise.
 
"Insurance-related expertise is going to be important, not only for insurers but for providers, because of the evolving health care scene, especially triggered by health care reform, both at the federal level and the state level," Robinson says. "And as a result of that we'll be looking for more entry-level people in support of these medical professionals."
 
He predicts an emphasis on early stage and startup companies-some of which may spin out of the medical center.
 
"I think with the research enterprise we have here in the Rochester community, businesses that are driven off that research, that are technology-based, are likely to see some growth as well," Robinson says. "I think we'll see a little bit of it in 2013, but I think that is going to be the trend over the next five years."

Manufacturing
While Bureau of Labor Statistics data show that the manufacturing sector here has declined over the last two decades, the numbers have leveled off in recent years. The Rochester area is not seeing the great declines of the past, indicating that perhaps some manufacturers, especially those that rely heavily on new technology, could bounce back.
 
"I think even though manufacturing will have its challenges in the coming year, key sectors of advanced manufacturing are really doing very well," GRE's Peterson says.
 
ITT Exelis Inc., whose Geospatial Systems unit is headquartered in Rochester, is a global supplier of night vision, remote sensing and navigation products used in various industries, from surveillance to global positioning systems.
 
As the company looks to 2013 and beyond, Chris Young, president of Exelis Geospatial Systems, says it anticipates greater need for advanced capabilities by both government and commercial customers.
 
"Here in Rochester, Exelis Geospatial Systems will continue to develop innovative imaging solutions for remote sensing platforms, optical technologies aboard satellites and solutions for manned and unmanned aerial vehicles," Young says.
 
What that means for the Rochester economy is that while the company faces an uncertain market, the decisions Exelis has made over the last several years have positioned the Geospatial Systems business for long-term success.
 
"The capabilities within our portfolio, particularly technologies manufactured in Rochester, do not rely solely on the Department of Defense," Young says, "but also commercial and international customers, enabling our company to create a diverse range of solutions here locally."
 
The company employs more than 1,200 people in Rochester, and Young says it has a number of open positions here, primarily in image science, system engineering and software engineering-a good sign for the local economy in the coming year or so.
 
"The open positions are indicative of continued demand from our customers," he says.
 
He remains realistic about the current federal budget environment and expects continued demand for Exelis' capabilities despite the coming year's anticipated budget deals.

Banking
The nation has some 7,000 banks, says Daniel Burns, regional president at M&T Bank Corp., but that number has been declining for some time. It will continue to be affected by new banking regulation, including the Dodd-Frank Act, liquidity rules, Federal Deposit Insurance Corp. insurance and compliance costs, Burns says.
 
"The banking industry is trying to figure out all the changes going on and make sure they can be the thriving business model that they've been in the past," Burns says. "Thankfully the banks in Rochester are pretty solid and the impact in Rochester will be pretty minor compared to what we're seeing nationally."
 
Burns notes that financial institutions have undergone several changes over the last few years and Rochester boasts a good complement of banks that are doing well.
 
"In terms of lending opportunities for business clients and consumers, there shouldn't be an issue," he says. "There will be plenty of people with their loan windows open."
 
Burns says he is seeing many business owners trying to figure out how to take advantage of depreciation and purchase equipment, as well as others who are concerned about the fiscal cliff, and therefore paying dividends or finding other ways to take advantage of the current tax situation.
 
Many area banks are looking at the small-business market as a growth opportunity, he says.
 
"We continue to spend money and time to create products and services for that segment," he adds.
 
M&T also is trying to foster greater competition over checking accounts, Burns says, in that it is one of a handful of banks to offer free checking accounts. He believes that is an area where the bank can grow over the next year.
 
Finally, M&T's merger with Wilmington Trust two years ago is likely to continue to increase the bank's business owner clientele. M&T's focus on a business life cycle will remain, with the bank helping business owners to plan for the future, Burns says.
 
"Let's face it, a lot of business owners are baby boomers who are getting close to retirement age, so they need to think about what they're going to do with their business, whether it's a big business or small business," Burns explains. "With Wilmington Trust now a part of M&T, we're finding ways of partnering to help business owners with succession planning, with identifying strategies for selling their business."
 
While the bank anticipates several areas for growth in the coming year, Burns notes that M&T may see a decline in the home mortgage sector.
 
"It's hard to imagine that we can continue to show the huge numbers we've shown over the years," Burns acknowledges. "So that's one thing we may see a bit of a decline in, on the refinancing. But hopefully we'll see more on the purchase side."
 
Burns expects no real changes in employment at M&T in the next year or so, but the bank will continue to use its college recruiting program.
 
"I think it's going to be pretty stable," he says. "We have four training programs within the banks, we hire a number of people each year to go into those programs and we continue to do that."

Real estate
Nothnagle Realtors president and CEO Armand D'Alfonso expects consumers in his industry to demand more information and better communication in the next year. Technology, he says, is the conduit to meet those needs.
 
"It is critical as a real estate broker to continue to invest heavily in new and expanded technology to provide tools, resources and services to both consumers and agents," D'Alfonso says.
 
He predicts further consolidation within the real estate industry as companies merge in an effort to expand services and remain viable. Nothnagle is in discussions with several smaller brokers that want to partner with the firm to take advantage of its tools, support and technology.
 
"Sales have been steadily increasing throughout 2012, and I see no reason why this trend will not continue into 2013," D'Alfonso says, adding that sales this year are up 20 percent, while the number of units transacted is up 12 percent at his firm. He expects to close the year with more than $1.2 billion in sales and more than 9,000 units transacted, the firm's best year since 2007.
 
D'Alfonso notes that inventory has been dwindling, creating a more balanced market and in some areas a tendency toward a seller's market.
 
"We are seeing more and more multiple offer situations occurring today," he says. "If a house is priced right, it's going to move quickly in this market."
 
The real estate market puts a significant amount of money into circulation in any economy, D'Alfonso says. In addition to real estate professionals earning money off transactions, local businesses are affected as well. "Buyers and sellers hire professionals for landscaping, repairs, painting and other household jobs," he explains. "New appliances, furniture, carpeting, drapes are purchased."
 
The National Association of Realtors estimates that for every 1,000 homes sold, 500 jobs are generated, and each home sale puts roughly $58,000 into the economy. The better the local real estate market does, the better the local economy will be, D'Alfonso adds.
 
He notes that within his company he does not expect any segment to remain flat next year or decline.
 
"All property types-including new construction, which took the biggest hit-are experiencing an increase this year and into 2013," he says, adding that growth for Nothnagle will come from several areas.
 
D'Alfonso expects growth from mergers and acquisitions as consolidation of real estate companies continues. Recruiting top talent also will continue to expand the company. In 2012 Nothnagle recruited roughly 115 agents.
 
Nothnagle also will grow as a result of expansion of ancillary services to continue to create a "one-stop shopping" experience for customers. In addition, D'Alfonso projects growth through expansion of its broker services division.
 
The company provides back-office support systems and tools to brokers outside New York, he explains. "We currently have clients in 10 different states and will be aggressively looking to expand services and attract additional clients in 2013."
 
The company recently invested $200,000 in upgrades to its infrastructure to support expansion, and Nothnagle is looking to hire in the coming year, D'Alfonso says.
 
"Most of the positions we plan to add in 2013 will be in our technology department as we expand our technology solutions, agent and consumer tools and work on a major overhaul of our websites," he notes. "We will also continue to look to hire individuals looking to make real estate a career, in particular targeting recent college graduates in the spring."

Telecommunications
Convenience will play a large role in the local telecom industry in the coming year, allowing customers to use services wherever and whenever they want.
 
"A big focus will be to look at what customers want at their convenience. The tag line I'd say is available anywhere you want it, anytime, delivered in the format the customer wants it," says Terence Rafferty, regional vice president of operations at Time Warner Cable. "I think you'll see a lot more of that in the coming year."
 
Another trend is a focus on broadband.
 
"We're becoming a country addicted to Internet," Rafferty says. "You start to see more people spending more time on the Internet than they do watching a TV set."
 
Time Warner is investing and reinvesting in broadband to give customers the best experience related to bandwidth and speed, Rafferty says. In the last year Time Warner has spent $6 million in incremental investments, allowing the company to reach out to businesses and residential customers it has not served before.
 
The telecom has stepped up its focus on its intelligent home product, which uses its existing services.
 
"It's a security offering that's wireless, but it's more than that," Rafferty says. "It's really a home management device."
 
Using a tablet like an iPad, customers can control various aspects of their homes while at the office or shopping, including lighting, heating and cameras.
 
"It really is a lifestyle management system," Rafferty says. "You'll see us push that offering a lot more in the coming year."
 
The investments and focus Time Warner has in new technologies will allow area businesses to thrive in the next year or so, Rafferty says. The company will continue to invest in the Rochester area in 2013 to expand its presence for commercial and residential customers.
 
"You have a lot of entrepreneurial companies in our marketplace. You have a lot of established, bigger companies; you have a lot of hospitals and colleges," he explains. "So when we make these investments in a rich infrastructure, it allows these companies to flourish."
 
Time Warner employs 1,700 people in Western New York, including 700 in Rochester. The company will continue to add staff in the coming year, Rafferty says.
 
As one of the largest telecom providers in the Rochester area, Time Warner may be in a position to support customers in a way that other providers cannot, he says. And that will have a positive effect on the local economy in the coming years.
 
"We have a pretty large presence in Western New York and in Rochester, so you're supporting employees who go out and support the Rochester community by buying homes, shopping in Rochester," Rafferty says. "In essence, you're creating local jobs so people are reinvesting their earnings in the local marketplace."

Challenges and opportunities
In spite of a somewhat optimistic outlook for Rochester's key sectors, challenges do exist. GRE's Peterson says the Rochester-area economy cannot be insulated from the national and global economy.
 
"It would be nice to see greater strength in the national economy," he says. "While there is some recovery under way, it's not been the best growth, and if the growth curve of the country were to bottom out or for some reason we dipped into another recession, that could negatively impact Rochester and this region."
 
Peterson also expects to see continued changes on a local level at Kodak and Xerox as they continue to reposition themselves. Changes in their business models could have a temporary negative impact on the overall economy, he says.
 
The federal budget also will affect the Rochester economy in the coming year.
 
"There are a number of companies in Rochester who have done reasonably well with government spending," CGR's Gardner says, and if the government pulls back on spending, some local companies may need to refocus their efforts.
 
Despite a handful of challenges that Rochester-area businesses and consumers may face in the next year, economists are hopeful, especially if the national economy shows positive signs.
 
"I think we're in a good position because of the diversity of our economy to continue to see us make progress against other places," Peterson says. "How much progress is related as much to how the national and global economy goes as anything."

12/28/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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