January 28, 2008
Eight on 2008 | Are we headed for a recession? Will the housing market crash? Eight Maine economists tell us what's in store for 2008.
By Whit Richardson
Recession talk is consuming the country and economic woes are near the top of the public's ever-lengthening list of concerns. Housing markets across the United States are dinged up, and fiscal belt tightening is the fashion of the day as more consumers find themselves with unmanageable mountains of debt.
But is the economy in Maine really in such bad shape? Or is it ˆ gasp ˆ worse than we expect?
To answer these questions and more, Mainebiz spoke with eight prominent economists, asking each to weigh in on what really matters for Maine's economy in 2008. The answers were varied: Some pointed to the weak dollar as a boon to the state while others said it could hurt the economy. Many praised the state's strong housing market while a few noticed cracks in the façade.
From tourism and energy costs to consumer confidence and population shifts, our eight economists paint an interesting and complex picture of the state's economy in 2008. And there was one thing they all seemed to agree on: If you're hoping for lights-out economic growth in 2008, better luck next year.
CHARLES COLGAN
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
Key Factors: Consumer confidence, Housing, Credit crunch, and Weak dollar
Chance of U.S. recession 60%
What to watch for: "If you want to know whether or not we're likely to be in recession, look at the February jobs report, which will come out the first Friday in February. Look at that one, and then look a couple weeks later for the Maine numbers."
Charles Colgan says the construction and retail sectors are the most at-risk sectors in Maine's economy if the nation does enter a recession. But recession or no, Colgan foresees sluggish growth for Maine. His "optimistic forecast" ˆ the one assuming the country dodges a recession ˆ forecasts 0.1% job growth in Maine in 2008. That's about 1,000 jobs, "essentially no growth at all," he says. Colgan guesses Maine could lose as many as 6,000 jobs in a recession, mostly from the construction and retail sectors. He says sectors like health care, transportation and business services might actually see job growth this year, but they "won't be enough to offset a decline."
The bulk of the housing problems in the state will be centered in Cumberland and York counties, which have seen big run-ups in home values. A decline in housing construction in southern Maine, however, would ripple throughout the state because a large amount of the lumber industry's business comes from new home construction, Colgan says. Maine's popularity as a second-home market may cushion some of the worst effects of the housing downturn, he adds, but if credit becomes increasingly tight it could "cause some people to pull back from investing in second homes."
Colgan expects the weak dollar will have "a positive effect" on Maine because it is making imports more expensive and exports cheaper, "thus reducing imports' competitive prices ˆ and makes us more competitive."
While some have said the credit crunch ˆ fallout from the subprime fiasco ˆ will negatively impact business investment, Colgan says the Fed is most likely going to push interest rates down as a way to loosen credit and keep activity going. "So businesses with good investment plans should find plenty of capital available at reasonable prices, all else equal."
But Colgan isn't holding his breath to see any bright spots shining through the dark cloud of recession and sluggish growth in 2008. "I would be satisfied if we got through 2008 with the damage limited to retail and construction. And other sectors, even if they didn't offset declines ˆ showed at least stability or growth," Colgan says. "That's about the only bright spot I'm looking for."
JON REISMAN
Associate professor of economics and public policy, University of Maine at Machias
Key Factors: Consumer confidence, Energy, Tourism, and Weak dollar
Chance of U.S. recession 33%
What to watch for: "If [the Fed] attempts to fight a recession by loosening the monetary policy strings, they're likely to reignite inflation."
The price of energy is probably the biggest factor impacting Maine's economy in 2008, says Jon Reisman. That's especially true for Washington County and other parts of rural Maine, he says. For one, high energy prices will continue to strain the public sector, which provides more than 50% of the personal income in Washington County and is "the driving force of the economy" Down East. A strained public sector could translate into cuts in funding for programs like MaineCare. "That's not good news for us," Reisman says.
And with gas prices over $3 a gallon, the tourism industry stands to lose out, he says. "That's a death knell for rural Maine," he says. Also, the fishing industry, a major factor in Washington County, is particularly susceptible to increases in the price of energy. "So we're likely to see strains there," he says, which could ripple throughout the economy in the form of less retail spending.
But Aroostook and Washington counties do have a savior, and it goes by the name "loonie," says Reisman. He notes that a weak U.S. dollar could lure more Canadians to Maine to shop or vacation, which could offset any declines in Mainers' consumer spending. He also points to the recent announcement of Ontario-based Acrobat Research opening a call center in Calais as a good sign. "The strong Canadian/weak U.S. dollar is likely to make investments in Maine look relatively attractive," he says.
As far as the likelihood of a national recession, Reisman says a lot depends on what the Federal Reserve decides to do about interest rates. If the Fed lowers rates and Congress introduces a fiscal stimulus package, Riesman says there'll be a "one chance in three of a recession in 2008."
In the end, recession or no, it may not matter much Down East, Reisman says. "If we have a recession, it won't be pleasant, but things are already not great here," he says. "We're already fairly depressed."
CHARLES LAWTON
Chief economist, Planning Decisions Inc., South Portland; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Consumer confidence, Credit crunch, and Tourism
Chance of U.S. recession 60%
What to watch for: "One thing that's important that people will come to recognize: the aging workforce."
Charles Lawton says a lot of people place a great deal of importance on whether we are heading into ˆ or already in the middle of ˆ a national recession. "That is probably less important than the fact that growth is slowing," he says. "And that's had serious effects whether [GDP growth] ever turns negative or not."
Regardless of a recession, Lawton expects Maine's job market in 2008 will grow by only a half a percent, or roughly 3,000 jobs. Best case, the economy begins recovering by summer, though Lawton fears that the slow growth will have a crippling effect on consumer spending, which would ripple out to other sectors of Maine's economy. On the other hand, he says, a recession probably isn't the biggest factor affecting Maine's economy in 2008. Because of Maine's reliance on its seasonal tourism business, Lawton says the amount of snow Maine gets this winter will probably have a bigger impact than a national recession. "If we had lots of snow and recession versus no snow and slow growth, I'd say snow would have a bigger impact on tourism in the north," he says.
A drop in consumer spending also could harm Maine manufacturers directly tied to consumer products, such as the timber and paper industries, while some of Maine's other manufacturers, such as precision manufacturers, "would be less likely to be directly impacted," Lawton says. Any hits to the paper and lumber industries could hurt Maine's rural areas that depend on those industries. "On the other hand, they already have high unemployment and are suffering from economic declines that predate any recession," Lawton says. "In a sense they have less far to fall."
Southern Maine, which is increasingly tied to the Boston economy, has risks of its own if recession hits, Lawton says. At risk are those York and Cumberland county residents who commute to jobs in southern New Hampshire and the Greater Boston area. "If those jobs dry up, that's going to be adding to unemployment up here," he says.
Looking at 2008, Lawton says one thing businesses will have to address is Maine's aging workforce. Businesses will continue to deal with the loss of institutional knowledge from retirement, but Lawton says companies also have an opportunity to adjust to be more friendly and accommodating to older workers who are working longer than past generations, whether that means offering part-time positions or job-splitting possibilities, Lawton says. "That to me is a big issue that is becoming more and more obvious," Lawton says.
MICHAEL DONIHUE
Professor of economics, Colby College, Waterville; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Housing, Credit crunch, and Weak dollar
Chance of U.S. recession 30%
What to watch for: The "biggest risk out there is [that recession
is] a self-fulfilling prophecy."
Michael Donihue takes a less doom-and-gloom approach to 2008 than many others. He doesn't call himself an optimist, but says he's not the "Chicken Little kind of guy who says the sky's falling." Donihue doesn't subscribe to the idea that the subprime mortgage meltdown could spur a national recession. However, what could cause a recession, he says, is a collapse in consumer confidence fueled by overzealous predictions of recession hyped in the media. He says the "biggest risk" is making this recession a self-fulfilling prophecy. "If it's going to happen it's because everybody believes what they read in the paper or what they are talking to their neighbors about," Donihue says.
While a weak housing sector means fewer construction jobs and bad news for the retail sector, Donihue says "most other sectors of the economy are pretty strong or are showing remarkable resilience." Still, Donihue forecasts "sluggish growth throughout 2008," and notes growth will be "below trend, but not a recession."
Donihue also expects the U.S. dollar to remain low at least throughout the summer of 2008, which may be bad for businesses buying products from overseas, but in the end he expects the weak U.S. dollar to be a "net positive" for Maine. For one, the strong Canadian dollar means more of our northern neighbors will be shopping at our malls, sitting on our beaches and sleeping in our inns, which will probably offset any decrease in consumer spending by Maine residents.
CATHERINE REILLY
Maine state economist, Maine State Planning Office, Augusta
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 40%
What to watch for: "We're learning more and more how Maine's economy is connected to the rest of the world. It's no longer enough to simply know what's in the state ˆ we really need to look beyond that."
Catherine Reilly says there's a 40% chance of a recession, and that what happens in Maine will happen to the national economy. Further increases in the cost of oil, a major geopolitical event or another Hurricane Katrina could push the country over the edge into recession, she says.
She also says all the talk of recession can be a self-fulfilling prophecy as businesses hesitate when making the decision to invest or grow. "A lot has to do with business and consumer confidence," she says. "So much of the U.S. economy is driven by consumers, it's hard to underestimate the importance of consumer confidence." Fallout from the subprime meltdown has also created a lot of uncertainty ˆ and "markets hate uncertainty," Reilly says. "What's troubling people right now is they're trying to figure out what the extent of the impact is. And I think once we get a better handle on that, the economy will do a lot better."
While the housing market in other places in the country is tanking due to "exotic lending practices," Reilly says there was less of that going on in Maine, so Maine's housing market should not be hit as hard. Also, Reilly says some major factors that fuel Maine's housing market, like baby boomers buying a retirement or second home, are still out there and will be less impacted by a recession, if it hits.
All the talk and discussion of recession, however, has created more pressure in Augusta to reform state policies, she says. Reilly says the two major initiatives that Gov. John Baldacci laid out in his State of the State address ˆ consolidating schools and pulling the county jails under the state's control ˆ probably won't have any noticeable effect on Maine's economy in the short term. But she does say the state is rethinking its approach to economic development, which Baldacci also hinted at in his State of the State address. "So if we use this time to streamline and reorganize for today's world, we'll be better off in the long run," Reilly says. "For better or for worse, change seems to happen when there is real financial pressure."
J. SCOTT MOODY
Chief economist, Maine Heritage Policy Center, Portland
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 80%
What to watch for: "I would keep my eyes on Augusta."
J. Scott Moody says the country "is more likely than not" to enter a recession in early 2008. "Historically, credit crunches don't end very well," he says, adding that "ups and downs are going to happen ˆ it's a fact of life."
But asking about a recession in Maine is redundant since the state's private sector has been in recession since 2002, he says, citing data from the U.S. Bureau of Economic Analysis that shows Maine's average private sector income has not changed much since the last recession, only increasingly slightly from $21,140 in 2002 to $21,273 in 2006. "Any growth has been from government."
A national recession would only contribute to Maine's ailing private sector, he says, while money funneling into Maine from the federal government isn't likely to dry up. "The federal government is not going to be cutting Medicare anytime soon," he says, adding that for every dollar Maine sends to Washington, D.C., the federal government sends $1.41 back. "That's a nice cushion heading into a recession."
Moody says the subprime meltdown will not affect Maine very severely, but the resulting credit crunch does have the potential to send ripples through Maine's economy, especially in the housing market.
Maine's business community may also be hurt by what Moody calls the spreading "credit crisis." "Banks have to clamp down," he says. "And not just on consumer loans, but on business loans, as well."
Where the weak dollar is concerned, Moody says it will help businesses that export and the retail sector in areas near a Canadian border crossing, but he's not sure if it will be a net positive. "At the same time, the weak dollar is responsible for high energy costs," he says, pointing out that Maine is a net energy importer. "I'm not sure Canadian tourists are going to be able to offset your energy bill that has doubled."
One other piece of recent data Moody says is very telling are numbers from the U.S. Census Bureau that show for the first time in a very long time Maine's year-over-year net domestic migration has gone negative, meaning fewer people moved to Maine between July 2006 and 2007 than left. It's a small number ˆ just 18 people total ˆ but it tells a larger story when paired with other data, Moody says. According to Census Bureau data, the age group whose net migration has gone from positive to negative at the same time as Maine's total net migration are not the mobile 20- and 30-somethings, but people in their 40s, which Moody points out is usually a stable portion of the population. "If 40-somethings can't make a go of it here," Moody says, "to me that's an indictment of Maine's economy."
JOHN DAVULIS
Chief economist, Central Maine Power Co., Augusta; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 60%
What to watch for: A weak U.S. dollar means "this is probably the right year to get into the export market"
John Davulis expects the first six months of 2008 to be tough. With or without a recession, he expects job losses to be anywhere from 500 to 1,500.
The major cause, he says, is a drop in consumer spending. People are "maxed out," he says. They don't have a home equity line of credit anymore, home values are shaky and oil prices have gone up dramatically. "All they have left to get credit beyond wages is a credit card," Davulis says. "Maine has had an awful lot of growth in retail established in the last year or two," he says. "I'm expecting that there's going to be some closure of businesses because of a slowdown of consumer spending."
Davulis thinks oil prices will ease up in the second half of 2008, and may even decrease by as much as 25%.
While housing prices have been relatively stable in Maine, he does expect them to come down roughly five percent this year and then begin to stabilize.
The bursting of the housing bubble has caused a slowdown in residential construction, which is already showing up in unemployment numbers, he says. Fewer homes being built in Maine spells bad news for Maine's lumber industry, which was helped by the booming housing sector. One thing that has helped is the weak dollar, which helps Maine's lumber products compete with those from Canadian lumber companies. "That sector would normally have a good year because of the decline of the dollar," Davulis says. "But unfortunately construction is down."
The weak dollar offers an opportunity for Maine's other businesses to take advantage of the export market. Davulis also says it could increase business investment in Maine. He cites Tambrands' recent decision to move some of its production from Hungary to its Auburn production facility.
Davulis was surprised by estimates that showed Maine's net migration had turned negative. He says that's a worrying sign because Maine has relied on early retirees migrating to Maine to help fuel new home construction and increases in housing prices. "It's too early to say this is a trend we have to worry about, but it's one that bears watching," Davulis says. "Maine's an attractive state and it would behoove the state to try to continue to attract early retirees, and get them in the workforce, as well, on a part-time basis. I think that would be a great benefit."
CHRISTOPHER ST. JOHN
Executive director, Maine Center for Economic Policy, Augusta
Key Factors: Housing, Energy, and Tourism
Chance of U.S. recession 60%
What to watch for: "Our concern remains that different parts of Maine and different
people in Maine are going to suffer differently, and our attention should be directed towards those that suffer the most."
If the United States does head into a recession in early 2008, Christopher St. John expects Maine would weather the storm relatively well. Unlike some areas of the country dealing with major fallout from the subprime lending meltdown, St. John says Maine's reliance on the second-home market means a weakening national housing market is likely to have less of an impact in Maine. "I do think there will be housing slowdown in Maine, but I don't think it's going to vanish as it almost comes to a standstill in some other markets," he says.
He also argues Maine is better prepared to weather a recession because it has diversified its industry base since the recession of 1990, when Maine went deeper and stayed longer in recession than other states because a big chunk of its economy relied on manufacturing jobs, which often take big hits during recessions. And Maine hasn't become too dependent like some other states have on sectors like technology or energy. "In other words, we have jobs distributed more evenly throughout the economy, and some of those jobs we've been growing are immune to downturns," St. John says, noting health care and call center jobs are less likely to be impacted. "Our economy has become a good deal more balanced with a wider variety of sectors showing success."
Maine, however, won't escape unscathed. St. John says a recession in 2008 would probably contribute to the continued erosion of the state's manufacturing base and have a "mixed effect" on Maine's tourism industry (though he admits the former is very hard to predict). A decrease in consumer spending resulting from recession paired with consistent high gasoline prices will almost certainly impact tourism in Maine. But St. John also says Maine could see an influx of New Englanders looking for a relatively cheap and nearby vacation.
Maine will continue to benefit from funds flowing north from Washington, D.C., St. John says, noting that Maine gets a good return on its tax dollars. "I don't want to overemphasize government spending," St. John says. "But it is a factor."
But is the economy in Maine really in such bad shape? Or is it ˆ gasp ˆ worse than we expect?
To answer these questions and more, Mainebiz spoke with eight prominent economists, asking each to weigh in on what really matters for Maine's economy in 2008. The answers were varied: Some pointed to the weak dollar as a boon to the state while others said it could hurt the economy. Many praised the state's strong housing market while a few noticed cracks in the façade.
From tourism and energy costs to consumer confidence and population shifts, our eight economists paint an interesting and complex picture of the state's economy in 2008. And there was one thing they all seemed to agree on: If you're hoping for lights-out economic growth in 2008, better luck next year.
CHARLES COLGAN
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
Key Factors: Consumer confidence, Housing, Credit crunch, and Weak dollar
Chance of U.S. recession 60%
What to watch for: "If you want to know whether or not we're likely to be in recession, look at the February jobs report, which will come out the first Friday in February. Look at that one, and then look a couple weeks later for the Maine numbers."
Charles Colgan says the construction and retail sectors are the most at-risk sectors in Maine's economy if the nation does enter a recession. But recession or no, Colgan foresees sluggish growth for Maine. His "optimistic forecast" ˆ the one assuming the country dodges a recession ˆ forecasts 0.1% job growth in Maine in 2008. That's about 1,000 jobs, "essentially no growth at all," he says. Colgan guesses Maine could lose as many as 6,000 jobs in a recession, mostly from the construction and retail sectors. He says sectors like health care, transportation and business services might actually see job growth this year, but they "won't be enough to offset a decline."
The bulk of the housing problems in the state will be centered in Cumberland and York counties, which have seen big run-ups in home values. A decline in housing construction in southern Maine, however, would ripple throughout the state because a large amount of the lumber industry's business comes from new home construction, Colgan says. Maine's popularity as a second-home market may cushion some of the worst effects of the housing downturn, he adds, but if credit becomes increasingly tight it could "cause some people to pull back from investing in second homes."
Colgan expects the weak dollar will have "a positive effect" on Maine because it is making imports more expensive and exports cheaper, "thus reducing imports' competitive prices ˆ and makes us more competitive."
While some have said the credit crunch ˆ fallout from the subprime fiasco ˆ will negatively impact business investment, Colgan says the Fed is most likely going to push interest rates down as a way to loosen credit and keep activity going. "So businesses with good investment plans should find plenty of capital available at reasonable prices, all else equal."
But Colgan isn't holding his breath to see any bright spots shining through the dark cloud of recession and sluggish growth in 2008. "I would be satisfied if we got through 2008 with the damage limited to retail and construction. And other sectors, even if they didn't offset declines ˆ showed at least stability or growth," Colgan says. "That's about the only bright spot I'm looking for."
JON REISMAN
Associate professor of economics and public policy, University of Maine at Machias
Key Factors: Consumer confidence, Energy, Tourism, and Weak dollar
Chance of U.S. recession 33%
What to watch for: "If [the Fed] attempts to fight a recession by loosening the monetary policy strings, they're likely to reignite inflation."
The price of energy is probably the biggest factor impacting Maine's economy in 2008, says Jon Reisman. That's especially true for Washington County and other parts of rural Maine, he says. For one, high energy prices will continue to strain the public sector, which provides more than 50% of the personal income in Washington County and is "the driving force of the economy" Down East. A strained public sector could translate into cuts in funding for programs like MaineCare. "That's not good news for us," Reisman says.
And with gas prices over $3 a gallon, the tourism industry stands to lose out, he says. "That's a death knell for rural Maine," he says. Also, the fishing industry, a major factor in Washington County, is particularly susceptible to increases in the price of energy. "So we're likely to see strains there," he says, which could ripple throughout the economy in the form of less retail spending.
But Aroostook and Washington counties do have a savior, and it goes by the name "loonie," says Reisman. He notes that a weak U.S. dollar could lure more Canadians to Maine to shop or vacation, which could offset any declines in Mainers' consumer spending. He also points to the recent announcement of Ontario-based Acrobat Research opening a call center in Calais as a good sign. "The strong Canadian/weak U.S. dollar is likely to make investments in Maine look relatively attractive," he says.
As far as the likelihood of a national recession, Reisman says a lot depends on what the Federal Reserve decides to do about interest rates. If the Fed lowers rates and Congress introduces a fiscal stimulus package, Riesman says there'll be a "one chance in three of a recession in 2008."
In the end, recession or no, it may not matter much Down East, Reisman says. "If we have a recession, it won't be pleasant, but things are already not great here," he says. "We're already fairly depressed."
CHARLES LAWTON
Chief economist, Planning Decisions Inc., South Portland; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Consumer confidence, Credit crunch, and Tourism
Chance of U.S. recession 60%
What to watch for: "One thing that's important that people will come to recognize: the aging workforce."
Charles Lawton says a lot of people place a great deal of importance on whether we are heading into ˆ or already in the middle of ˆ a national recession. "That is probably less important than the fact that growth is slowing," he says. "And that's had serious effects whether [GDP growth] ever turns negative or not."
Regardless of a recession, Lawton expects Maine's job market in 2008 will grow by only a half a percent, or roughly 3,000 jobs. Best case, the economy begins recovering by summer, though Lawton fears that the slow growth will have a crippling effect on consumer spending, which would ripple out to other sectors of Maine's economy. On the other hand, he says, a recession probably isn't the biggest factor affecting Maine's economy in 2008. Because of Maine's reliance on its seasonal tourism business, Lawton says the amount of snow Maine gets this winter will probably have a bigger impact than a national recession. "If we had lots of snow and recession versus no snow and slow growth, I'd say snow would have a bigger impact on tourism in the north," he says.
A drop in consumer spending also could harm Maine manufacturers directly tied to consumer products, such as the timber and paper industries, while some of Maine's other manufacturers, such as precision manufacturers, "would be less likely to be directly impacted," Lawton says. Any hits to the paper and lumber industries could hurt Maine's rural areas that depend on those industries. "On the other hand, they already have high unemployment and are suffering from economic declines that predate any recession," Lawton says. "In a sense they have less far to fall."
Southern Maine, which is increasingly tied to the Boston economy, has risks of its own if recession hits, Lawton says. At risk are those York and Cumberland county residents who commute to jobs in southern New Hampshire and the Greater Boston area. "If those jobs dry up, that's going to be adding to unemployment up here," he says.
Looking at 2008, Lawton says one thing businesses will have to address is Maine's aging workforce. Businesses will continue to deal with the loss of institutional knowledge from retirement, but Lawton says companies also have an opportunity to adjust to be more friendly and accommodating to older workers who are working longer than past generations, whether that means offering part-time positions or job-splitting possibilities, Lawton says. "That to me is a big issue that is becoming more and more obvious," Lawton says.
MICHAEL DONIHUE
Professor of economics, Colby College, Waterville; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Housing, Credit crunch, and Weak dollar
Chance of U.S. recession 30%
What to watch for: The "biggest risk out there is [that recession
is] a self-fulfilling prophecy."
Michael Donihue takes a less doom-and-gloom approach to 2008 than many others. He doesn't call himself an optimist, but says he's not the "Chicken Little kind of guy who says the sky's falling." Donihue doesn't subscribe to the idea that the subprime mortgage meltdown could spur a national recession. However, what could cause a recession, he says, is a collapse in consumer confidence fueled by overzealous predictions of recession hyped in the media. He says the "biggest risk" is making this recession a self-fulfilling prophecy. "If it's going to happen it's because everybody believes what they read in the paper or what they are talking to their neighbors about," Donihue says.
While a weak housing sector means fewer construction jobs and bad news for the retail sector, Donihue says "most other sectors of the economy are pretty strong or are showing remarkable resilience." Still, Donihue forecasts "sluggish growth throughout 2008," and notes growth will be "below trend, but not a recession."
Donihue also expects the U.S. dollar to remain low at least throughout the summer of 2008, which may be bad for businesses buying products from overseas, but in the end he expects the weak U.S. dollar to be a "net positive" for Maine. For one, the strong Canadian dollar means more of our northern neighbors will be shopping at our malls, sitting on our beaches and sleeping in our inns, which will probably offset any decrease in consumer spending by Maine residents.
CATHERINE REILLY
Maine state economist, Maine State Planning Office, Augusta
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 40%
What to watch for: "We're learning more and more how Maine's economy is connected to the rest of the world. It's no longer enough to simply know what's in the state ˆ we really need to look beyond that."
Catherine Reilly says there's a 40% chance of a recession, and that what happens in Maine will happen to the national economy. Further increases in the cost of oil, a major geopolitical event or another Hurricane Katrina could push the country over the edge into recession, she says.
She also says all the talk of recession can be a self-fulfilling prophecy as businesses hesitate when making the decision to invest or grow. "A lot has to do with business and consumer confidence," she says. "So much of the U.S. economy is driven by consumers, it's hard to underestimate the importance of consumer confidence." Fallout from the subprime meltdown has also created a lot of uncertainty ˆ and "markets hate uncertainty," Reilly says. "What's troubling people right now is they're trying to figure out what the extent of the impact is. And I think once we get a better handle on that, the economy will do a lot better."
While the housing market in other places in the country is tanking due to "exotic lending practices," Reilly says there was less of that going on in Maine, so Maine's housing market should not be hit as hard. Also, Reilly says some major factors that fuel Maine's housing market, like baby boomers buying a retirement or second home, are still out there and will be less impacted by a recession, if it hits.
All the talk and discussion of recession, however, has created more pressure in Augusta to reform state policies, she says. Reilly says the two major initiatives that Gov. John Baldacci laid out in his State of the State address ˆ consolidating schools and pulling the county jails under the state's control ˆ probably won't have any noticeable effect on Maine's economy in the short term. But she does say the state is rethinking its approach to economic development, which Baldacci also hinted at in his State of the State address. "So if we use this time to streamline and reorganize for today's world, we'll be better off in the long run," Reilly says. "For better or for worse, change seems to happen when there is real financial pressure."
J. SCOTT MOODY
Chief economist, Maine Heritage Policy Center, Portland
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 80%
What to watch for: "I would keep my eyes on Augusta."
J. Scott Moody says the country "is more likely than not" to enter a recession in early 2008. "Historically, credit crunches don't end very well," he says, adding that "ups and downs are going to happen ˆ it's a fact of life."
But asking about a recession in Maine is redundant since the state's private sector has been in recession since 2002, he says, citing data from the U.S. Bureau of Economic Analysis that shows Maine's average private sector income has not changed much since the last recession, only increasingly slightly from $21,140 in 2002 to $21,273 in 2006. "Any growth has been from government."
A national recession would only contribute to Maine's ailing private sector, he says, while money funneling into Maine from the federal government isn't likely to dry up. "The federal government is not going to be cutting Medicare anytime soon," he says, adding that for every dollar Maine sends to Washington, D.C., the federal government sends $1.41 back. "That's a nice cushion heading into a recession."
Moody says the subprime meltdown will not affect Maine very severely, but the resulting credit crunch does have the potential to send ripples through Maine's economy, especially in the housing market.
Maine's business community may also be hurt by what Moody calls the spreading "credit crisis." "Banks have to clamp down," he says. "And not just on consumer loans, but on business loans, as well."
Where the weak dollar is concerned, Moody says it will help businesses that export and the retail sector in areas near a Canadian border crossing, but he's not sure if it will be a net positive. "At the same time, the weak dollar is responsible for high energy costs," he says, pointing out that Maine is a net energy importer. "I'm not sure Canadian tourists are going to be able to offset your energy bill that has doubled."
One other piece of recent data Moody says is very telling are numbers from the U.S. Census Bureau that show for the first time in a very long time Maine's year-over-year net domestic migration has gone negative, meaning fewer people moved to Maine between July 2006 and 2007 than left. It's a small number ˆ just 18 people total ˆ but it tells a larger story when paired with other data, Moody says. According to Census Bureau data, the age group whose net migration has gone from positive to negative at the same time as Maine's total net migration are not the mobile 20- and 30-somethings, but people in their 40s, which Moody points out is usually a stable portion of the population. "If 40-somethings can't make a go of it here," Moody says, "to me that's an indictment of Maine's economy."
JOHN DAVULIS
Chief economist, Central Maine Power Co., Augusta; member, Maine's Consensus Economic Forecasting Commission
Key Factors: Consumer confidence, Housing, and Credit crunch
Chance of U.S. recession 60%
What to watch for: A weak U.S. dollar means "this is probably the right year to get into the export market"
John Davulis expects the first six months of 2008 to be tough. With or without a recession, he expects job losses to be anywhere from 500 to 1,500.
The major cause, he says, is a drop in consumer spending. People are "maxed out," he says. They don't have a home equity line of credit anymore, home values are shaky and oil prices have gone up dramatically. "All they have left to get credit beyond wages is a credit card," Davulis says. "Maine has had an awful lot of growth in retail established in the last year or two," he says. "I'm expecting that there's going to be some closure of businesses because of a slowdown of consumer spending."
Davulis thinks oil prices will ease up in the second half of 2008, and may even decrease by as much as 25%.
While housing prices have been relatively stable in Maine, he does expect them to come down roughly five percent this year and then begin to stabilize.
The bursting of the housing bubble has caused a slowdown in residential construction, which is already showing up in unemployment numbers, he says. Fewer homes being built in Maine spells bad news for Maine's lumber industry, which was helped by the booming housing sector. One thing that has helped is the weak dollar, which helps Maine's lumber products compete with those from Canadian lumber companies. "That sector would normally have a good year because of the decline of the dollar," Davulis says. "But unfortunately construction is down."
The weak dollar offers an opportunity for Maine's other businesses to take advantage of the export market. Davulis also says it could increase business investment in Maine. He cites Tambrands' recent decision to move some of its production from Hungary to its Auburn production facility.
Davulis was surprised by estimates that showed Maine's net migration had turned negative. He says that's a worrying sign because Maine has relied on early retirees migrating to Maine to help fuel new home construction and increases in housing prices. "It's too early to say this is a trend we have to worry about, but it's one that bears watching," Davulis says. "Maine's an attractive state and it would behoove the state to try to continue to attract early retirees, and get them in the workforce, as well, on a part-time basis. I think that would be a great benefit."
CHRISTOPHER ST. JOHN
Executive director, Maine Center for Economic Policy, Augusta
Key Factors: Housing, Energy, and Tourism
Chance of U.S. recession 60%
What to watch for: "Our concern remains that different parts of Maine and different
people in Maine are going to suffer differently, and our attention should be directed towards those that suffer the most."
If the United States does head into a recession in early 2008, Christopher St. John expects Maine would weather the storm relatively well. Unlike some areas of the country dealing with major fallout from the subprime lending meltdown, St. John says Maine's reliance on the second-home market means a weakening national housing market is likely to have less of an impact in Maine. "I do think there will be housing slowdown in Maine, but I don't think it's going to vanish as it almost comes to a standstill in some other markets," he says.
He also argues Maine is better prepared to weather a recession because it has diversified its industry base since the recession of 1990, when Maine went deeper and stayed longer in recession than other states because a big chunk of its economy relied on manufacturing jobs, which often take big hits during recessions. And Maine hasn't become too dependent like some other states have on sectors like technology or energy. "In other words, we have jobs distributed more evenly throughout the economy, and some of those jobs we've been growing are immune to downturns," St. John says, noting health care and call center jobs are less likely to be impacted. "Our economy has become a good deal more balanced with a wider variety of sectors showing success."
Maine, however, won't escape unscathed. St. John says a recession in 2008 would probably contribute to the continued erosion of the state's manufacturing base and have a "mixed effect" on Maine's tourism industry (though he admits the former is very hard to predict). A decrease in consumer spending resulting from recession paired with consistent high gasoline prices will almost certainly impact tourism in Maine. But St. John also says Maine could see an influx of New Englanders looking for a relatively cheap and nearby vacation.
Maine will continue to benefit from funds flowing north from Washington, D.C., St. John says, noting that Maine gets a good return on its tax dollars. "I don't want to overemphasize government spending," St. John says. "But it is a factor."
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