Primary puts Pa. economy center stage

• Hiring holds steady
• Half of 'rescued' borrowers still default
• Job outlook gets gloomier
• Where the jobs are
• Where the jobs are

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BETHLEHEM, Pa. (CNNMoney.com) -- In the run up to the Pennsylvania primary this Tuesday, the headlines have focused on issues such as the Democratic candidates' religious piety and empathy for the working class.

But when voters go to the polls on April 22, the issue at the top of their minds will be the economy. The nation's fiscal health trumped the war in Iraq by more than 2-to-1 as likely voters' main concern, a recent Quinnipiac University poll showed.

For the past month, the Pennsylvania economy has served as a stage for the troubles facing the nation as Democratic candidates Barack Obama and Hillary Clinton have put the state and national economies at the top of their stump speeches. So far, unlike most of America, Pennsylvania's economy is still chugging along. Home values aren't dropping, foreclosures aren't spiking and employers aren't laying off workers en masse.

Still, experts warn, the state can't escape the slowdown plaguing the rest of the United States. Already, residents are complaining that high food and fuel prices are cutting into their spending.

"Right now, the economy is holding up fairly well," said Ryan Sweet, economist at Moody's Economy.com in West Chester, Pa. "But stress lines are emerging."

Economy of greater concern than Iraq

For likely primary voters, the economy is by far the single most important issue, according to the Quinnipiac poll. Some 52% of respondents listed the economy as the top deciding factor, followed by the Iraq war at 22%. These voters give Clinton a slight edge.

Despite this concern, nearly two in three Pennsylvanians say their family's financial situation is holding steady. Only 21% report they are falling behind.

Unlike neighboring Ohio, which has been hit hard by the national economic downturn, Pennsylvania has evolved beyond manufacturing over the past 30 years, economists said. In fact, the state has many different regional economies and that has helped it weather this economic storm.

The Pittsburgh area in the southwestern part of the state has capitalized on the local universities and has fostered healthcare-related businesses, said Christopher Briem, regional economist with the University of Pittsburgh. These are more stable employers, even during tough times.

The state's traditional steel manufacturers, however, haven't disappeared. U.S. Steel announced in December plans to invest $1 billion in its coke making operation near Pittsburgh. The infusion would add 600 jobs to the payroll.

Globally-oriented manufacturers are also benefiting from the weak dollar and strong demand for exports from the United States, said Robert Dye, senior economist for Pittsburgh-based PNC Financial Services Group, one of the state's biggest banks. Companies making products such as steel, robotics and technology for international buyers are seeing more business.

Northeastern Pennsylvania, meanwhile, is more dependent on financial services industry and the New York City economy, which likely will suffer more during a recession. But the region is bolstered by high-tech and health care companies, particularly biotechnology firms. Suburban Philadelphia has one of the highest concentrations of biotech companies on the East Coast, said Mark Vitner, senior economist for Wachovia, one of the largest banks in the state.

Statewide, the unemployment rate is comparable to the country's figure. In February, Pennsylvania's rate rose by 0.1% to 4.9%, while the national rate was down 0.1% to 4.8%.

One of the state's saving graces is that it didn't have a great run-up in home prices in recent years. Therefore, it is skirting the housing crisis plaguing many other parts of the United States, experts said. Pennsylvania ranks 34th in foreclosures with one filing per 2,245 households, according to the most recent statistics from RealtyTrac, a tracking firm. The national rate is one for every 557 households.

The median sale price for a single-family home in the Keystone state was $168,540 at the end of last year, up 2.38% from a year earlier, compared to the national median of $207,090, down 5.84% over the previous year, according to Economy.com.

"We don't have as big a bubble to burst," Dye said.

Gas and grocery prices starting to hurt

Still, Pennsylvania isn't an island and residents are feeling some of the nation's woes. Trucking and transportation are big industries in the state, which has several interstates running through it. Many drivers are owner-operators and they are suffering from higher gas prices, said economist Stephen Herzenberg, executive director of The Keystone Research Center in Harrisburg. He knows of one driver who had to quit the business after the cost of filling his truck doubled to $300.

While home prices aren't plummeting, the construction industry is pulling back and that's rippling through local economies. In Lehigh Valley, for instance, business leaders report that companies from builders to interior suppliers to plumbers are seeing slowdowns.

"It's going to be tight this year," said Peter Mickolay, owner of Aykroyd Hardware in Bethlehem, who expects revenue to be off about 5%.

Area restaurants, which were packed on weekends, all of a sudden have a few tables available on a Saturday night, said Lehigh Valley economist Kamran Afshar. He was stunned that he could get reservations for 7 p.m. on two Saturdays in March when he called a few hours earlier.

Higher gas prices are cutting into Dyanne Holt's business. Owner of Apollo Grill in downtown Bethlehem, Holt has noticed more empty seats on weeknights and more room for walk-ins on weekends. Some regulars are only coming twice a week instead of three times and customers are substituting appetizers for entrees.

"People still want to go out, but they are toning it down a little," said Holt.

Higher food prices are also squeezing her bottom line. Holt raised her prices six months ago, but is loath to do so again for fear of losing even more customers. Instead, waiters are only giving second helpings of bread upon request and are being more careful when pouring alcohol. And if it's not busy, Holt sends the kitchen staff home early.

Down the block, Popmart last month started stocking more $20 T-shirts and trimmed back its collection of higher-end clothes after noticing they were sitting on the shelves, said manager Kate Hughes. For instance, it now carries only a handful of Betsey Johnson, which had run up to $550.

"It's just not something people are willing to spend money on right now," said Hughes. "People are still interested in fashion but not at that price point."