5 on the future | Five economists foretell what's in store for 2011

It's been real, 2010, but a new year and a new decade bring hope for a fresh financial start. To let us in on what we can expect in 2011, Mainebiz brings together five economic experts as part of our annual attempt to peer into the future. With predictions for the economic recovery ranging from "promising" to "anemic" and best guesses on the chances of a double-dip recession ranging from nearly zero to 40%, their forecasts are far from uniform. Read on to see where they agree.  

What’s in store for Maine in 2011?

COLGAN: The recovery should hold but fiscal policy will turn toward contraction and away from stimulus, and the European debt crisis will limit export growth, which is the key to expanding GDP in the next few years. The hangover from a weak 2010 will last through the first half of 2011.

REISMAN: Income and output will slowly improve, but not fast enough to significantly reduce unemployment and create momentum.

CARANCI: The recent pick-up in state tax receipts, particularly corporate and sales taxes, is a reflection of the underlying momentum in business and consumer activity. Also, after a relatively slow start, Maine’s export market has finally blossomed and exceeded pre-recession levels. Maine’s three biggest trade partners are solid performers — Canada, Malaysia and China.

ST. JOHN: The consensus economic forecast suggests Maine will experience very slow growth, improving gradually through 2011.

MOODY: Thanks to muddled federal monetary and fiscal policy, the economy will also continue to muddle its way forward. For example, how will the switch in political power affect the actions of the Federal Reserve or the fate of Obamacare? These are big issues with big uncertainties that, in the end, keep businesses wary of creating new jobs.

What are the chances of a double-dip national recession?

COLGAN: 30-40%. This is uncomfortably high for six quarters into a recovery.

REISMAN: 25%. Fiscal and monetary policy remain stimulative, but this anemic recovery could end with an energy price shock or other confidence-sapping event.

CARANCI: Around 20%, but six months ago I would have said it was higher (30%). Economic momentum is holding firm, and should remain resilient with the combination of recent positive policy initiatives by the Federal Reserve (i.e. QE2) and government tax cuts, alongside evidence that credit standards are loosening up.

ST. JOHN: 5-10%. Policy choices will affect potential growth in 2011 one way or another. Presently, the chances of a double-dip recession over the next year appear near zero.

MOODY: 40%. A few weeks ago, I would have put this much higher, but the extension of the Bush tax cuts significantly reduces the chances of a double-dip recession, at least in 2011.

How long will a full economic recovery in Maine take?

COLGAN: My current forecast is that Maine will get back to pre-recession employment levels in the second quarter of 2014, which will mean a five-year recovery period, the same as in the 1990-1991 recession. This assumes no second recession.

REISMAN: Three to four years.

CARANCI: It depends on how you define full recovery. Economic output did not contract as severely in Maine as it did across the rest of the nation. As a result, the level of economic activity (i.e. GDP) should be back to pre-recession levels by the end of 2010. However, this economic growth has been driven by productivity gains, and not job growth. Employment is unlikely to return to its past cyclical peak until the second half of 2013 or early 2014.

ST. JOHN: 2013-2015.

MOODY: To get Maine’s economy back on track, we must first resuscitate job creation from new startups, which has significantly downshifted since 2002. This is a particularly daunting task since both the businesses and jobs must be created out of thin air. It will require outside-the-box thinking such as implementing immediate expensing for all business investment in the state.

We can now see that the effect of the federal stimulus is _____.

COLGAN: Maine lost 30,000 jobs. The American Recovery and Reinvestment Act filled about one-third of the hole in demand created by the recession, so Maine would have lost another 10,000 jobs without the stimulus. General Fund revenues fell by 11% but state spending declined only about 8%, the difference being the stimulus support for public services. Long-term investment benefits in broadband, highways and other infrastructure lie in the future.

REISMAN: Minimal, speculative and likely damaging to the long-term sustainability of the American enterprise.

CARANCI: That the effect of the past federal stimulus (ARRA) offered about a one percentage point lift to real GDP growth in 2009 and 2010. While its termination would have detracted from GDP growth in 2011, the new government tax initiatives announced in December should fully offset the impact. However, the pain from stimulus unwinding has only been deferred, not prevented. In 2012, the combined drag from ARRA and the expiration of the payroll tax cuts will pull down GDP by 0.8-1 percentage points — double the impact if only ARRA was unwinding.

ST. JOHN: Substantial. The nonpartisan Congressional Budget Office estimated that the recovery act generated between 1.8 million-4.1 million more jobs than what would have existed without the legislation. The Council of Economic Advisors estimates the recovery act has created or saved 14,000 Maine jobs. The federal stimulus enabled Maine to sustain critical investments in education, research and development, health, transportation and broadband, providing long-term economic benefits.

MOODY: … good for public-sector employment, but not so much for the private sector. The stimulus also created a drop in the private-sector share of personal income that rivals the drop seen during the Great Depression. Outside of government, this economic downturn does feel like a depression to many people.

What is your forecast for state job growth?

COLGAN: For 2011, employment will grow about 0.5% or about 3,000 jobs annually on average year over year. Job growth will be strongest in the second half of the year — 2012 and 2013 will be when the bulk of the recovery occurs.

REISMAN: Slow job growth over 2011, adding at most one-quarter of the 30,000-plus jobs lost since 2008.

CARANCI: Although the initial phase of this recovery has been characterized by strong productivity growth, this will be difficult to sustain. Firms will increasingly need to hire workers to boost output. I anticipate that the economy will generate close to 12,000 jobs in 2011 (1.8% growth), followed by 11,000 (1.6% growth) in 2012.

ST. JOHN: Maine jobs are projected to grow 2.3% in 2011. Cuts in government spending could significantly affect this figure. If the new administration and Legislature reduce spending by $800 million to meet revenue forecasts, 20,000-25,000 public- and private-sector jobs will be lost. Private contractors and local and state employees who lose their jobs will spend less, with a ripple effect on other jobs. Finally, short-term unemployment may actually rise as unemployed workers who have stopped looking for work reenter the labor force.

MOODY: Maine’s unemployment rate will likely remain at a few percentage points below the national average. The one short-term benefit of an aging labor force is that many in the labor market today are in their peak earning years, creating some measure of stability. Of course, if the national unemployment rate goes up (which is likely), Maine’s will still follow.

For the housing market and mortgage rates?

COLGAN: Foreclosures will peak in mid-2011. Existing home sales will not pick up until mid-2011. New home construction will remain barely above 2010’s level of about 2,000 starts. Mortgage interest rates will remain about where they are through 2011, although may decline somewhat if the Fed’s policy to increase the money supply is successful.

REISMAN: Continued lethargy/anemia. Interest rates will stay low.

CARANCI: The world for an economist is pretty straightforward — it’s all about demand and supply. And, on the supply side, foreclosure and delinquencies remain a bigger problem for Maine’s housing market than both the national aggregate and regional average. As a result, Maine’s housing market should underperform over the next year or two as this shadow inventory works its way through the system. Maine is at risk of experiencing gradual price declines (of roughly 5% or less) in 2011.

ST. JOHN: The housing market will continue to improve slowly. Portland was recently cited as one of the few markets in the country to witness sales and price increases, and overall prices and sales have not declined as much as in many areas of the country. The Federal Reserve’s “monetary easing” will likely keep historically low mortgage rates.

MOODY: The housing market will remain in the doldrums. Foreclosures and the “shadow market” of vacant housing will continue to weigh down home prices.

For energy prices?

COLGAN: Current oil prices will be about the average in 2011, with some ups and downs.

REISMAN: Oil will creep toward $125 per barrel with gas moving toward $4 per gallon. Anti-affordable energy policies pursued by the environmental left and global warming alarmists will be resisted by Gov. LePage and the GOP Congress, but stalemate/gridlock is likely.

CARANCI: Energy prices should remain firm alongside ongoing strength in emerging market demand, particularly China.

ST. JOHN: Energy prices will likely rise slowly along with worldwide overall economic growth.

MOODY: Energy prices, oil in particular, are being kept artificially high due to the weakness in the dollar stemming from the Federal Reserve’s policy of “quantitative easing,” i.e., printing money. Until QE is put to rest and we get the federal deficit under control, energy prices will continue to remain elevated.

For consumer spending?

COLGAN: Consumer spending should be better in 2011 than 2010, particularly in expenditures on services. Consumer debt burdens are coming down quickly, but without more robust employment growth overall income growth will not be enough to do any more than make 2011 a better year than the last three fairly miserable years.

REISMAN: Modest growth.

CARANCI: Consumer spending should proceed at a 2.5-3% pace in 2011.

ST. JOHN: Domestic consumer spending will grow slowly, particularly as public-sector job losses partially offset private-sector employmen gains.

MOODY: Consumer spending got an early Christmas present with the extension of the Bush tax cuts. However, the need to rebuild the balance sheet will keep spending down compared to historical standards.

What economic factors are being overlooked?

COLGAN: Health care, which has generated most of the net new jobs in Maine (and the U.S.), is showing real signs of weakness, particularly among hospitals, which are experiencing layoffs because of declining patient volumes due to loss of income and insurance. Public employment is likely to decline, possibly significantly, reducing public services and delaying the recovery to pre-recession employment by as much as another year.

REISMAN: Policies restricting individual and economic freedom in the name of social justice and environmental protection are reducing economic growth and wealth creation, while accomplishing little or nothing of their desired social goals.

CARANCI: The sky-high federal debt and the eventual impact on the broad economy, and even state and municipal finances through trickle-down effects when it’s time to pay the piper. If credible and transparent consolidation plans aren’t put in place soon after the next presidential election in 2012, tolerance may start to run short in international financial markets. Once this happens, the economic pain of unwinding the fiscal imbalance gets magnified through high interest rates and a loss in investor confidence.

ST. JOHN: The earnings and buying power of middle- and lower-income families have eroded over the last 30 years while income inequality has increased. The current federal tax cut/unemployment benefits “agreement” benefits the broad majority of American working families and consumers AND a very narrow group who will most likely invest their windfalls overseas. Extending middle class and refundable tax credits and unemployment benefits will produce the greatest gains in consumer spending and related jobs.

MOODY: New Hampshire had a political shake-up in 2010 as significant as Maine’s. As Maine’s nearest domestic competitor, we must keep an eye on their policy moves in 2011. Relatively speaking, if Maine’s business climate improves but New Hampshire’s climate improves more, then Maine is still losing ground economically.

Any reasons for optimism?

COLGAN: Employment costs are low and productivity growth has ceased. There is little more that can be gotten from the current work force so any expansion will require new employment. Businesses are as profitable as they have ever been so there are ample resources for hiring and investment when a sustained growth in demand is clear.

REISMAN: The Tea Party has brought a healthy feedback loop and an outbreak of honesty and possibly humility to our political class. The green nanny state of Maine will move toward freedom over the next two years, while the environmental left and statists howl.

CARANCI: The job market offers some promise. While we have been underwhelmed (to say the least) by the job gains thus far in the economic recovery, record levels of productivity gains and strong corporate profitability offers reason to believe that employment is long overdue to reap some of these benefits.

ST. JOHN: The ingenuity and strong work ethic of Maine people and small businesses, which have kept producing during a sputtering recovery. Employment levels and income growth in Maine, while slow, are better than most of the rest of the country. The current economic challenges provide an opportunity to reevaluate our investment priorities and set a course toward longer-term prosperity.

MOODY: The winds of change are blowing in Augusta.

If a business owner asked you for one piece of advice to follow in 2011, it would be _____.

COLGAN: Hang in there...

REISMAN: Tilt at windmills. Otherwise we’ll be pouring vast amounts of capital and resources into an offshore scheme that will give us very expensive energy, handicap our economy for the 21st century, and do absolutely nothing to avert global warming.

CARANCI: Try to filter out all the noise in the day-to-day U.S. economic reports. Recoveries aren’t smooth. Do pay increased attention to international events, especially sovereign debt risks in Europe. It is more likely that any meaningful fraying in market confidence would come from an international event rather than a domestic one in 2011.

ST. JOHN: Support your local economy and remain cautiously optimistic. For generations, Maine people have constantly demonstrated that we can accomplish great things in the face of very daunting challenges.

MOODY: Keep an extra-healthy reserve of liquidity and, if cash-flow allows, pay down debt. If the right policy choices are made in the next year, 2012 could shape up to be the year of investment.

Compiled by Mainebiz Senior Writer Jackie Farwell, who can be reached at jfarwell@mainebiz.biz.