Tough economy touching all industries, but some are hurting more than others

September 22, 2008

Stock markets are falling, jobs are disappearing, and the outlook for the economy seems grim.

Banks, real estate developers, retailers and manufacturers are taking the worst hits, but all types of businesses in central Indiana are hurting. From health care to technology, education to philanthropy, every industry is trying to take the setbacks in stride. Convention boosters are hoping to capitalize on the nasty economy by selling customers on the city's value. Banks are trying to reassure customers their deposits are safe. Local charities are trying to hold on to reliable donors. More people are taking classes at Ivy Tech Community College in hopes of landing better jobs. Hospitals are treating more uninsured patients.

But how many more shocking developments can the economy withstand?

The demise of Bear Stearns in March looks like a speed bump now that Lehman Brothers has filed the largest bankruptcy in U.S. history. Now that the government has rescued Fannie Mae and Freddie Mac. Now that the nation's largest investment bank, Merrill Lynch, had to sell itself to Bank of America. And now that the government has stepped up with an $85 billion loan to keep insurance giant American International Group--long known for its slogan "the strength to be there"--solvent.

"There's a bottom somewhere, and we're closer to it," said John Reed, executive vice president in the local office of Chicago-based investment firm David A. Noyes & Co. "We have a resilient system. It'll get better."

For now, industries that rely on borrowing from financial institutions or spending from consumers are feeling the most pain, said Kenneth A. Carow, a professor of finance at Indiana University's Kelley School of Business. More immune are staple industries such as consumer products and health care.

The biggest concern: fear.

"Fear doesn't help the economy at all," Carow said. "It's time to realize things will get better. It's not like this is a downturn in everything."

He said finance "is a segment that's having ripple effects everywhere else in our economy. It's natural for firms to fail, no matter what industry they're in. We think it's a lot bigger deal when they're in a financial industry."

BANKING: Hobbled by fear

The economic crisis has dealt a devastating blow to the banking industry nationwide, but the biggest problem for most local banks is fear.

"You're almost afraid to wake up Monday morning to see what happened over the weekend," said Bob Jones, CEO of Old National Bank of Evansville.

Customers are seeking assurances that their money is safe, asking whether their local bank took on as much risk as foundering institutions such as Lehman Brothers and AIG.

A popular refrain for local bankers: Customers with deposits insured by the Federal Deposit Insurance Corp. (up to $100,000 for an individual account) have never lost money to a bank failure. Still, the FDIC has only $45 billion available to cover such failures, its lowest level in five years. Already, 11 banks have failed in this crisis, and many more are expected.

Ultimately, strict regulations on traditional banks--somewhat of an annoyance during boom times--now look like a blessing given the fate of three of the top U.S. investment banks, which did not face the same rules.

"We've been held to higher standards," Jones said. "And that's good."

TECHNOLOGY: Customers in peril

Banks and other finance-related companies are known as early adopters of technology and accounted for as much as one-fourth of technology spending. So the Wall Street swoon is taking a big swipe at the world of technology.

"The financial services sector has all but dried up," said Bill Godfrey, CEO of local marketing software maker Aprimo.

Other sectors, including retail, life sciences and manufacturing, remain "fairly healthy," Godfrey said.

While Godfrey remains bullish on Aprimo's long-term outlook, he expects the remainder of 2008 and the early part of 2009 to be rocky for the technology sector. He expects the economy to stabilize in 2009.

Companies that charge clients a monthly fee to use their products are faring better than firms that accept an upfront licensing fee, Godfrey said.

"Traditionally, technology companies got an upfront licensing sale, but that leads to potential for market volatility," he said.

REAL ESTATE: Trying to survive the storm

If Gerry Kosene had any inkling last year of how ugly the economy and credit markets would become, he would have held off on construction of his 105-unit downtown condo project called The Maxwell.

He still has plenty of confidence in the viability of the $24 million project, but he worries about the economy's "perfect storm."

"Man, I never thought we'd see this in our lifetime," he said. "You'd think Merrill Lynch is the bastion of good health, but no one's exempt. A lot of good companies and good people could be sent to the sidelines as the result of this international disaster."

His firm, Kosene & Kosene Residential, has laid off about 20 percent of its staff this year and now has about 40 employees. Fellow local developers Lauth and Duke Realty Corp. also have laid off employees as they try to cope with the slowdown. Kosene expects it could take up to two years before the market returns to any semblance of normal.

"There's not one active developer that isn't dealing with the same issues," he said. "It's a case of survival right now."

MANUFACTURING: Making more with less

Transportation expenses are up 33 percent over projections, and raw materials such as cotton and plastic also have jumped for locally based Main-Gate Inc.

The company is one of the biggest Midwestern makers of licensed goods--ranging from T-shirts to key chains--or customers such as the National Hot Rod Association, Indy Racing League, Harley-Davidson and the Indianapolis Colts.

MainGate has continued to grow by tightening its belt where it can, company President David Moroknek said.

"We can't hang a fuel surcharge on a T-shirt," he said. "We've had to buy a little smarter and keep inventory a little tighter, and continue to become more efficient."

Many manufacturers have faced even more daunting challenges, especially those tied to the ailing domestic auto industry or the recreational-vehicle industry. Northern Indiana RV makers have slashed more than 1,000 jobs this year as high gas prices sap sales.

The number of manufacturing jobs in the state has fallen from 675,000 in 2000 to 523,000. But that's not the whole picture. During the same span, industrial output climbed more than 50 percent.

"The manufacturing sector is so competitive that companies are being forced to increase output with less manpower," said John Layden of Fishers-based Prevel Consulting.

A bright spot for manufacturers has been exports--which have risen sharply, in part because the declining value of the U.S. dollar made American goods cheaper to buy overseas.

EDUCATION: A mini-boom

An old adage connecting the state of the economy and higher education is proving true, at least at Ivy Tech Community College.

"As the economy goes down, enrollment goes up," said Hank Dunn, the Indianapolis chancellor for the statewide giant.

Dunn said the enrollment for his portion of Ivy Tech is up 10 percent for the fall semester. A record 18,000 people have enrolled in classes in the region.

A big selling point has been flexible classes that are taught both online and in classrooms, helping students save on gasoline. And since many of Ivy Tech's popular subject areas are in hot fields such as health care and technology, students still are finding jobs.

Finding student loans is getting tougher, but most of Ivy Tech's students qualify for scholarships or government grants, Dunn said.

CONSTRUCTION: Worries down the road

At the moment, business is still humming for Fort Wayne-based The Hagerman Group, but the future pipeline looks troublesome, said Terry Greene, who presides over the firm's construction management division.

Housing starts just hit a 17-year low and the outlook for commercial construction doesn't look much better. Particularly concerning is a lack of new retail projects in the works. The slowdown won't fully hit construction firms such as Hagerman for another year or so when existing projects dry up.

The company, which hasn't shed any employees, is shifting some of its focus to health care projects, along with higher education.

Meanwhile, construction materials costs are rising and so is competition for the shrinking number of jobs on the market. That means smaller margins.

HEALTH CARE: More are uninsured

Costs are rising almost across the board for health care providers, and the slowing economy now means there are more unemployed and uninsured patients than in recent years.

In the last year, Indiana has seen its percentage of uninsured people under age 65 jump from 17 percent to 22 percent. The national number stands at about 20 percent.

"The increase in uninsured or charity cases is notable this year and has squeezed doctors' groups, especially specialists," said Steve Warner, partner in accounting firm Katz Sapper & Miller's health services group.

The economic swoon has caused a number of doctors locally and nationally to opt out of physician-owned medical groups and seek employment with deep-pocketed large hospitals.

And insurance companies are continuing to apply more pressure to the health care price structure, Warner said. "The hospitals are feeling the same pressure as the physicians' groups; the hospitals just have deeper pockets to deal with it."

RESTAURANTS: Tips, traffic drop

Restaurateurs and their servers are feeling the pain as much as anyone.

Business at D'vine a wine bar in Castleton is down about 30 percent lately and tips have shrunk 40 percent, said Bennet Ackerman, the owner of D'vine and two local Melting Pot restaurants.

"We don't have a late-night crowd anymore and we're a bar," he said. "It's bizarre."

Ackerman tries to cheer up his servers by buying them drinks and reminding them that the busy holiday season is coming up. He's hoping merry customers will return and open their wallets soon.

"There's nothing we can do to combat the slowness of the restaurants," he said. "We've got our backs against the wall."

They're not the only ones. The Orlando-based owner of Olive Garden, Red Lobster and Capital Grille just reported a 23-percent drop in its first-quarter profit, thanks to weak sales and rising costs.

The company, Darden Restaurants Inc., plans to increase its prices, add new promotions, and try new ways to reduce food waste.

PHILANTHROPY: Some charities hurting

Tough economic times force donors to consider which causes they care about most, said Marnie Maxwell, a faculty member at IUPUI's Center on Philanthropy and an independent fund-raising consultant.

That helps explain why some national charities are getting squeezed while local ones are doing fine. In an interview with Reuters, an American Red Cross official called it the "worst fund-raising environment" he had seen. And giving by large corporations is expected to remain flat or decrease this year, thanks to housing and financial woes, The Chronicle of Philanthropy reported in August.

But locally, it's not all doom and gloom.

"Even in bad times, people still give money," said Maxwell, who serves on the boards of Girls Inc., Indianapolis Art Center and the WFYI Foundation. "Donations will go to the missions people care about most. To the extent an organization is really nurturing the donors it has, they will raise money."

TOURISM & CONVENTIONS: Emphasizing value

The city's convention and tourism boosters already had a tall order: Recruit a couple of dozen new city-wide conventions and boost the annual hotel room-nights from 500,000 to 800,000 to justify a new convention hotel and convention center expansion.

The troubled economy could make it even more difficult. But Don Welsh, the new CEO of the Indianapolis Convention & Visitors Association, is trying to turn the economy into an advantage.

"We're looking at national associations that have never been here before that previously worked in more expensive markets," Walsh said. "Indianapolis is a value."

The airport is close to downtown, most everything a convention group needs is within walking distance, and the city is affordable. The GenCon convention had record attendance this year, and the FFA convention is coming up in October.

Yet risks remain, including the possibility of airline cutbacks. The ICVA plans to put a full-court press on airline executives to make sure they don't trim flights to and from Indianapolis.

"We need to convince them we're not in the same category of other Midwest towns," Welsh said.

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