Thu, November 20, 2008

New England Economists Predict 250,000 Lost Jobs

Originally, Congressman Barney Frank was scheduled to be the conference keynote speaker, but he decided to cancel so that he could remain in Washington to pursue solutions to the economic crisis.  He did put in an appearance, however; more on that later.

NEEP’s forecasts are based on Moody’s macroeconomic forecast for the nation as a whole, so the meeting’s kickoff speaker was Mark Zandi, chief economist for Moody’s economy.com.

The National Economic Outlook
Zandi noted that one of the hallmarks of this recession (even though the NBER has not yet declared the start of the recession) is that it is broad-based.  Rather than being precipitated by overleveraged businesses, it was led by overleveraged consumers.  He gave a couple of plugs for his recent book, in which he argues that the housing market slump that led us into this recession came about for three basic reasons.

• The process for securitizing mortgages was broken. No one – not lenders, nor anyone else – was responsible for making sure that the loans being made were good.
• Regulatory oversight of mortgage lenders was inadequate.
• Everyone, including homebuyers, was “forecasting with a ruler” – there was an expectation that housing price gains would continue indefinitely.

Zandi identified three waves of mortgage defaults so far.  The first wave, starting in 2006, was mostly due to speculators who found that they could no longer make money and simply walked away from their mortgages.  The second wave was the result of ARM interest rate resets that took place in 2007, forcing many overextended borrowers into foreclosure.  The current wave is a consequence of rising unemployment, which, when coupled with negative equity (due to home price declines) has caused homeowners who would otherwise have kept paying their mortgages to throw in the towel.

Zandi projects that nationwide unemployment will continue to rise until about 2010.  One of his more remarkable graphs showed how frozen the credit markets really are.  It summarizes the rise in private mortgage-backed bond issuance through 2006, which peaked at nearly a trillion dollars, and showed that 2008 YTD issuance is perhaps 3% of that figure.  The same is true, he said, for issuance of new commercial bonds, junk bonds, and almost everything else – except Treasuries. The rest of the developed world has entered recession, and emerging economies are weakening. This will undermine US exports.

At this point, he quipped, “you’re thoroughly depressed now, right?”

Zealous to end on an optimistic note, Zandi offered his only slightly tongue-in-cheek prediction that the housing slump will end on August 15, 2010.  That is his prediction for when the housing market will finally begin to rise and there will be “a light at the end of the tunnel.” He drew attention to several positive economic elements:

• Housing is becoming more affordable.  As the ratios of housing prices-to-rental costs and housing prices-to-median income decline, they’re approaching their historic averages. In some parts of the country (including, interestingly, the Boston area) these ratios are back to normal.  I think prices probably will overshoot their equilibrium values, but getting housing prices back in line is a necessary condition for recovery of the housing markets.
• Housing inventories are peaking; we have about two years of housing inventory that needs to be sold.  Hence, Zandi’s date of August 2010.
• The FHA’s share of mortgage loans is rising rapidly; we should be at the low point in mortgage lending and more mortgage credit is on the way.
• The recent drop in oil prices should save consumers about $300 billion in energy spending.
• Government policymakers will continue to work to quell the panic.

His forecast was hedged with a closing warning: “this is all subject to revision!”

The New England Economic Forecast, 2009 - 2011
Zandi’s talk was followed by presentations from NEEP’s panel of economic forecasters, a group of academic, public- and private-sector economists from across new England.  They provided an analysis of the regional economy in general and state-by-state. 

As already noted, the group is predicting that regional job losses from 2Q2008 to 3Q2010 (when the recession is expected to end) will total 250,000.  Of that total, Massachusetts is expected to lose 135,000 jobs (about 4% of total state employment).  They project that that this recession will be similar to that of the early 2000’s and not as severe as the 1990s recession, which hit New England with greater force than the rest of the nation.

The breakdown of concerns on a state-by-state basis was fairly diverse:

Massachusetts – The global recession impacts the state’s export-oriented areas; the MA economy is more business-oriented and less consumer-oriented (except the financial services sector).  Greatest strength will be in the state’s information and health and education sectors.  Statewide housing prices have not found a bottom yet.

Connecticut - The state has a $3 billion budget shortfall.  Greatest weaknesses are its dependence on the insurance sector and its exposure to financial services (there are 700 hedge funds based in CT).

New Hampshire – Projections suggest that its economy will be a bit stronger than the US generally and than the region as a whole.  Job creation has slowed; it has not yet declined but is expected to do so.  NH housing prices seemed least hard-hit in the region.

Rhode Island - By far, the most dismal forecast.  The state was probably the first in the nation to enter recession and is expected to be the last to recover. Current unemployment is better than 1991 – but is expected to worsen. All areas of the state’s economy are expected to decline except for education and health services, which accounts for about 20% of the state’s workforce.  Median housing prices are projected to spiral downward from a 2007 peak of $282,000 to $203,000 in 2011 and prices are not projected to increase until 2012.

Vermont – Although the projection calls for the worst downturn since WWII, the state’s outlook was middle-of-the-road compared with the region as a whole.  Tourism from Canada is down due to the strengthening of the greenback versus the loonie; weather-related tourism losses, which are hard to predict, could have a serious impact.  The state is expected to have peak-to-trough job losses of about 3%.

Maine – The state’s unemployment has so far has been less severe than the nation as a whole, but this is not expected to last beyond 2009.  Most sectors are expected to lose jobs, and the forecast includes the out-migration of much of the population of Brunswick, ME as the result of the closure of the Naval Air Station there.  A tantalizing economic possibility is the hoped-for creation of an 800-turbine wind farm in Aroostook County, which would also require the creation of a major transmission line to link the facility with the rest of New England.

Although the speakers did their best not to be too pessimistic, there was a distinct feeling that things must get worse before they get better.

Barney Frank’s Appearance- Prerecorded
Barney Frank chairs the House Financial Services Committee.  Congressman Frank didn’t actually phone in his appearance, but participated via a video recording made yesterday afternoon.  He explained that he needed to be in Washington so that he could try to facilitate three initiatives that he considers critical to hastening economic stability:

Spending some of the TARP funds – about $20-$25 billion – to proactively reduce foreclosures

Providing $300 billion in economic stimulus to states and cities, with an emphasis on infrastructure improvements

Helping Treasury Secretary Paulson push banks that have received TARP funds to begin re-lending the money.

In Frank’s stead, the conference keynote speaker was Tom Curry, director of the FDIC, who spoke about the effects of the crisis on bank stability and the FDIC’s response to the financial crisis. Although Curry’s talk was timely, I don’t think it would be of much interest to my readers, so I won’t bother summarizing much of it.  Curry’s most salient observation was the fact that “the rising trend of troubled loans shows no signs of abating” in FDIC-insured institutions.  Although the vast majority of insured banks are in good shape, we should expect more bank failures.

Stay Tuned
My final observation from the conference is something that Zandi and several other economists said repeatedly: if their economic projections are wrong, the greatest likelihood of error in their forecasts is in the direction of being too optimistic.  Revisions, if needed, are likely to be towards a worse recession than they’re currently projecting.