5 on the future | A group of Maine economists dares to predict what's in store for 2010

Economics really earned its label as “the dismal science” in 2009. While we cross our fingers for a sunnier outlook to usher in the next decade, five experts lay out what we can look forward to, from alternative energy “schemes” to the looming threat of a “demographic winter” to fiscal reforms borne of adversity. Don’t get out your shades just yet, though.

Charles Colgan
Chair of the Community Planning & Development Program and professor of public policy and management at the University of Southern Maine’s Muskie School of Public Service; chair, Maine’s Consensus Economic Forecasting Commission

2010 snapshot: “The worst is over and at least the early stages of recovery are in sight. Net job growth will begin in the early-middle part of the year.”

How will state unemployment track?

We have been consistently below the U.S. unemployment rate, and this should continue. However, both the U.S. and Maine unemployment rates will remain uncomfortably high through 2010, with rural Maine having the greatest problems.

Should we expect a rise in energy prices?

At the moment, oil prices look to be fairly stable from a supply/demand perspective, though politics could always mess the markets up. Some rise in oil prices during the second half of the year would not be surprising.

How long will low interest rates stick around?

The current very low rates will last until mid-2010. Interest rates below historic averages will persist through the year, though some rise will begin to occur.

What’s in store for the housing market?

Housing prices should bottom out in mid- to late 2010, but housing starts will remain at depressed levels for at least two more years. Existing housing sales have stabilized and should show a very modest growth over the year.

Which industries will be key to pulling Maine out of the recession?

Health care, professional and business services, and leisure and hospitality will provide most of the recovery period jobs. Other sectors like construction, manufacturing, transportation and retail will show some recovery in jobs, but none of these sectors are expected to return to 2008 levels for at least five years.

What will affect Maine businesses the most?

A slowly growing economy will have Maine businesses scrambling to find ways to “get on board.” Most will succeed, some will not. The statewide elections in 2010 will make for a great deal of noise, but the most important thing will be the slowly improving economic outlook.

What challenges will be unique to our state?

The impact of Naval Air Station Brunswick’s closure will hit at the worst time possible, just as we are struggling to climb out of the recession. Maine’s small size will continue to be a constraint in sectors like professional and business services, which are absolutely key to the recovery.

Which economic factors have been overlooked?

The public sector in Maine is taking a hit of historic proportions. Rather than being an island of relative stability, state and local government spending is now “Keynsianism in reverse,” as The Economist notes. Without some continuation of help from Washington in the 2010 and 2011 budgets, declines in public sector employment could overwhelm private sector gains and keep Maine’s economy (and that of many other states) in a much more prolonged jobs recession.

Are there reasons for optimism in 2010?

Recessions do end. Fiscal and monetary policies have clearly reversed what could have been an utter calamity and given space for the private sector to reorganize and find new ways to seize opportunities.

Jonathan Reisman
Associate professor of economics and public policy at the University of Maine at Machias

2010 snapshot: “Maine’s economy in 2010 will be in a persistent state of anemic stagnation. Employment and income will continue to fall through the first two quarters, and will likely level off or show very slight signs of recovery by the end of the year.”

State unemployment:

Largely unchanged, just below the national average, with the rim counties in double digits. The labor force will continue to shrink, reflecting aging demographics and discouraged workers. Total employment will be flat or falling.

Rise in energy prices:

Recovering Indian and Chinese economies and tensions with Iran will push oil back toward $150/barrel, further damaging a weak U.S. economy. Capital resources and entrepreneurial energy are being specifically directed, via subsidy and fiat, toward “socially responsible” green alternative energy schemes (not including nukes) to fallaciously promote energy independence and combat global warming. These green job initiatives will do neither. Spain’s experience with very similar “sustainable development” policies was that every green job came at a heavy cost in terms of taxpayer subsidies and lost manufacturing and other private sector jobs.

Low interest rates:

For the entire year. The Fed may try to push them back up to counter inflation concerns, but a weak economy and likely adverse reaction to even small rate increases mean no significant increases in interest rates.

Housing market:

Short run spurts driven by tax credits and other sleight of hand, but with weak fundamentals of output, income and employment, no recovery likely.

Key industries:

None, we won’t be pulling out of the recession in 2010. The increases in the government share of the economic pie will continue to depress the rest of the economy. Unless the public sector stops growing faster than the economy, the best we can hope for is stagnation.

Maine businesses:

Whatever economic strength and growth there is will emanate north from the Boston metro area, primarily affecting York, Cumberland and Sagadahoc counties. The second congressional district will have to wait.

Unique challenges:

Maine has steadily moved toward becoming a green nanny state, which raises energy prices, discourages innovation and risk taking, and encourages rent seeking and social engineering, rather than a market-oriented pursuit of profit and wealth creation.

Overlooked economic factors:

Most of Maine’s elite forecasters and analysts will continue to systematically err in predicting state revenues and the economy’s performance because they rely on flawed assumptions that reflect political and statist biases.

Reasons for optimism:

The elections will help struggling media outlets and offer a slim chance for a change of course favoring economic freedom. That would be real hope and change.

Michael LeVert
State economist; member, Maine Revenue Forecasting Committee

2010 snapshot: “2010 will be like the days that follow a bout of the flu. A little shaky, a little subdued. But, with some rest and some soup, we’ll start to feel better.”

State unemployment:

Maine will see job growth start in late spring/early summer. As employment picks up, some previously discouraged workers will return to the labor force, which will keep the unemployment rate steady for most of the year.

Rise in energy prices:

Energy prices will rise slowly but steadily and crude oil will average about $80/barrel. The recovery won’t be robust enough in 2010 to encourage a speculation-fueled spike in oil prices. Sadly, the wave of carpoolers who began during the price spike of summer 2008 will slowly dwindle, despite gas prices approaching $3.

Low interest rates:

Interest rates will stay low for all of 2010, less than 1%.

Housing market:

New home buyers will continue to lead the housing market out of the abyss. This will keep the mix of sold properties on the low end so median home prices won’t budge much in 2010. Cumberland and York counties, closest to employment centers, will rebound the quickest.

Key industries:

Health care has been the only industry that has grown during the recession and will take the lead in adding jobs, followed by the professional and business services sector. Paper manufacturing, which took such a hit in 2009, will see a small uptick.

Maine businesses:

There is a large pool of talented workers who were put out of work by the recession. When businesses are ready to hire, they will be able to draw from an abundance of motivated workers, which will improve productivity.

Unique challenges:

In-migration. Maine’s economic and fiscal health will in large part depend on whether we can entice people, particularly young, educated people, to move to the state. For most of this decade, this has been the case: more people moved into Maine than moved out. But this pattern has slowed, culminating in a net loss of residents in 2009. Add to this trend that Maine is the oldest state in the country and the first baby boomers will start to retire in a few years, and we really need to attract people to grow our economy.

Overlooked economic factors:

Maine’s quality of place. It attracts young, smart people to Maine and helps keep the ones we have. This in turn attracts businesses looking for a skilled work force. It also powers Maine’s billion-dollar tourism industry. And, aside from aiding economic development, it improves the well-being of everyone who lives here. Maine was just ranked the 10th “happiest state.” That’s good for the economy.

Reasons for optimism:

Evidence is mounting that Maine people are ready to rethink economic development. Tax reform, school and jail consolidation, expedited permitting for wind power, quality of place, bonds for land conservation and downtown revitalization — these are the long-term strategies that Maine needs for sustainable prosperity.

J. Scott Moody
Chief economist, Maine Heritage Policy Center, Portland

2010 snapshot: “2010 will be defined by the state budget deficit and its impact on the gubernatorial election in November.”

State unemployment:

Maine’s unemployment rate is an unreliable indicator of the labor market. Between January and November 2009, employment has dropped by 9,568 but only an additional 1,131 folks joined the unemployment lines. The remaining 8,437 dropped out of the labor force altogether. This is likely due to the lack of new jobs available and the overall aging of Maine’s work force.

Rise in energy prices:

Gasoline and heating oil prices seem to be stuck in a rut. However, a downward push on electricity prices might be in cards. Since nearly 40% of electricity is generated from natural gas, recent domestic discoveries have swelled inventories and driven down the price. This is all-around good news for Maine’s household budgets, domestic energy security and the environment.

Low interest rates:

Interest rates will stay low as long as foreigners, especially China, continue to buy our debt. However, the dollar’s persistent decline, driven by unprecedented levels of borrowing, threatens to scare off foreign investors.

Housing market:

Nationally, the housing market will come under increasing downward price pressure as foreclosures are dumped. Fannie Mae just reported a surge in delinquent mortgage payments, which is a precursor to higher foreclosures. The recent spate of “good news” in the housing sector was driven by the federal housing tax credit, which is due to end in early 2010.

Key industries:

Only private sector industries can pull Maine of this recession. Unfortunately, Maine’s private sector has been crowded out by the public, which will make recovery a very long and slow process.

Maine businesses:

Pending changes in Congress on health care and global warming will hurt Maine businesses especially hard if they become law. Combining the new taxes in these federal initiatives with the already high state tax burden will be the proverbial straw that broke the camel’s back for many Maine businesses.

Unique challenges:

The Census Bureau’s recent data showing Maine as one of three states losing population is a very bad sign. Maine is on the leading edge of a new phenomena being labeled as “demographic winter” where the natural increase (births minus deaths) in population is unable to sustain current population levels. If you thought it was hard to sustain economic growth in Maine before, imagine doing it with a shrinking population.

Overlooked economic factors:

Not to sound like a broken record, but Fannie Mae and Freddie Mac continue to fly under the radar despite their huge role in the economy. In fact, just in time for Christmas, they both received a blank check from Uncle Sam to cover future losses while their executives pocketed millions in salary and bonuses. They are a ticking time bomb that will ultimately costs taxpayers billions, if not trillions, of dollars.

Reasons for optimism:

The state budget crisis could finally force policymakers to make long-term, sustainable reforms to the way the state spends our tax dollars.

Laurie Lachance
President and CEO, Maine Development Foundation, Augusta; former state economist

2010 snapshot: “To the extent that financial markets stabilize and resume an upward track, energy prices remain relatively stable, and business and household investment re-engage, Maine will turn the corner and start a very slow climb out of this deep retrenchment.”

State unemployment:

Unfortunately, when people do get the courage to re-enter the labor force, jobless rates will rise a bit further before they start to drop and could approach the dreaded double-digit level.

Rise in energy prices:

To the certainty of death and taxes, we can add two more things: Energy prices will rise and we will not be able to predict with any degree of accuracy exactly when or the speed with which it will happen.

Low interest rates:

For the past two decades (until the recent stimulus package), interest rates have been the tool of choice for fine-tuning economic activity. Some muse, however, that sustained low interest rates have created a level of consumerism that is way out of line with other countries and not sustainable for the long run.

Housing market:

Even with extremely slow population growth, new houses will be needed to replace and upgrade the existing stock and once the recovery begins to instill any degree of confidence, we should begin to see some housing activity resume, albeit at a very slow pace.

Key industries:

Businesses and organizations who use this recessionary period to totally rethink and refine their operations — taking full advantage of every operating efficiency possible; innovating new products, services and approaches; and making strategic investments to position themselves for long-term growth — will survive this downturn, will thrive once the recovery begins in earnest and will lead Maine forward.

Maine businesses:

National economic activity is the number one determinant of Maine’s health. If financial markets settle and the president can instill confidence, national economic growth can get back on track and Maine businesses will benefit.

Unique challenges:

First, our political process adds greater uncertainty to business investment decisions, ultimately adding costs to business investments and muting private investment in Maine’s future. Second, our tendency to search for the silver bullet — the one policy that will save us — rather than sticking with the right combination of strategic investments and critical efficiencies in our tax and fiscal policy sustained over the long term — the silver buckshot.

Overlooked economic factors:

Folks have little left in reserves, leaving them vulnerable should the recession continue or should we suffer another shock, like a spike in energy prices. Once recovery begins, consumers may not have the resources to enable them to act on their pent-up demand, thus hampering the recovery process.

Reasons for optimism:

Through two of MDF’s programs, Leadership Maine and Policy Leaders Academy, we regularly tour a myriad of Maine businesses and organizations. Throughout this state, there are innovative, passionate leaders and workers who are using this downturn to redefine and refocus their operations, making cuts, creating efficiencies and investing in equipment, processes and training that will enable them to compete effectively once the business cycle turns. That gives me great hope for Maine.

Compiled by Staff Reporter Jackie Farwell, who can be reached at jfarwell@mainebiz.biz.