Finding One Economic Bright Spot on Main Street
By Bill Saporito/Pittsburgh
Pittsburgh knows all about recessions. This city was left for dead when steel and heavy manufacturing were smothered by globalization that started some 20 years ago. Pittsburgh never had a housing boom. How could it, when a quarter of the population evaporated when the jobs did? Pittsburgh's finances were so awful that it became a virtual ward of the state in 2003. Is your burg afraid of losing airline service? USAir's business crashed here in 2002. The spacious airport is half empty on a Sunday.
With Wall Street going off the cliff, and housing prices still declining in many areas, both spending and lending are being squeezed all across the country. Consumer lending contracted last month--that's practically un-American. Car dealers may fold by the hundreds, as customers can't get credit to buy and manufacturers won't finance dealer inventories. Holiday-shopping forecasts are getting bleaker. Declining home values mean more homeowners could default, further driving down property values. All that crimps tax revenues, and states such as Pennsylvania and New York are now trying to plug gaping holes in their budgets, while California is looking for $7 billion from Washington in part to make payroll, since short-term borrowing is unavailable. Two out of three city finance officers are reporting that they're less able to make up budget shortfalls this year. Municipalities are facing skyrocketing borrowing costs--some of it tied to complex derivatives contracts they agreed to that have blown up with the rest of Wall Street's toxic securities.
How bad will it get? The answer depends in large part on how local economies like Pittsburgh's adapt. And here's a surprise: for a metropolis synonymous with America's declining industrial might, the no-longer Steel City seems in a better position to withstand a downturn than many other places.
Why? Practice, for one. "We never had a housing crisis," says Pittsburgh's controller, Michael Lamb. "We already weathered that storm." Foreclosures declined 20% for two months compared with a year ago. Home prices are relatively steady. When the economy began to pick up steam again after 2003, Pittsburgh was a city with affordable housing, great parks and recreation, rich cultural and sports scenes, and surviving industry clusters that were globally competitive--a helpful thing when recession returns. "We've done a really good job at coming to terms with how to manage. Our weaknesses 25 years ago led to strength. We're much stronger as a result of our struggles," says Mike Anselmo, regional manager of PNC Financial, a dominant bank in the area. Anselmo's firm is a case in point. Unlike so many larger banks that got tangled in the subprime scam, PNC Financial avoided exposure to derivatives or combustible mortgages. Now PNC is building the first office tower to go up in downtown Pittsburgh in 20 years. There's also a new hockey arena being built, as well as a casino and even some downtown condos, which will keep the construction trades busy while they get crushed elsewhere.
Bending Steel
Pittsburgh's playbook still has some familiar features, but it is far more diverse. They still make stuff here, albeit with 8,400 fewer workers over 10 years. But commodity metals have been abandoned in favor of higher-value alloys like titanium. Importantly, the metal companies here now serve global industries that have been going flat out, such as power generation, energy, mining and transportation.
That in turn has created opportunities for the specialty high-value metals that Allegheny Technologies (ATI) makes. "We have manufacturing operations that no one else has," says spokesman Dan Greenfield. The company handles specialty alloys such as titanium and zirconium, as well as grain-oriented electrical steel used in the energy, power and aerospace industries. ATI is spending $1.16 billion over four years to improve its capability to do the most difficult metal rolling, which should preserve the 2,900 ATI jobs in the area. That funding is expected to be internally generated, so ATI doesn't have to worry about any credit crisis.
Most important, Pittsburgh has diversified its economy to replace the lost jobs of thousands of steelworkers. To get a real sense of that transformation, go to the CEO's perch on the 62nd floor of the U.S. Steel building--a floor that sat empty for seven years. "What made Pittsburgh great is exporting the steel that it made, and the money came back," says Jeffrey Romoff. Understand, Romoff does not work for U.S. Steel, which has been doing fine, mind you. Instead, he's the CEO of the University of Pittsburgh Medical Center (UPMC), the thriving $7 billion health-care conglomerate that occupies some of the top floors of the building and whose logo now glows in the night sky.
UPMC, not U.S. Steel, is the biggest employer in the area, with 50,000 workers. It's an exporter in its own right: UPMC runs hospitals in Ireland, Italy and Qatar. It exports knowledge, not metal. UPMC's operating revenue has been growing at 12% annually for the past five years, generating cash-flow earnings in excess of $500 million annually and enabling UPMC to reinvest a like amount. "We believed, even before this dramatic recession, that UPMC could not continue to support its growth living off Medicare and insurance revenues," he says.
So instead UPMC healed itself, devising a new health-care model that is more entrepreneurial: it is 60% health-care provider and research institution, 30% for-profit company that operates a health-care insurance subsidiary, and 10% commercial-services exporter running emergency rooms in the Middle East and transplant and cancer programs in Europe. It looks to companies such as Siemens and General Electric as role models, since both do basic research but have to develop profitable products. UPMC has formed a joint partnership with GE, called Omnyx, to develop an information-technology-based digital pathology business. Each company is investing $20 million.
That said, health care is no longer recession-proof, because rising co-payments have given consumers some painful choices to make. Says Romoff: "Do I fill up the car with $50 of gas and take the kids to school and go to work, or do I pay the $50 co-pay to see a doctor?" He's limiting the growth of UPMC's salary-related expenses to 5% compared with last year. And yet despite the collar, the company will probably hire more than 3,000 people this fiscal year.
Learning from Hard Times
Ironically, some of the things that have made Pittsburgh seem weak over the years will help protect it. It has large numbers of students and seniors. Seniors have unearned incomes in the form of pensions and Social Security, which puts a floor beneath the economy.
And because the city's corps of middle managers was wiped out in previous downturns, companies are now looking for younger workers. Westinghouse hired 800 people last year, bringing its total new hires to 3,000 in the past three years. Most are engineers, half of them replacing engineers who first joined the company in nuclear energy's early boom years, in the '60s and '70s. The rest are enjoying nuclear's newfound popularity. The jobs range from about $55,000 for college grads to more than $100,000 for experienced engineers. Even tech workers with associate degrees can crack $80,000. That goes a long way in an area where a comfy three-bedroom house can be had for $150,000 or less.
Pittsburgh is certainly not going to escape a national recession. But it can provide lessons for how to survive it: invest in knowledge, compete globally, rewrite the old rules of business. A couple of its signature companies, such as Alcoa, have announced cutbacks as demand slows. "No area is totally immune, but it is going to be, if we are right, a bit more modest in Pittsburgh," says Stuart Hoffman, PNC's chief economist. From ground level, Bob Intrieri can see the same thing. A partner at Allegheny Steel Products, he sells industrial innards to the machine shops and factories in the region: forgings, hubs, steel bars, wire belts used in furnaces--the stuff the global economy runs on. "I call on power-generation shops, and those guys are busy as hell," he says.
Still, even machine shops in the Pittsburgh region had to face a new economic reality. Of course, you don't have to go far to see the face of America's current economic troubles: cross the state line into Ohio, which has a far greater exposure to the American auto industry, and the pain is palpable in industrial shops in Finley and Toledo. They don't have to be told that we're heading for a slowdown; they're already in one. But if Pittsburgh is any indication, there is virtue to going through hard times. The hard part is that it might take a decade to realize it.