2014 Economic Outlook: Philadelphia

2014 cover

What does 2014 hold for Philly business? Four experts gave us their forecasts for next year.

By Judy Weightman

The View From The Fed 

The Federal Reserve Bank of Philadelphia tracks big picture economic data, and regional economic adviser Luke Tilley is seeing some encouraging trends in the Philadelphia metropolitan area, which covers the city and adjoining suburbs, plus southern New Jersey and northern Delaware. Overall he’s projecting slightly stronger growth than in 2013.

“Unemployment is still fairly high — 7.8 percent in October — but trending downward,” Tilley said, with Philadelphia’s rate moving pretty much in step with the national rate. “I think that will continue. I’m currently predicting it might be as low as 7 percent by the end of 2014.”

The strongest growth sector locally is in education and health, mainstays of the Philadelphia region’s economy. “We’ve seen about 14,000 new jobs” in the education/health sector in 2013, Tilley said. The majority of those jobs were in health care, in settings ranging from large institutions to small ambulatory-care providers. This makes health care a major driver of economic growth in the region, especially, he points out, since it is driven by demographics rather than the business cycle. He expects health care to remain strong in 2014.

The impact of the Affordable Care Act will be felt in the long term. In the short term, Tilley predicts hiring in call centers and similar non-medical support staff. In 2014, people will be responding to “the adjustment that’s going on for affordable care,” he said. Many employers will postpone hiring decisions until the implications of the ACA become clear.

The prospects for the other half of that sector, education, are not quite so rosy. “We’re still experiencing adjustments for anything funded by state and local government,” Tilley said. “The cycle lags behind what’s happening in the private sector, so it’s harder to gauge what’s going to happen.”

Also strong, regionally, is the sector that includes professional and business service jobs, everything from architects and engineers through administration and clerical staff to waste management workers. “This is a long-term driver of growth in a service-based economy,” Tilley said, and he expects it to stay strong after adding about 9,000 jobs in 2013.

Asked to speculate about the economic impact of the transportation bill recently passed in Harrisburg, Tilley pointed out that both the costs and the benefits will be more significant over a longer term than just 2014. “It’s going to take several  years to implement the gas tax in full,” he said. Pennsylvania is currently 12th or 13th nationally in the amount of tax paid on gasoline; Tilley thinks it’s possible the substantial increase in the gas tax will move the state up on that list. And although people in the Philadelphia region have the option of going out of state to buy gas, the majority of the state doesn’t, so gas purchases will take away from other spending.

 

Entrepreneurial Ferment

The Economy League of  Greater Philadelphia has two missions: conducting research and analysis and convening local business, government and nonprofit leaders to make the region’s future competitive. “We serve as a civic catalyst,” said Steve Wray, the league’s executive director. He sees exciting developments ahead.

“Philadelphia is a center for entrepreneurial activity,” Wray said, listing Drexel’s new school of entrepreneurship; the Blackstone Foundation’s LaunchPad partnership between the Science Center, Temple University and Philadelphia University; and the Innovation Center at the University of Pennsylvania’s South Bank campus in Gray’s Ferry. Another highlight, Wray added, is the Goldman Sachs 10,000 Small Businesses initiative, a program launched last May that will provide up to $10 million in loans in the region and support mentorship and idea generation.

Local universities and business schools play a crucial role in this ferment. “People are taking ideas out of the classroom,” Wray said. “There’s a hunger and desire to get involved in creating your own business, not so much heading to Wall Street.” The combination of Philadelphia’s location, between New York and Washington, and its affordability make it a great place to set up shop. “We need to make sure that we’re taking care of the policy side, though,” Wray said, “including taxes, regulations and oversight, not just in Philadelphia but in the surrounding counties and across the river” in South Jersey.

Two other recent developments will affect the region in 2014. Wray predicts that the transportation bill that just passed in the general assembly will release pent-up demand. “It will create jobs for local companies and hopefully begin the process of bringing road and transit infrastructure up to snuff,” he said. The merger of American Airlines and US Airways will also have a local impact, since they are the dominant providers at Philadelphia International Airport. “I hope we’ll see more and better service,” Wray said, “especially for international flights.”

Asked about the governor’s race coming up in 2014, Wray responded, “We need to continue making the case that we’re the engine of the state’s economy. No matter who’s elected, the state will succeed based on this region succeeding.” Thus, he said, the important point is “how to facilitate the debate so we get [the candidates] focused on how they can help us.”

 

The health of the health care sector

Health care costs account for about 18-19 percent of the GDP, according to Somesh Nigam of Independence Blue Cross (IBC), and have grown in excess of inflation. Nigam, IBC’s chief informatics officer, says that better information — for both consumers and providers — can help with these runaway costs. “These will, we hope, combine for both better quality of care and better coordination of care,” he said. “We’re celebrating some success in the moderation [of costs], but we hope that we can not only control the trend [of rising costs] but also lead to a decline.”

Some of these developments reflect national changes, but many of them are coming out of work being done here. “As our CEO [Daniel Hilferty] says, Philadelphia could be the Silicon Valley of health care,” Nigam said. “Our region is very rich in resources and assets, both in health care and analytics.”

For instance, “one of the most exciting developments in health care delivery is the patient-centered medical home [PCMH],” which uses registries, information technology, health information exchange and other means to provide better primary care. The National Committee for Quality Assurance, which writes the certification guidelines for medical homes, “mined the data that we published showing that PCMHs are making a clear difference in price and quality” of care, Nigam said. The most dramatic results were with diabetic patients, who had 21 percent lower total medical costs, driven by a 44 percent reduction in hospital costs. “Philadelphia leads the country” in this move toward PCMHs, Nigam said. “Most of the major medical institutions around us were participants in original pilot program.”

IBC recently formalized its longstanding relationship with one of those institutions, the University of Pennsylvania. The new partnership “will allow us to take care of how to exchange data, how to govern and how to fund” projects. “Almost a dozen projects have spawned already,” Nigam said, all in different stages.

One of these projects is developing technology to improve drug adherence, since “poor drug adherence is a huge health factor, leading to worse health and increased hospitalization, especially for heart attacks,” Nigam said. Through Bluetooth technology, it’s possible to monitor that the medication is being taken on time and at the right frequency — if not, the container will signal the patient (“it’s hard to ignore a beeping bottle”). It can also let the physician know about problems with compliance, or signal a family member to follow up.

These, and other projects, are “part of our culture of encouraging start-ups,” Nigam said.

 

The role of government

Philadelphia is a little more recession-proof than other areas of the country, according to David Fiorenza. The great mix of business and industry — plus the arts, sports, and entertainment — put it in a position to take advantage of the improving economy, says the Villanova University economics instructor.

With his background — Fiorenza has extensive experience serving as a financial consultant for municipalities in Chester and Montgomery County — he sees the role of local government as crucial to what happens next. “The business community, when it comes to expansion, will depend on the City of Philadelphia,” he said, “what it does with tax incentives, abatements and enterprise zones.”

He is concerned, however, with some of the region’s smaller municipalities. “Norristown is a county seat, it shouldn’t be struggling,” he said. Coatesville and Chester face similar economic challenges. “No disrespect to Dominic Pileggi [the Pennsylvania Senate majority leader, who represents the 9th district], who helped bring the stadium and casino to Chester, but those will not be factors that will drive business and manufacturing,” Fiorenza said. The stadium and casino only brought “one, two hundred jobs — we need infrastructure, not casinos.” That infrastructure, he predicts, will be strengthened as a result of the transportation bill just passed, though the results won’t really be felt until 2015 or 2016.

The space is available for expansion — Fiorenza points to the shipyard, for instance — and incentives are in place. “Most of the counties, especially Chester County, are trying to hold the line on tax increases for both individuals and businesses,” he said. “They’re competing to keep business in their counties through tax rates and other incentives.”

Fiorenza predicts “not a surge of employment, but a steady, gradual increase as people are getting more confident in the direction of the economy.” There are still uncertainties, of course, including the impact of the Affordable Care Act and the possible changes in minimum wage legislation at both the federal and state level.

The other thing that might help improve the region’s economy? “We could also use a championship team,” Fiorenza said.

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