Sat, May 23, 2009

New England Economists Now Predict 450,000 Jobs Lost and Uncertain Future

Though I do twit economists in my writing from time to time, I’ve started really looking forward to these meetings, which are full to overflowing with information and good insights.  When the slides from the yesterday’s presentations are posted on NEEP’s website, I’ll add links to them here.

Since NEEP’s forecasts are built using national macroeconomic forecast data from Moody’s, the opening speaker was again Mark Zandi, chief economist for Moody’s economy.com
Mark Zandi’s May, 21, 2009 NEEP Presentation

National Forecast: Recession Ending Fall 2009
Apparently, American economists have decided to call what we’re in right now the Great Recession, because everyone, including Zandi, has adopted that moniker. However, Zandi declared that the “free-fall” in the economy is over, or, as a later speaker said, we’re done falling off the cliff and we’re just sliding downhill now.  Moody’s middle-of-the-road forecast is for a further loss of about 2.5 million jobs nationwide.

Mortgage rates, Zandi noted, are at record lows and could even go lower. He sees this as a positive for the housing market, because there are about $3 trillion worth of Fannie/Freddie mortgages with coupon rates at or above 5.5%, and these are likely to be refinanced if rates go as low as 4.5%.  This could relieve some of the stress on homeowners and the housing market.  He expects the housing market to bottom as foreclosures peak, which he believes will happen later this year.  If loan modifications don’t work as expected, the consequences would be grave.

Zandi was remarkably upbeat about the recent bank stress tests and believes that the process “has worked marvelously well.” He pointed out that the tests required banks to be resistant to a two-year loan loss rate of 9.1%, slightly higher than the highest rate experienced during the Great Depression.  I was surprised by how positive he was, given other criticisms I’ve read of the test criteria. He does expect that about 1,000 bank failures will be needed before losses on credit market instruments will be completely dealt with. While noting the stagnation of debt issuance, he did not seem terribly worried about the state of its recovery.

One positive aspect of the present crisis that is unique, Zandi noted, is that there has been a substantial stimulus response from a number of national governments, including China, Russia, Japan, the US, and the Saudis.  He expects China, with stimulus spending exceeding 13% of 2008 GDP, to lead the way out of the Great Recession, with Europe lagging behind. In the US, Zandi expects a “U-shaped” recovery.

I have to say that found him surprisingly optimistic about the prospect of job recoveries in 2011 -12.  His reasoning is that jobs have been cut so deeply in this recession that businesses will have to hire more rapidly than they did after the early 2000’s recession in order to recover.  He also noted that productivity growth is in a downtrend now, so that more workers will be needed to make up the difference. During the Q&A session, someone pointed out that the last expansion was financed by debt and that this surely cannot happen again in the next few years. Zandi responded, in part, that businesses are not as over-leveraged as consumers, and he believes job growth is still a realistic possibility.

Zandi closed his presentation by discussing some of the major risks that he perceives. Among them, not surprisingly, is the fact that if the Federal debt-to-GDP ratio rises to 65% by 2010 as projected, that will be “barely manageable.” Probably, he noted, the Congressional Budget Office’s projections for the next three years are too optimistic, which means the Federal debt picture is likely to be even worse.  He expects global investors to balk at the rise in US debt and raise long-term rates significantly unless a credible solution is found soon.  Almost as if on cue, Standard & Poors warned yesterday that it might have to lower the United Kingdom’s triple-A credit rating as the UK’s debt is projected to exceed 80% of GDP.  This is effectively a warning shot for the US as well.

Trying to end on a positive note, Zandi noted that if monthly US job losses drop to 250,000 by September, that will “feel” better than the 550,000 lost last month. Economists, he observed, only need two points to draw a line, and a good result this fall would enable them to do so and extrapolate to zero.  The resulting optimism would presumably be infectious enough to hasten the end of the recession.

The New England Economic Forecast: The Great Recession
In his presentation on the regional economy, NEEP forecast manager Ross Gittell of UNH tried to put a positive spin on things by noting, “at least we’re not California.” Although every speaker tried to look for something positive to say, it was clear they were finding it hard.  One of the most insightful general observations was made by Vermont economist Jeff Carr, who pointed out that a fair amount of current optimism about “green shoots” is based on recent unemployment claim data. The actual shift in unemployment is tiny, but a small drop in unemployment claims is being hailed as good news.  Carr noted that what everyone is excited about is not that the employment changes are positive, but that they are slightly less negative – nothing to crow about.

NEEP’s forecasting team quietly increased its estimate of the number of jobs that will be lost in New England during the Great Recession to 450,000 – roughly double the 250K level it projected in November. Overall, in New England the recession is expected to be worse than in 2001 but not as bad as the early 90’s.  A slow, weak recovery is expected to start in mid-2010.
NEEP Spring 2009 New England Economic Forecast

The breakdown of comments by state:

Massachusetts – UMass professor Alan Clayton-Matthews compared the state to man who’s accosted by an assailant who first beats him with a crowbar, but who then drops the crowbar and continues the beating with a bat: it’s still painful, but less so.  Job losses in Massachusetts came later than in the rest of the country because of the state’s reliance on jobs in information technology and finance (as opposed to manufacturing). Clayton-Matthews pointed out that the state has a deepening structural deficit; state tax revenues are falling farther and farther behind the trend that was set prior to the recession of 2001.  There is a growing revenue shortfall that will not be easily addressed.

NEEP Spring 2009 Massachusetts Economic Forecast

New Hampshire – The strongest state in the region, New Hampshire also has a structural deficit. Its “housing bubble” is a bit behind the rest of the country and the current forecast is that median home prices will not recover to 2005 levels (the peak) until after 2012.

NEEP Spring 2009 New Hampshire Economic Forecast

Maine – Finally, said Maine economist Charles Colgan, Maine has caught up to the rest of the economy, “and we’re sinking like a stone.” The Great Recession will wipe out 10 years of job growth in Maine, with one third of the job losses in retail trade. Maine, too, has a structural deficit, and Colgan said that the state’s public revenue structure is such that its problems will long outlast the economic recovery.

NEEP Spring 2009 Maine Economic Forecast

Vermont – Jeff Carr, of Economic and Policy Resources, Inc., reported that in Vermont the job losses are expected to actually be worse than the 90s recession. Although Vermont is the only triple-A rated state in New England and no TARP money has had to be disbursed to a Vermont-based bank yet, Carr projected a deep downturn and slow recovery. He also noted that the legacy costs of unfunded pension obligations for Vermont teachers are on the order of $10,000 per resident as of the middle of last year.

NEEP Spring 2009 Vermont Economic Forecast

Rhode Island – Bryant University’s Edinaldo Tebaldi was happy to report that Rhode Island is no longer number one in the nation for employment (thanks, Michigan).  Although the recession in Rhode Island appears close to bottoming, future growth will be slow. The state suffers from a shrinking labor force and a net loss of well-educated workers.  Ratios of median housing price/median income have retreated to 2000 levels.  Tebaldi noted other challenges for the Ocean State: the tenth highest tax burden in the nation and a budget gap equal to 25% of general funds.

NEEP Spring 2009 Rhode Island Economic Forecast

Connecticut – Ed Deak, who was slated to give the Connecticut report, was ill, so his summary was given by Ross Gittell.  Connecticut’s economy, like Massachusetts’, has been late to bottom out and will be slow to recover.  The portion of the state’s economy closely coupled to New York City suffered in the restructuring of the financial services industry, and additional job losses are expected at Pratt-Whitney. 

NEEP Spring 2009 Connecticut Economic Forecast

The forecasters were able to muster a certain amount of gallows humor, but the consensus was that the New England states are facing significant long-term challenges. Maine and Vermont fund pension obligations through their general funds.  New Hampshire currently funds 35% of retirement benefits through its general fund and its current pension fund is at 55% of the projected need. Similar shortfalls exist in other state budgets in the region. 

One speaker observed that without significant revenue enhancements, the New England states will probably be forced in the future to make a choice between (1) education, (2) health care, and (3) local control.  New England towns are notorious for their insistence on locally controlled school districts and services (Charles Baker, Harvard Pilgrim Health Care CEO, who spoke in the afternoon, noted that in Massachusetts there are over two hundred emergency service dispatch centers, while much larger states like Georgia, New York, and Texas have fewer than a dozen).  With the rising cost of education and health care, cities and towns will have little choice but to consolidate some services in order to achieve greater cost efficiencies.