Southern Oregon Business Journal

NUTS!

SEPTEMBER 2018

THE TURKISH LIRA, CHINESE TARIFFS AND OREGON HAZELNUTS,

THERE IS A CONNECTION

A few words from Greg Perhaps Labor Day weekend will mark the end of the 2018 Wildfire Season. We can hope.

Extreme events dominate headlines overshadowing less extreme but important issues. The flood of subjects can be overwhelming and confusing. The tendency is to expect conversation about the extreme whenever speaking to anyone with even a passing interest in daily activities. I try to throw a curve-ball now and then by mentioning the less dominant sub-topics of the day.

Someone reported that there are 84,000 obese horses in Oregon and Washington, many suffer from diabetes. Horses need exercise whether little Billy or Suzy have “out-grown” their interest in the prized pet or not. We may need to expand on the subject of veterinary treatment of our children’s pets.

How square is your house? Are construction practices good enough to make your flooring and windows fit the way you know they should? Let’s look into that.

Our legislator’s give us a laundry list of their accomplishments every now and then. Are these accomplishments relevant? Did as much get done as should have? We understand the Theory of Constraints – are the constraints keeping effective legislative work from being done? What can we do to help? Or, should we just stay out of the way and let our elected officials do their jobs? Are we a larger part of the problem or an important link to successfully managing the issues of the state?

There are fires, some large and some small, that are burning in the forests, on our farms, and in the construction of buildings. How we take care of them may depend more on us as individuals than we know.

Its up to us to be informed.

Stay tuned. The business journal will attempt to assist in the effort with every issue.

Greg The Southern Oregon Business Journal extends sincere thanks to the following companies for their continued presence as important cogs in the wheels of industry in southern Oregon. There are 45,000 businesses in southern Oregon and these are among the leaders on whom we depend.

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A JOURNAL FOR THE ECONOMICALLY CURIOUS, PROFESSIONALLY INSPIRED AND ACUTELY MOTIVATED

Contents Inside This Issue

FEATURED ARTICLES

2. A Few Words 6. SW Oregon Economic Indicators

4. Rural Business & Innovation Summit

8. Cap and Trade

16. Who’s Driving Oregon’s Wage Growth?

10. Entering the Danger Zone

22. Unique Partnerships Enhance Business

12. Enabling Connectivity—Global Cache’

Services in Brookings

14. Education Pays

27. Mercy Care—an Economic Contributor

20. “I don’t Give a (Bleep) about Akron!”

37. The Irrelevance of Thingies

25. Norway, Oregon’s Bottle Bill & Recycling 30. Central Oregon’s Growth Centered in Bend 33. Region Exceeds Two-Year Energy Benchmark 34. NUTS—Turkey, China and Tariffs

703 Divot Loop Sutherlin, Oregon 97479 www.southernoregonbusiness.com 541-315-6127

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COVER PHOTO Hazelnuts photo by Brian Rossiter www.fruit-powered.com reprint by permission

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In Cap-and-Trade Considerations, Oregon Policy-Makers Should Include Reductions for Federal Forest Fire Smoke Carbon Emissions Sara Duncan 503-586-1246 Oregon Forest & Industries Council On Wednesday, August 22, hundreds of policymakers will gather in Lincoln City for the annual Oregon Coastal Caucus Economic Summit to discuss carbon cap-and-trade mechanisms and ways to reduce Oregon’s carbon footprint.

“Solutions to decrease unchecked wildfires and increase the production of sustainable wood products in our federal forests must be part of the dialogue of Oregon’s cap-and-trade program,” said Kristina McNitt, Oregon Forest & Industries Council President. “Rampant megafires in federal forests have catastrophic consequences for our safety, health, communities, and economy. Private forestland owners already contribute sizable solutions to climate change by managing forests for fire resiliency and sustainably producing renewable wood products that store carbon for the entire life of the product. Federal forests should do the same.”

Last summer, more than 7,600 people were evacuated from their homes. Oregonians suffered unhealthy air quality and emergency-room visits spiked. The cancellations of Oregon Shakespeare Festival performances, the Sisters Folk Festival, and Cycle Oregon cost our state millions in tourism dollars.

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Of the more than 700,000 acres that burned in Oregon last fire season – roughly the size of Rhode Island – an equal number of fires started in federal and private forests, but about 96 percent of the acres burned were in federal forests. This summer, over 210,000 timbered acres have already burned – an area larger than Portland, Eugene and Seattle combined – and roughly 90 percent is in federal forests. Since 2008, nearly 80 percent of burned acres in Oregon were in federal forests.

“There’s a better way to do this,” said Jim James, Executive Director for the Oregon Small Woodlands Association. “Oregon policy-makers can do something to improve the health and economic vitality of all Oregonians, reduce forest fires, and mitigate climate change: take the position of the International Panel on Climate Change and encourage the use of Oregon-grown wood from federal forests.”

In 2007 and 2008, the International Panel on Climate Change concluded that in “the long term, a sustainable forest management strategy aimed at maintaining or increasing forest carbon stocks, while producing an annual sustained yield of timber, fiber or energy from the forest, will generate the largest

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sustained mitigation benefit.”

Of the roughly 30 million acres of forestland in Oregon, about 60 percent of it is federally-owned, and roughly 34 percent of it is privately owned (the remainder is tribal and state land). Conversely, 75 percent of Oregon’s timber harvest comes from that private forestland (and only 15 percent from federal land), making Oregon the number one producer of softwood lumber and plywood in the U.S. Producing renewable, environmentally-friendly products helps the planet: trees literally use sunlight to capture carbon dioxide (a primary greenhouse gas) from the air and turn it into sustainable building products.

over 3000 small woodland owners in Oregon.

For over 50 years OSWA has helped to serve needs unique to small woodland owners. OSWA focuses on fostering peer-to-peer communication between landowners, providing support for legislative and regulatory challenges, and cultivating partnerships to address and solve common problems. For more information, visit oswa.org.

In 1971, Oregon pioneered forest regulations and today observes some of the strictest environmental protections in the nation, including mandatory reforestation after harvest. For every tree that is harvested in Oregon, four are planted in its place.

Notably, reforestation after fire is not required, but nearly all private forests are rehabilitated after fire and replanted. Federal forests mostly remain charred.

“When our forests go up in flames, decades of carbon sequestration and storage goes with it,” said McNitt. “We can either breathe that carbon into our lungs as smoke, or we can store that carbon in renewable, sustainable wood products and plant trees to re-start that carbon cycle. We encourage our policy-makers to support wood products to meet Oregon’s climate goals.”

The Oregon Forest & Industries Council is a trade association representing more than 50 Oregon forestland owners and forest products manufacturers. Our members combine sustainable forest management practices with the latest science and technology to continuously improve the environmental, social and economic value of healthy working forests. We protect and manage more than 5 million acres of Oregon forestlands, employ nearly 60,000 Oregonians, and make Oregon the nation’s largest state producer of softwood and plywood. For more information, go to ofic.com.

The Oregon Small Woodlands Association is a member-based association that represents

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Entering the Danger Zone As we wait for Federal Reserve Chair Jerome Powell to take the podium in Jackson Hole and impart some wisdom on the economy and hopefully provide policy guidance as well, it is worth considering that we may soon be entering a dangerous period for monetary policy – the time when the lagged effects of previous rate hikes have yet to reveal themselves in the form of slowing growth while inflation numbers continue to firm.

It is in such an environment in which the Fed has to be willing to take a risk that their estimates of neutral policy are more right than wrong and pull back from rate hikes if they want to keep the expansion alive. Will Powell & Co. take such a leap of faith?

The US economy continues to ride along on the momentum of the first quarter. Economists surveyed by Bloomberg expect 3.0% growth in the first quarter, down from a smoking hot 4.1% the first quarter but still well above the 1.8% growth rate the Fed believes sustainable over the longer run. The Atlanta Fed is currently looking for another 4+% growth quarter. Job growth has been running at a monthly rate of 224,000 the past three months while the forward-looking indicator of initial jobless claims has been pinned down at record lows, promising more job gains to come. Manufacturing activity remains solid as well.

Moreover, the economy holds strong despite the uncertainty of trade wars and an emerging market pullback that includes the threat of financial crisis in Turkey. Overall, most important is that the Fed’s monetary tightening to date has apparently done little to slow the pace of activity down toward

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something the Fed thinks will ultimately be sustainable and noninflationary.

While the economy chugs along, price pressures are firming as evidenced by the rise of core-CPI inflation in July to 2.4%. To be sure, the Fed will tolerate some overshooting of their inflation target – it’s a symmetric target, not a ceiling. They will not overreact and accelerate the pace of tightening unless the overshooting looks to be significant and persistent. The rebound of inflation coupled with solid growth prospects looks likely to keep the Fed hiking rates at least twice more this year and into next as well.

Presumably, the Fed will be looking for an opportunity to pause in early 2019 so they can see the impact of their work. But will the data cooperate? Central bankers need some of the momentum of recent quarters to fade as tighter monetary policy and higher resource costs straighten to weigh on aggregate activity. For example, I am hearing anecdotal stories of slacking demand for commercial construction due to sticker shock. Additionally, they will be looking toward 2019 and the fading impact of fiscal stimulus on the economy.

Such an actual and expected slacking of demand, combined with contained inflation and an increase of risks from abroad, could give the Fed room to pause. I view this as a best-case scenario in which the Fed shifts to an extended policy pause before a slowdown becomes so deeply ingrained that it turns to recession.

Danger lurks, however, in this stage of the business cycle. Due to long and variable lags in monetary policy, activity might not slow

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sufficiently quickly to deter the Fed from hiking rates. Moreover, they may still be witnessing a lagged impact of higher inflation from prior economic strength. This combination could push the Fed to hold rates higher for longer than is appropriate for the economy. Indeed, this is an error I believe the Bernanke Fed made at the height of its tightening cycle.

My sense is that the Fed will resist pausing until the data suggests enough slowing to put the economy on a sustainable path. If true, this is where the risk of recession rises as policy transitions from “less accommodative” to “neutral” to “restrictive.” That said, should Powell’s comments at Jackson Hole be relevant for the near-term policy path, I am watching for signals that he is looking to raise policy rates another 50 or 75 basis points into the range of estimates of the neutral rate and then be willing to pause even if the data flow remains strong. This will take of a leap of faith on the part of the Fed that their estimates of neutral are more correct than not and that continuing strong data simply reflects a policy lag.

Bottom Line: In recent years, the Fed has tended to choose recession over the risk of higher inflation, with the result being recessions in 2001 and again in 2007-09 while inflation remains locked down to the point it drifted persistent below the Fed’s target in recent years. Powell’s relative dovishness on inflation – he is more concerned that inflation expectations may have drifted downward than that they are poised to shift higher – may turn out to be the key insight that allows the Fed to navigate the economy through the coming policy danger zone. But beware that the Fed often just can’t stop itself from hiking until the data turn (too much backcasting and too little forecasting), which will most likely be too late to stave off recession.

Timothy A. Duy Senior Director, Oregon Economic Forum Professor of Practice Department of Economics University of Oregon Eugene, OR 97403-1285 duy@uoregon.edu

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Quality Information, Informed Choices

Who’s Driving Oregon’s Wage Growth?

by Damon Runberg Wages in Oregon have been on the rise over the past three years. From fourth quarter 2014 to fourth quarter 2017, the quarterly average wage (smoothed and adjusted for inflation) rose by around 6.7 percent (+$800 per quarter). This is seemingly good news, right? This means that during that three-year period the average worker had more disposable income when accounting for the increased cost of goods and services.

At a recent presentation where I shared this good news about rising wages I was approached by a member of the audience; let’s call her Sue. Sue said, “I don’t know who is making that sort of growth in their wages, but it isn’t me and it is not anyone I know.” When dealing with millions of workers clearly Sue’s wage growth (or lack thereof) has little effect on the average wage. However, she made an important point. The average wage is not an individual story, but a rough aggregation of all payroll divided by the number of workers. It does not tell us who is seeing higher wages, only that payroll is up relative to the number of workers. This spurred me to ask if we can identify who is driving Oregon’s wage growth.

The Problem with the Average Sue pointed out an important issue with averages as they can be notoriously misleading. A great example is to look at the Oklahoma City Thunder basketball roster. This past season the average annual wage

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for the top 15 players on their roster rose by a staggering 48.7 percent; an average gain of around $3 million per year per player. However, this wage growth was not perfectly distributed across the whole roster. There were major outliers who threw off the average wage and “new hires” acquired by the team were much more costly than those players they replaced.

The Oklahoma City Thunder saw their average wage rise sharply in a single season. However, this was not good news for everyone on the roster. In the end, the story of wage gains for the OKC Thunder is a bit messy. Only five out of the top 15 players accounted for the growth in the roster’s average wage, while the rest of the roster collectively saw a reduction in payroll.

What does this have to do with wage growth in Oregon? Our traditional metric for wage growth, gains in the average annual wage, is susceptible to being influenced by similar outliers and the effect of new hires.

How to Isolate Wage Gains?

Sue told me she had worked continually with the same employer the past three years, but she had seen no substantive wage growth. How common is Sue’s story among Oregon workers?

To answer this question I used wage records of Oregon workers between 2014 and 2017. These are

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employment and wage records by firm for all workers covered by unemployment insurance. Wage records for all Oregon workers who reported wages in every quarter during that three-year period were isolated. Our universe of continually employed Oregon workers tallied 391,000. By tracking the wage growth of those continually employed we are weeding out the effect of those new to Oregon’s labor market, such as youth, in-migrants, or longterm unemployed.

The next step was to break out this universe of continually employed workers into two groups. The first group were made up of people like Sue, incumbent workers who stayed continually employed with the same employer during the threeyear period. Many of these workers were likely in the same position for that three-year period of time.

However, they would still be counted in this group if they received a promotion or changed occupations within the same firm. There were 345,250 incumbent workers who worked continually for the same Oregon employer from 2014 through 2017.

The second group were those who were continually employed, but changed their employer one or more times during the three-year period. These “job hoppers” will represent new hires in this analysis.

They include workers leveraging the tight labor market to find a job with better working conditions, pay, hours, etc. Just under 46,000 “job hoppers” remained continually employed in Oregon during the three-year period.

industry.

Another concern was those who job hop frequently.

Moving to a new employer once strategically during an expansion can be a great career move both for wages and future opportunities, but what about those who constantly think the grass is greener on the other side? Those who job hopped just once seem like a better reflection of the impact of new hires than those who have changed employers multiple times. To control for these multiple job hoppers the analysis focused on those who changed their employer just once during the three-year period.

Who Is Contributing to Oregon’s Wage Gains?

The results of the analysis were quite unexpected.

The expectation or hypothesis was that incumbent workers, like Sue, were not experiencing particularly notable wage growth. That assumption was wrong.

The real median hourly wage for those who changed their employer one or more times (the job hoppers) between 2014 and 2017 rose by 13.3 percent, very rapid growth. That represented a growth in median hourly wage of $2.92. As expected the incumbent workers posted a slower pace of wage growth, however it was only marginally slower growth than the job hoppers. During the three-year period incumbent workers, those who stayed continually employed with the same firm, saw real median hourly pay rise by 11.7 percent with nearly an identical growth in the median hourly rate (+$2.87 an hour).

A few additional sub-breakouts were made of the data in order to isolate where wage gains were coming from. First, we control for young workers or those making a radical career shift. Presumably the largest share of folks moving from one industry to another are young people or those changing their career. For instance, an individual works as a barista while in nursing school (leisure and hospitality), but then finds work as a nurse upon graduation (health care). This shift would result in a large wage gain, but that is more a reflection of normal career trajectory for students and young workers than the wage growth of folks who job hop. To control for these young workers and those making big career shifts the analysis focused on those who job hopped within the same Southern Oregon Business Journal

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When isolating those who exclusively job hopped within the same industry we find a slightly higher rate of growth in the real median hourly rate (+13.6%) than for those who changed industry (12.1%). This was particularly surprising as the assumption was that those job hopping between industries, presumably a reflection of young workers or those changing their careers, would see a faster rate of wage growth. It turns out that the young people moving around between industries early in their career had less of an impact on broad wage growth than initially thought.

Although job hoppers didn’t see dramatically higher wage gains over the past three years there was at least a modest advantage in changing employers to realize higher wage growth. But, is there a limit to the benefit of job hopping? This initial analysis looked just at those who hopped once versus those who had more than one change in employer during the three-year period. Although both groups saw an increase in their real median hourly wage those who changed employers only once actually posted slightly higher wage growth (+13.2%) than those who changed their employer more than once (+13.0%).

The assumption was that multiple job hoppers would have thrown off the analysis with very high rates of wage growth from young people moving through the beginning of their career, but that simply wasn’t the case.

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We can learn a few things from digging into this cohort of job hoppers. First, strategically changing employers once during a tight labor market can yield large wage growth. Second, perhaps the grass isn’t always greener on the other side as there seems to be a limit to how much job hopping will increase your wages.

Those who stayed continually employed, whether they stayed employed with the same employer or job hopped to a new employer, saw rapid wage growth over the past three years. It pays to stay employed. You don’t need to change employers to realize wage gains. However, is this consistently true? Or, are these results unique to this economic expansion? We replicated the analysis during recessionary conditions (2009-2011) and during a previous expansion (2004-2007).

Perhaps unsurprisingly we see that this is a fairly consistent trend with workers who change employers observing slightly higher wage gains than those who stay continually employed with the same business regardless of economic conditions. I say unsurprisingly as job hoppers likely have more complete wage information than those who stay with the same employer. If you are offered a new job then you know your current wage and the wage of the new offer. What was surprising was that the cohort of continually employed workers saw

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their wages rise even during the depths of the most recent recession. Avoiding periods of unemployment, thereby building skills and experience, is likely the best way to grow your wages.

Was Sue’s Experience Unique?

Remember when Sue told me, “I don’t know who is making that sort of growth in their wages, but it isn’t me and it is not anyone I know.” It seems like Sue’s experience is not common in Oregon.

Continually employed workers in this current expansion posted very strong wage gains, both those who stayed employed with the same firm and those who changed their employer.

It is important to note that wage gains for those who stayed continually employed with the same firm were realized by workers across the wage spectrum.

It wasn’t just the high wage earners or managers who drove up incumbent worker wages. In fact, the highest 20 percent of incumbent wage earners saw their wages grow by the slowest pace (8.8%) while the lowest 20 percent saw their pay rise by the highest margin (14.6%). Some of this discrepancy can likely be explained by increases in the minimum wage, but even the second lowest 20 percent of wage earners saw rapid wage growth over the three -year period (+11.7%). Not only does staying employed in today’s labor market get you paid, but it is a consistent pattern for most Oregonians along the wage spectrum.

Aggregate wage growth in Oregon is not exclusively the result of new hires or rapid job gains in highpaying industries. The wage pressure from the tight labor market and the high demand for labor is strong enough to be felt across a broad spectrum of situations. Those willing to disrupt continuity and take on more risk were rewarded with larger wage gains than those who stayed continually employed with the same firm. However, these job hoppers take on more than just additional risk; there are added costs. A voluntary separation rarely goes without at least a short period without pay, probationary period at the new job, or different benefits. There are likely many stories of Oregonians not receiving substantive gains in their pay during this current expansion, such as Sue. However, that experience is an exception, not the norm.

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"I Don't Give a (Bleep) About Akron!"

by Charles Marohn

Last year I moderated a panel of suburban mall developers as part of an economic forum at New York University. It was a spirited conversation among some heavy hitters, including a few well-capitalized investors whose opinions directly shape communities around the country. Needless to say, this was a high-testosterone affair.

deeply fragile), there is comparatively little profit to be made by providing high-end “experience retail” to what some Wall Streeters think of as a population of comparatively poor, blue collar, overly-indebted rubes living in flyover country. The real profits—as the panelists explained to me—are in the “top 50” markets. That’s where the money is.

A couple weeks prior to the event, I’d had an opportunity to visit Akron, Ohio, and, as part of that visit, experience the rotting corpse that was the Rolling Acres Mall. As I listened to these men talk about their efforts to deploy Wall Street capital to build the next generation of malls—places that offered a theme park -style experience as an entrée to a shopping dessert—I wondered where a place like Akron, and a property like Rolling Acres, would fit into these investors’ visions for the communities they were “developing.” I asked the question. The reply I received from one of them— and this is a quote:

The latter is the fate of Akron’s Rolling Acres Mall.

Photo source: Nicholas Eckhart via Flickr. Creative Commons license.

I don’t give a F*CK about Akron!

Truth….. As our economy continues to grow more centralized and efficient (read: tightly wound and Southern Oregon Business Journal

Rolling Acres opened in 1975 and closed thirty-three years later, in 2008. Thirty-three years, by the way, is just three years longer than the tax subsidy the city is now prepared to give for redevelopment of the site. Akron is going to borrow money to build a bunch of infrastructure, based on hopes that a new mega-development will last as long as the last megadevelopment that failed on the exact same site. What is it they say about the definition of insanity?

"Outside Goodyear, this is the biggest thing that we have seen," councilman Mike Freeman told Cleveland.com.

"This grabs the whole city when you're talking $30 million in payroll."

No offense to the councilmember, but that’s kind of silly. Yes, $30 million is a big number, and if it happens as planned, it will provide the city an additional $750,000 each year in income tax revenue (Akron has a 2.5% local income tax rate).

I’m not suggesting that three quarters of a million dollars isn’t a lot of money, but for some context, Akron’s entire 2018 budget is $530 million. A successful redevelopment of the Rolling Acres site will provide a 0.8% increase in income tax receipts, an amount hardly worth getting excited about.

If what “grabs the whole city” is the impact to Akron’s city budget—and council members, who essentially serve as the board of directors for the municipal corporation that is Akron, do see it that way—then we’re 20

becoming very excited over nothing. For context, Akron will pay $5.6 million in interest alone on general obligation debt in 2018. They’ll pay an additional $5.1 million in just interest on sewer bonds. If an additional $750,000 in annual revenue means this much to us, something is very wrong.

But if “the biggest thing that we have seen” is the proposed 500 new jobs the mall is estimated to create, then we have an even bigger problem. Because even if every single job, at an average wage of $60,000 per year, went to current Akron residents— something not required by a development agreement and almost impossible to imagine actually happening— that would put only a tiny dent in the population of 18,900 unemployed Akronites, who represent 5.1% of the labor force.

By the numbers, this proposal is just not a good deal.

Akron gives away decades of property tax revenue and commits to even more infrastructure liabilities in exchange for a tiny bit of income tax and a handful of jobs. As a long-term strategy for the city of Akron, it’s not replicable or even scalable. The isolated location of the site ensures there will be few, if any, spinoff investments. The large scale of the operation suggests that the mall won’t be the kind of neighbor that increases adjacent property values.

Yet, here we are, falling all over ourselves to make this deal happen, talking like we’re the pimply-faced geek who just got asked out by the prom queen.

“With a project of the magnitude, it’s pretty hard to leave a $100 million development sitting out in the wind and a $30 million payroll just out there,” [Council President Margo] Sommerville said. “I hope we understand this is big for the city of Akron.”

Only it’s not big for the city of Akron, unless your only goal is to heal the scar in the community psyche left behind by the failure of Rolling Acres, no matter how much it costs. If what we’re measuring this deal against is the scale of that community pain, then yes, this is a big deal. On a normal day, nobody from the outside world "gives a f*ck about Akron," but now here is somebody who does. All it took was 30 years of tax subsidy and a bit of new infrastructure. That’s cheaper than therapy. And more to the point, wanting someone—anyone—to bet on your town is human. I absolutely understand why the average Akronite would be tempted by this deal—even if I also believe its leaders have a responsibility to set emotions aside and do better.

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Akron is living with what psychologists call a sunk cost fallacy: the tendency to examine new opportunities not on their own merit, but to consider them in the context of past investments. This causes us to double down on previous failures and to discount new opportunities.

That’s a tragic cycle leadership can overcome, but only through intention and focus.

How many small local businesses like these could the city help incubate for less than it wants to spend to redevelop the Rolling Acres site? (Photo source: Shane Wynn) If Akron’s goal is to grow the tax base by a measly $100 million over the next three decades, then let’s talk about how we can make better (read: lowrisk, iterative, Strong Towns-style) neighborhood investments that reverse the cycle of decline and get private capital off the sidelines. There are some really smart people in Akron doing this work already. Given the low costs and high potential returns of the Strong Towns approach, there is no reason not to put our faith and our resources into these local leaders.

If the goal is to add 500 jobs over the next few years and experience a modest $750,000 increase in income tax revenue, then let’s talk about the role of neighborhood commercial development, an economic gardening program and small business incubators. Such efforts would cost a fraction of what will be sacrificed in the process of redeveloping Rolling Acres, and they would likely result in more jobs and a broader, more stable employment base.

Decades of bad development choices and misguided public investments have given Akron more than its share of problem sites, including Rolling Acres.

Recognizing these as mistakes of policy, not flaws of character, will free us to look at new opportunities with an eye towards their real long term potential, instead of just what we think will redeem us as quickly as possible.

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UNIQUE PARTNERSHIPS ENHANCE BUSINESS SERVICES IN BROOKINGS

By Gary Milliman struggling financially for many years and when the contract management company proposed that the City replace the event tent at the golf course with a permanent structure to accommodate year-round events, the City turned to SCDC to prepare a minibusiness plan for the project.

The analysis performed by SCDC found that costs for the new building could be recovered within 36 months and could be used for revenue-generating activities such as virtual golf simulations during inclement weather months, wedding receptions and company retreats. The City Council allocated funding for the project.

A new public/private coalition has formed in southern Curry County to provide enhanced services to business and promote economic growth.

Partners in this effort include the South Coast Development council (SCDC), City of Brookings and the Brookings-Harbor Chamber of Commerce.

Recognizing that small cities like Brookings cannot financially afford to support an economic development department the City entered into an agreement with SCDC in 2017 to, essentially, serve as the economic development arm of the city.

Working closely with the City Manager, SCDC receives referrals from the city when inquiries are received at City Hall from people interested in starting a new business. SCDC takes it from there, following up with prospective businesses to help them find locations, financing and professional services to help them with business planning.

Services are provided under an agreement whereby the City pays a $20,000 annual membership fee and has a seat on the SCDC Board of Directors. SCDC has developed a “business friendly” policy and procedure outline for the City staff.

The City’s golf course, Salmon Run, has been

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“A major benefit from our participation with SCDC is networking with other partners within the organization,” said City Manager Janell Howard.

Through this networking, the City found a financing partner for the golf course event center.

“It has been a great relationship,” said SCDC Executive Director Sam Baugh. And Howard noted that having an organization like SCDC interacting with prospective businesses “in business language” is preferential to have proposals evaluated by City staff.

The City contracted separately with SCDC to manage a $95,000 grant the City received to evaluate the economic impacts of the 2017 Chetco Bar Fire.

SCDC has also reached out into the community to gather information about local business needs. One of the identified needs was to strengthen the local Chamber of Commerce whose membership was declining and was struggling with maintaining an office and staff.

As a result of this effort, SCDC employed an Economic Development Specialist (EDS) for Curry County who also serves as Office Manager of the Chamber.

“This was a win-win opportunity for the Chamber and SCDC,” said Chamber President Greg Williams. “By co-locating and co-staffing with SCDC, the services provided to the business community have been greatly enhanced.”

Williams said the Chamber was unable to afford paying for an Executive Director but is providing

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office space for the SCDC EDS while the EDS serves as Chamber Office Manager.

Meetings with people looking to do business in Brookings that were conducted at City Hall have now shifted to the Chamber office. “It’s more of a business atmosphere here,” said EDS and Chamber Office Manager Judy May Lopez. The Chamber recently moved into a new office space at the historic Central Building in downtown Brookings after relocating three times in as many years.

Making SCDC services available through the Chamber is a “value added” benefit of Chamber membership.

Chamber/SCDC services now include assisting with business start-ups and expansions. The Chamber/ SCDC will soon be offering regular business roundtable discussion groups and other educational programs.

“We also go out and visit individual businesses to find out what they need,” Baugh said. “We have found that the number one need is a reliable workforce, so we are working to develop appropriate training programs through organizations like the South West Oregon Workforce Investment Board,” Baugh said.

Lopez said that there has been a dramatic increase in Chamber membership since SCDC became involved.

“The Chamber office is becoming the first stop for people seeking help in building their business,” Lopez said, “The Chamber may not have all the resources needed to help, but through the relationship with SCDC the Chamber now has access to a vast array of resources.”

Sam Baugh, SBDC Executive Director; Janell Howard, City Manager; Greg Williams, Chamber President

Administration from Eastern Oregon University.

President of the Brookings-Harbor Rotary Club, Lopez has been a community volunteer in a variety of fields for many years.

Baugh and Lopez are supported by Coos Bay-based EDS Shaun Gibbs who has worked for SCDC for three years. He has over 10 years of experience in retail management and has a Bachelor of Science degree in Business Administration from San Jose State University.

Infrastructure Improvements

The City, SCDC and Chamber relationship is intertwined in several ways. Howard serves on the SCDC Board of Directors and is an Ex-Officio Member of the Chamber Board, while Lopez serves on the Chamber Board.

Baugh has served as SCDC Executive Director since August 2017 and the SCDC office is located in Coos Bay. The SCDC region spans from Florence along the coast to the California border.

Prior to his work with SCDC, Baugh managed a regional job training and business finance program in Utah and is a certified small business coach. With a master’s degree in Business Administration, Baugh uses his knowledge and experience to help business owners find ways to promote and build their businesses.

Brookings Harbor Sinkhole

Bookings Park Sidewalks

Street Repairs

Lopez retired after 40 years in the financial service industry, most recently with Rogue Credit Union and has a Bachelor of Science degree in Business Southern Oregon Business Journal

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Norway, Oregon’s Bottle Bill and Plastic Recycling

China’s refusal to keep buying US-sourced recyclable materials and the mounting threat of plastic pollution in the ocean have redirected attention to schemes such as beverage container redemption, in which Oregon has been a leader.

The HuffPost headline was breathless: “Norway has radical approach to plastic pollution and it’s working.” The radical approach: Bottle deposits.

For Oregonians, bottle deposits and redemption hardly sound radical or new. Oregon passed its Bottle Bill in 1971 and implemented it the following year. The containers covered under the Bottle Bill were expanded in 2011. And now Oregon has something called BottleDrop, strategically located regional redemption centers with reverse vending machines that swallow cans, glass container and plastic bottles.

On a typical weekend afternoon, people stand in line waiting to feed a redemption unit that spits out a receipt at a rate of 10 cents per container.

Some people drive up in trucks heaped with bottles and cans.

Oregon’s original deposit was a nickel. It was Southern Oregon Business Journal

increased to a dime when recycling rates fell below a legislatively set target. The higher redemption rate was predicted to double Oregon’s container recycling rate.

Norway’s system is set up somewhat differently and boasts an impressive 97 percent plastic bottle recycling rate. Norway achieved that recycling rate by hiking the redemption fee on plastic bottles to 15 to 30 cents, depending on container size. There are reverse vending machines all over the place, including schools.

Norwegian supermarkets accept used bottles in return for store credit.

The biggest difference is Norway imposes a tax on plastic bottles that aren’t recycled. Higher redemption fees can be built into prices for textiles and packaging (including “new” plastic bottles) made from recycled plastic bottles.

Plastic bottles in Norway are limited to types of plastic that can be recycled in Norway.

Oregon is moving toward regional beverage container redemption centers that feature units capable of accepting aluminum cans and glass and plastic bottles.

What’s interesting, at least to long-time Oregonians, is 25

the failure to the HuffPost story to mention Oregon. It cites Vermont’s copy-cat bottle bill enacted in 1972 and California’s more recent recycling efforts with beverage containers.

Despite the oversight, it is a fair question to ask why bottle bills haven’t been enacted more broadly in the United States. Instead, a number of states passed bottle bill bans, often with the financial backing of beverage producers.

As concern grows about discard plastics flooding into the ocean and affecting ocean ecosystems, plastic recycling has attracted attention. According to HuffPost, the PepsiCo Foundation has donated $10 million to make municipal plastic recycling easier. The Strawless in Seattle movement has taken aim at single-use plastic products and persuaded brands such as Starbucks to forego plastic straws.

However, none of these efforts replicates Norway’s closed-loop system for plastic bottles.

Scaling up such as a closed-loop system would require changes in the way plastic products are manufactured. After all, redeeming plastic bottles is only useful if the plastic can be recycled.

China’s refusal to continue to buy mixed loads of potentially recyclable material has raised questions about the viability of plastic bottle recycling.

There may be some hopeful developments.

“London-based Polymateria is developing nextgeneration plastics that biodegrade or can be recycled, depending on where they end up,” HuffPost reported. “Polymateria CEO Niall Dunne says many plastic brands use multiple resins and additives that the system cannot deal with and prioritize marketing over solutions for when Southern Oregon Business Journal

plastic products reach the end of their lives.”

An overlooked aspect of Oregon’s original Bottle Bill was redemption of refillable glass bottles.

Breweries such as Portland-based Blitz-Weinhard featured reusable glass bottles. Customers brought them back to grocery stores that redeemed them and returned them to the brewery. Average glass bottles could withstand three or four reuses.

The refillable bottle gave way under pressure from grocers who disliked the hassle, hand counts and mess in their backrooms. Retailers like Winco reached the point of refusing to stock beer in reusable bottles.

Now there is a movement to bring back the refillable bottle. Brewers such as Double Mountain brewery are working with the Oregon Beverage Recycling Cooperative and Owens-Illinois on standardized glass bottles that are thicker and have a special finish to hold up to repeated washings.

Gary Conkling is a co-founder of CFM and its managing partner. He has been a state and federal lobbyist, but now leads CFM's strategic communications practice, which includes crisis counsel, corporate communications, reputation management, media relations, media training and marketing PR.

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Health Care an Economic Contributor

By Dick Baltus

It doesn’t take an economics degree to understand that local jobs are the lifeblood of any community, especially those of the small, rural variety.

In rural areas, hospitals are typically near or atop the list of a community’s largest employers. In Roseburg, CHI Mercy Health, with its approximately 1,100 employees, is the No. 1 employer. In all of Douglas County, it’s second only to Roseburg Forest Products.

With an active medical staff of more than 120 providers, including new surgeon Dr. Eric Soder, Mercy's economic impact extends beyond the hospital and into many area clinics.

Needless to say, Mercy makes a significant contribution to the economic health of Roseburg and surrounding communities. Its payroll contributes nearly $90 million to local families and, in turn, the local businesses that benefit from employee support.

But it’s more than just the payroll number. The dollars employees earn from working for Mercy have a ripple effect that spreads deep into the Douglas County communities in which they live. As CHI Mercy President and CEO Kelly Morgan says, “The wages we pay have an economic multiplier that produces a profound impact on our regional economy. The wages we pay our people get reinvested in our community when they buy new houses or cars or go to the grocery store or pay their taxes” Indeed, according to a 2017 report by the American Hospital Association on the economic contributions of hospitals, every dollar spent by a hospital supports $2.30 of additional business activity in the community.

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Each year Mercy contributes thousands of dollars to important community causes and organizations, including Oakland School which, with Mercy's financial support, is now able to provide instruments to any student interested in learning music.

In addition, for every job in the hospital industry there are another two “ripple-effect” jobs in local communities created. These could be anything from jobs in local business that support Mercy’s activities to the restaurants that serve Mercy employees.

Having a strong healthcare community also bodes well for the future of any community’s economy. As members of the enormous Baby Boomer generation continue to age into their retirement years and consider relocating to other communities, the state of local healthcare is one of their primary considerations. Having a state-of-the-art hospital like CHI Mercy and a robust medical staff of 120 active providers (and some 300 altogether) makes Douglas County, with its many other quality of life benefits, a very attractive retirement destination.

That bodes well for local businesses that cater to their needs, whether it’s senior-living facilities, durable medical equipment suppliers or other care providers, such as dentists and optometrists.

The challenge for Mercy in the coming years is how to continue to expand to meet the growing healthcare needs of the community (and continue injecting dollars into the local economy) while addressing the increasing financial pressures it and hospitals nationwide are facing.

With the continued decline in the amount of funding that states and the federal government provide hospitals for caring for Medicaid and Medicare patients, simply maintaining profitability has become a significant challenge.

This is especially true in smaller, rural hospitals like CHI Mercy, which care for fewer commercially insured patients than their urban counterparts. In addition, patients in rural community hospitals typically are poorer, older and sicker than patients in larger cities and require more healthcare resources.

As these pressures have mounted over the years, CHI Mercy Health has worked diligently to maximize the

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State-of-the-art robotic surgery is the latest technology Mercy has added as part of ongoing efforts to ensure Douglas County patients are able to stay in their own communities for the vast majority of the care they need.

use of its resources and increase its efficiency in order to ensure Douglas County residents continue to have access to the highest-quality healthcare without having to leave their communities.

Of course, one of the keys to keeping the local economy healthy is to continue supporting local businesses, including the local hospital. Every time a patient heads out of town for the same care that is available locally, it’s a double hit to the economy – the local hospital loses needed revenue as do all the business benefiting from the ripple effect.

“We’ve worked hard to expand our medical community to ensure people don’t have to leave town except in the rarest of circumstances,” Morgan says. “Probably 95 percent of care that any Douglas County resident will need in his or her lifetime is available from Mercy and our medical staff. It’s only the most highly specialized care that isn’t economically feasible for us to provide that requires a trip out of town.

We’re doing everything we can to keep people local for their care. It’s not just good for the future of CHI Mercy, it’s good for the economic future of all of Douglas County.”

Photos provided by CHI Mercy Medical Center

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Central Oregon’s growth is centered in Bend Oregon’s recovery from the Great Recession of 2008 – 2010 has been predictably uneven. Statewide population density variations with local business emphasis and economic diversity in industrial productivity shows in recovery contrasts in urban vs rural areas. Central Oregon, especially in Bend, seemed poised for growth as the recession hit. That appears to have been true.

OPB’s Amanda Peacher reported in November, 2017: “Economic growth in Deschutes County is not only outpacing most other Oregon cities, it’s seeing some of the biggest gains in the nation.

That’s according to economists who presented the annual economic forecast sponsored by the local Chamber of Commerce in Bend on Wednesday.

Deschutes County’s gross domestic product grew by more than 8 percent in the last year. Recent figures show the national average increase for GDP was around 3 percent.

“Which is phenomenal growth,” said state economist Damon Runberg. “We tied for the fastest growth of all metro areas in the United States.”

Bend tied with a Louisiana community going through an oil boom. Runberg said central Oregon’s growth is more diversified — with sectors from housing and financial to manufacturing and technology all expanding. Tourism also contributed to growth in the region.”

The September 2018 Economic Forecast from the Governor’s office is favorable to the Bend area. Following is a brief excerpt from that 67-page report.

Greg Henderson, Publisher Oregon Economic and Revenue Forecast Katy Coba

Kate Brown

Prepared By:

Chief Operating Office DAS Director

Governor

Office of Economic Analysis Dept of Administrative Services

“While economic growth continues and nearly all leading indicators flash green, the shape of the business cycle may be coming into focus. Specifically, economists are becoming more comfortable talking

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about plausible recession scenarios given the expected path of federal policy. To be clear, the flow of economic data remains healthy, and the risks to the near-term outlook are balanced, if not tilted toward the upside.

However, potential danger lurks around the corner with many forecasters pointing at the confluence of events beginning in 2020. At this time, federal fiscal policy will be a drag on economic growth and monetary policy is expected to have transitioned from accommodative, to neutral, and potentially even restrictive. Should this fully come to pass, a recession is likely to follow. However, this outcome is not a foregone conclusion. Rather, for really the first time this cycle, it is a reasonable, and clear scenario for how this expansion ends. Even so, between now and then, economic growth is expected to be at or above potential.

Here in Oregon, the economy follows the U.S. business cycle overall, albeit with more volatility.

The good news is job gains are enough to match population growth and absorb the workers coming back into the labor market. Wages are rising faster than in the typical state, as are household incomes.

That said, growth is slower today than a few years ago. The regional economy continues to transition down to more sustainable rates. Ongoing improvements in these deeper measures of economic well-being are also expected to continue.” [Page 2 Economic Summary excerpt.] “…What does stand out across the Northwest is that all of the region’s urban areas are currently at historic highs for employment. Tri-Cities leads the pack, due to both the lack of a recession as the region was awarded significant funds as part of the ARRA to aid with the nuclear waste clean-up efforts, and in part due to strong underlying growth trends. Bend, however, is

close behind. Bend, one of the worst housing bust metros across the nation, experienced the largest employment losses across the Northwest, however it has also experienced the strongest growth since the downturn. Furthermore, while Eugene and Grants Pass may rank at the bottom of the Northwest metros that is largely about how far they fell in recession. Growth since the bottom is significantly faster in both Eugene and Grants Pass than a handful of the more stable metro areas…”[page 20 – paragraph #3]

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Region Exceeds Two-Year Benchmark for Energy Efficiency Boise at night By: JENNIFER LIGHT In 2016 and 2017, the Northwest region achieved 404 average megawatts of electric energy efficiency savings, enough power to equal the average annual energy use of 290,000 homes, according to a report by the Northwest Power and Conservation Council.

This achievement exceeds the first two-year efficiency target set in the Council’s Seventh Northwest Power Plan (2016).

The achievement includes savings from efficiency programs run by regional electric utilities, the Bonneville Power Administration, Energy Trust of Oregon and the Northwest Energy Efficiency Alliance. This is the eighth consecutive year that the region met or exceeded the Council’s targets in its power plans. Much of the regionwide savings for 2016 and 2017 came from conversion to efficient LED lighting.

The survey is conducted by the Regional Technical Forum, an advisory committee to the Council established in 1999 to develop standards to verify and evaluate energy efficiency savings. The annual survey assesses energy efficiency savings and expenditures from the previous year compiled from reports submitted by utilities and energy efficiency organizations. The survey also helps the Council track progress toward energy efficiency goals in the Council’s Northwest Power Plan, which provides a least-cost plan for meeting the Northwest’s future electricity needs.

While currently on track, these initial results do raise some concern about whether the region will meet the six-year goal in the Seventh Plan of 1,400 average megawatts. There is concern because the Seventh Plan milestones increase over the next four years, but projections for 2018 and 2019 show that program budgets and savings are expected to be relatively flat. Additionally, the Bonneville Power Administration, the region’s largest electricity provider, plans to reduce its spending on energy efficiency by approximately 10 percent in 2020 and

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2021 as part of its agency-wide cost-cutting efforts to maintain its financial competitiveness.

However, there is significant untapped costeffective potential in several electricity end-uses, specifically residential and commercial heating, ventilation, and air conditioning equipment and residential water heating. In order to meet the Council’s 2021 regional energy efficiency goal, programs will need to capture savings from these markets.

Historical data show that energy efficiency savings tend to track well with budgets. This means if budgets decline, savings generally will, too. Based on current projections and achievements, meeting the six-year goal will require significant amounts of energy efficiency occurring outside of direct energy efficiency programs.

The utility cost of acquisition remains steady and low, energy efficiency provides significant benefits for meeting the region’s peak-power needs by reducing overall loads, and it reduces regional greenhouse gas emissions. The data in the Council’s report provide important insights to support the region’s utilities in their efforts to continue to acquire this valuable resource.

Region Exceeds Two-Year Benchmark for Energy Efficiency https://www.nwcouncil.org/news/region-exceedstwo-year-benchmark-energy-efficiency-1

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Photo by: Brian Rossiter FruitPowered fruitpowered.com

Turkey: Hazelnut prices fall early in season Hazelnuts prices in Turkey are headed lower at the start of the hazelnut season this year from last year.

A kilo of hazelnuts (in shell) was worth nearly 22 Turkish lira ($10) last year per kilo as a devastating frost in March reduced the size of the harvest, according to a trade organization.

Turkey is the world’s largest producer of hazelnuts: Turkey’s Black Sea, northern Turkish coast provides around 75 percent of the world’s hazelnuts.

Turkish hazelnuts generally ripen between the beginning and the end of August, depending on the latitude of the field.

Their price has fallen from almost 13 Turkish lira ($4.3) to 11 Turkish lira ($3.6) in the first week of September.

Arslan Soydan, a board member of the Union of Turkish Agricultural Chambers from Ordu province, said they did not expect a sharp drop in hazelnut prices: “We thought the price would go up, but prices are falling day by day because a massive amount of nuts has come to market.”

Soydan noted that the Turkish State used to buy hazelnuts through Fiskobirlik (the Union of Hazelnut Sales Cooperatives). In 2009, state aid was removed. “Since then, the price is determined in the free market,” he added.

He pointed out that some producers must sell their production early to pay their expenses. “The price last year was 22 Turkish lira for a kilo If the price this year remains lower than the price last

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year, farmers will leave their hazelnut farms.”

The Turkish hazelnut industry earned $1.73 billion from hazelnut exports in 2013, according to the Istanbul Hazelnut and Products Exporters Association, shipping more than 276,000 tons of hazelnuts to almost 110 countries. Last year, they earned $2.3 billion after shipping more than 252,500 tons. Production of hazelnuts in Turkey usually reaches nearly 600,000 tons a year. http://newsfultoncounty.com/? reqp=1&reqr=nzcdYaAypzM1L3yhoJ4hpTW6

“The first entity created by the growers of hazelnuts was the equivalent to the Nut Growers Society and began an Annual Meeting tradition in 1915. The Society celebrated 100 years of meetings in 2015. Through the years the industry leaders have added three other organizations with specific responsibilities.

They have kept the organizations united and enjoyed efficiencies by having one industry office.” https://members.oregonhazelnuts.org/page/Industry

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“I’VE ALWAYS CALLED THEM FILBERTS” By: Greg Henderson Little did I know how important the hazelnut industry would become to Oregon when I watched my uncle Ray ducking under tree limbs when dragging a harrow through his filbert orchard over fifty years ago. It has become more than just important. (I’m going to use “hazelnuts” and “filberts” interchangeably).

Turkey, tariffs and hazelnuts suddenly become an important topic of conversation. The lira, Turkey’s currency, has suffered a devaluation recently with serious consequences in the global marketplace.

International trading negotiations adjust according to currency valuations impacting the industries producing traded sector crops. Additionally, the bumper crop of hazelnuts in Turkey in 2017 may also impact prices based on increases in supply. Oregon expects a bumper crop in 2018 while also placing 20,000 more tons of hazelnuts on the market than a year ago.

The state of Oregon grows 95% of America’s hazelnuts on acreage that seems to be multiplying daily as more is planted every season. There is currently about 800 hazelnut farms in Oregon.

Everything is just right, especially in the Willamette Valley, to grow the small round nut that is favored in many parts of the world.

The U.S. decision to increase tariffs on agricultural crops to China has a possibly serious impact on Chinese trade, a country gaining interest in Oregon’s hazelnuts. With Turkey’s currency devaluation, large supply of hazelnuts, Oregon’s bumper crop and increasing acreages, there comes an important education requiring a steep learning curve to avoid harm to the hundred year-old hazelnut industry in Oregon.

“Oregon hazelnut growers can expect a record-high crop in 2018, according to the USDA National Agricultural Statistics Service.

As the lira loses value against the dollar, the cost of its hazelnuts falls on the global market – undercutting prices worldwide.

The latest production forecast issued Aug. 21 calls for 52,000 tons of hazelnuts, surpassing last year’s total of 32,000 tons and the previous record of 49,500 tons set in 2001.

Oregon famers are preparing to harvest the 2018 crop while they watch events in both Turkey and China, and Washington D.C.

Meredith Nagely, manager of the Hazelnut Industry Office in Aurora, Ore., said the report comes as little surprise. Hazelnuts tend to be alternate bearing, meaning low yields one year are usually followed by higher yields the next.

Jason Norris, EVP of Research at Ferguson Wellman Capital Management in Portland addresses this topic in his August 17, 2018 report.

Greg Henderson, Publisher, Southern Oregon Business Journal

Overall hazelnut acreage is also on the rise, with 72,353 acres of orchards across the state — including 40,000 acres of mature, nut-bearing trees.

Total acreage has more than doubled in the last 10 years, Nagely said, and rose from 66,980 acres in 2017.” https://www.opb.org/news/article/oregon-hazelnut-filbert -crop-usda-2018/

While Oregon farmers produce 95% of America’s hazelnuts the farmers halfway around the world in Turkey produce 75% of the world’s hazelnuts. It is a critical part of the Turkish agricultural industry.

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TARIFF AND TURKEY TALK

888 Southwest Fifth Avenue, Suite 1200 Portland, Oregon 97204

by Jason Norris, CFA Executive Vice President of Research

A currency crisis in Turkey and continued trade uncertainty resulted in a volatile week for equities.

International stocks, specifically emerging markets, started selling off. U.S. commodities were also weak.

This was offset by positive news on the China trade front. Overall, our view of U.S. economic growth and the markets haven’t changed in the last week; however, we do acknowledge increased investor concerns regarding increased global uncertainty.

While we remain tilted toward global growth, we have maintained a large overweight in the healthcare sector.

We believe this offers solid long-term growth, with less risk on the trade side. This has played out over the last several months, when comparing healthcare performance to the S&P 500.

As trade concerns started heating up in May, healthcare rose considerably, outperforming the S&P 500 by over 6 percent. Other investors are starting to

notice, as seen in fund flows into ETFs over the last seven weeks. The healthcare sector ETF has received $1.4 billion of inflows ─ more than any of the other S&P 500 sector ETFs. To date, there haven’t been any announcements regarding tariffs on drugs or medical devices. With healthcare stocks more attractively valued than the overall stock market, favoring this sector continues to make sense.

While there are risks, specifically with regard to drug pricing, we believe they are manageable and discounted in valuations. The second potential risk we are monitoring in the news regarding healthcare is Amazon’s strategy to enter more areas of the market.

While this may affect some companies, such as pharmacies, we believe this is more headline noise than a fundamental issue affecting the sector.

Week in Review •

U.S. stocks finished the week up 1 percent as issues in Turkey were offset by strong earnings and improvement on China trade talks.

Interest rates ticked down as investors continued to buy U.S. dollars and invest in Treasuries.

The yield on the 10-year Treasury ended the week at 2.86 percent.

•

After a week of daily volatility, we still believe U.S. economic growth remains healthy, which will support corporate earnings and benefit equities. As indicated earlier, we favor healthcare stocks which provide a balance of strong potential growth and low tariff risk.

Source: FactSet

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I o T: T h e I r r e l e v a n c e o f T h i n g i e s

by Joe Cortright Strong Towns member Joe Cortright runs the think tank and blog, City Observatory. The following essay is republished from his site with permission.

Smart City aficionados are agog at the prospect that the Internet of Things will create vast new markets for technology that will disrupt and displace cities. Color us skeptical; our experience with technology so far—and its been rapid and sweeping—is that it has accentuated the advantages of urban living and made cities more vital and important. From the standpoint of urban living, one should regard “IoT” as “the irrelevance of thingies.”

It’s been more than two decades since Frances Cairncross published his book The Death of Distance that prophesied that the advance of computing and communication technologies would eliminate the importance of “being there” and erase the need to live in expensive, congested cities. (It goes down, along with Francis Fukuyama’s The End of History and Kevin Hassett’s Dow 36,000 as one of the demonstrably least accurate book titles of that decade.)

Back in the 1990s, when the Internet was new, there was a widely repeated and widely accepted view of the effect of technology on cities and residential location. The idea was “the death of distance”—that thanks to the Internet and overnight shipping services and mobile communications, we could all simply decamp to our preferred bucolic hamlets or scenic mountaintops or beaches, and virtually phone it in.

And these predictions were made in an era of dial-up modems, analog cell-phones (the smart phone hadn’t been invented, and Amazon was still making most of its money cannibalizing bookstore sales). We were all going to become “lone eagles”, tipping the balance of power away from cities and heralding a new age of rural economic development. Here’s a typical take from 1996, courtesy of the Spokane Spokesman Review:

Freed from urban office buildings by faxes, modems and express mail, lone eagles are seen by economic development experts as a new key to bolstering local economies, including those of rural areas that have been stagnant for much of the century.

Faxes? How quaint. Since then, of course, we’ve added gigabit Internet and essentially free web conferencing and a wealth of disruptive apps. But despite steady improvements in technology, pervasive deployment and steadily declining costs, none of these things have come to pass. If anything, economic activity has become even more concentrated. Collectively, a decade after the Great Recession, the nation’s non-metropolitan areas have yet to recover to the level of employment they experienced in 2008; meanwhile, metro areas, especially large ones with vibrant urban cores, are flourishing.

The economic data put the lie to the claim that cities are obsolete. One of our favorite charts from Oregon

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economist Josh Lehner points out that larger metropolitan areas have outstripped smaller ones, and rural areas have continued to decline in this tech-based era:

Source: Josh Lehner

But what’s even greater is the growing premium that people pay to live in center of cities. Economists call this the urban rent gradient: the price of housing is more expensive in the center of regions, which are generally the most convenient and accessible to jobs, amenities and services. Over the past two decades, the urban rent gradient has steadily grown steeper: people now pay more to live in the center of cities than ever before.

Edlund, Machaco, & Siviatchi (2015)

The importance of this trend was identified by University of Chicago economist Robert Lucas writing in the

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late 1980s. His words are even truer today that they were then:

If we postulate only the usual list of economic forces, cities should fly apart. The theory of production contains nothing to hold a city together. A city is simply a collection of factors of —capital, people and land—and land is always far cheaper outside cities than inside. Why don’t capital and people move outside, combining themselves with cheaper land and thereby increasing profits? . . . What can people be paying Manhattan or downtown Chicago rents for, if not for being near other people?

The growing ease and low cost of communication have, paradoxically, made everything else relatively more important in location decisions. What’s scarce are time and opportunities for face-to-face interaction.

Both in production and consumption, proximity is more highly valued now than ever. Economic activity is increasingly concentrating in a few large cities, because they are so adept at quickly creating new ideas by exploiting the relative ease of assembling highly productive teams of smart people. Cities too offer unparalleled sets of consumption choices close at hand. From street food, to live music, to art and events, being in a big city gives you more to choose from, more conveniently located and cheaper than you can get it anywhere else. Plus cities let you stumble on the fun: discovering things and experiences that you didn’t even know existed.

The “death of distance” illusion is being repeated today with similar claims about the impending disruption from “the Internet of Things.” On a municipal scale this manifests with the cacophony of visions for tech-driven smart cities. Supposedly, attaching sensors to everything from cars to streetlights to water meters is going to produce a quantum leap in city efficiency.

Far from provoking a shift to the suburbs and a decline of cities, the advent of improved computer and communication technologies has helped accelerate the revival of urban work and living. In recent comments to the Urban Land Institute’s European meeting in the Netherlands, Harvard Economist Ed Glaeser explains:

“So why didn’t computers kill cities?” Glaeser asks. It’s a fair question: remote working has never been more possible, and productivity has never been higher. So why are more people flocking to urban areas than ever? “Cities are about exchanging ideas,” he says. The proximity of people to other people sparks ideas in a way that is impossible in remote areas.

As Philip Longman wrote at Politico a few years back:

. . in the centers of tech innovation, . . .the trend has been toward even greater geographic concentration, as Silicon Valley venture capital firms such as the storied Kleiner Perkins Caufield & Byers have set up offices in downtown San Francisco, closer to the action. Apparently, there is no app that will bridge the gap. To seal the deal, you must be in the room, literally, just like some tycoon from the age of the robber barons.

As technology becomes cheaper and more commonplace, it ceases to be the determining factor in shaping the location of economic activity. All the other attributes of place, especially human capital, social interaction and quality of life—the kinds of things that are hardest to mimic or replace with technology— become even more valuable. To be sure, the Internet of Things may disrupt some industries and promote some greater efficiency, but the arc of change is moving inexorably to the city.

Joe Cortright is President and principal economist of Impresa, a consulting firm specializing in regional economic analysis, innovation and industry clusters.

Joe’s work casts a light on the role of knowledge-based industries in shaping regional economies. Joe served for 12 years as the Executive Officer of the Oregon Legislature’s Trade and Economic Development Committee.

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