February 23, 2013

Low region GDP belies a hot trend

By: Larry Rulison

Source: Times Union

ALBANY — The upstate economy isn't growing much these days.

Data released Friday by the federal Bureau of Economic Analysis found that only Buffalo's economy is growing faster than the rest of the state's, and two upstate cities — Syracuse and Binghamton — have watched their economies shrink, a dire scenario for business and political leaders.

However, despite similarly sluggish growth in the Capital Region economy, there is an exciting trend beneath the surface: the small but growing high-tech industry, driven by the University at Albany College of Nanoscale Science and Engineering and by GlobalFoundries, is expanding at a furious pace.

The health of an economy can be looked at in many ways. But one of the most important figures to economists is gross domestic product, or GDP, which measures the amount of goods and services produced in a geographic area.

In 2011, the most recent year in the federal data, the "real," or inflation-adjusted, GDP in the United States grew 1.5 percent, with metro areas having slightly better growth at 1.6 percent.

Numbers such as that are not expected to get the economy back on track. The number was lower for New York state, which had only a 1.1 percent increase in GDP, despite efforts by the Cuomo administration to control spending and taxes and encourage businesses growth.

In the Capital Region, GDP grew less than one percent. Buffalo, by way of contrast, had 1.4 percent GDP growth. Syracuse suffered the worst contraction of any major upstate city as its economy shrank by 1.2 percent.

But local business and political leaders can take solace that years of focusing their economic development efforts on the high-tech industry, especially the semiconductor industry that produces computer chips, appears to be paying off.

In fact, according to the government, computer and electronic product manufacturing — which includes computer chips, is the fastest growing sector in the local economy. In 2010, the latest year for which data are available, the GDP of the local computer and electronics manufacturing sector grew to $297 million from $134 million the year before — an increase of 121 percent.

Kajal Lahiri, an economics professor at the University at Albany, says the local semiconductor industry is behind the increase. He said that, statistically, the sector is still a small percentage of the whole economy, and it is easier to grow an industry when it is smaller.

"But the potential is great, and its psychological effect on the overall economic multiplier can be very large," Lahiri said.

The semiconductor industry has one of the highest GDP growth rates in the world when things are going well, and many cities across the country have seen their GDPs grow significantly because of local computer chip operations, says Sergis Mushell, an San Jose-based analyst for technology research firm Gartner. Examples include San Diego, home to Qualcomm, which designs chips for smart phones, and Portland, Ore., home to several Intel chip factories.

"They are a big contributor to the economy in those areas," said Mushell.

Alain Kaloyeros, CEO of the NanoCollege, says the GDP data released Friday don't include all the research and development spending by companies such as Intel and IBM at the school.

Kaloyeros estimates that R&D spending in the sector probably represents three to four times the manufacturing output. But over time, as the local semiconductor industry matures, manufacturing will overtake spending on research, which chip companies typically set at about 20 percent of revenues.

David Rooney, a senior vice president with the Center for Economic Growth, which works to attract companies to the region, says the 2010 GDP data haven't captured the true growth of the chip sector because the GlobalFoundries factory in Malta didn't start manufacturing until early 2012. And the NanoCollege is still embarking on more expansion.

"The industry's impact on the region should only accelerate in the coming years as integrated circuits continue to proliferate in familiar products and in those we can't yet imagine," Rooney said.