Lingering problems with the housing market and the financial credit squeeze will strongly impact the region's economy, according to the New England Economic Partnership (NEEP).
NEEP released new forecasts for the United States, the New England Region and each of its six states at the group's Fall Economic Outlook Conference, "Back to the Future: Regaining New England's Competitiveness," held recently at the Federal Reserve Bank of Boston. NEEP says growth across the region will lag that of the national average through the remainder of this decade with few exceptions, citing broadening effects of the national credit crisis and economic vulnerabilities extending from the housing market to other sectors of the economy.
NEEP is a nonprofit economic forecasting organization that has been tracking and analyzing the regional economy since 1971. Its members include financial institutions, utilities, insurance providers, government agencies, academic institutions, business services firms, health care organizations, and others.
At the Boston conference, sponsored by the Northeast Utilities System, the economic forecasting group predicted real gross product growth across the region to average just 2.2 percent per year from 2006-2011, with the weakest period to be the fourth quarter of 2007 and first quarter of 2008. This will be followed by a slow and modest recovery, in which all of the states — with the exception of New Hampshire — are expected to have gross state product (GSP) growth at least 0.4 percent below the U.S. annual average. The Granite State will lead the region with a GSP of 3 percent.
New Hampshire is also expected to lead the region in total employment growth, and is the only state in the region likely to grow faster than the nation — logging 1.7 percent annually compared to the United States' 1.1 percent. New England as a whole will average just 0.8-percent annual employment growth.
While Rhode Island's employment growth will register 1 percent per year, just below the national pace, the expansion will be concentrated in sectors of the economy that do not support strong overall growth. And Maine is expected to have the weakest employment growth, showing just 0.5 percent a year.
The good news: the end of the decline in regional housing prices is forecast, with a slow and modest recovery expected to begin in 2008. The peak-to-trough decline in median housing prices is expected to be just below 10 percent.
In addressing the conference theme of regaining New England's Competitiveness, NEEP Vice President Ross Gittell noted that the region has been experiencing population and employment growth slower than the U.S. average and significantly below the growth rates of other regions in the country.
"There is no single factor causing the current vulnerability in New England's regional competitiveness," said Gittell, who is James R. Carter professor at the University of New Hampshire's Whittemore School of Business and Economics, "but rather a confluence of factors that will have to be addressed to ensure a strong regional economic future. Noteworthy among these factors are indications that the region is experiencing a decline in 'attractiveness' to young adults and businesses expanding employment."
Also addressing the region's challenge in competing with other regions, NEEP President Michael Goodman, director of Economic and Public Policy Research at the UMass Donahue Institute, commented, "The problems of the region are diverse. Some are best addressed at a regional level, while some might best be addressed in individual states.
"There are, however, a number of critical areas where New England's leaders should seriously consider working together," he added, "specifically in the areas of transportation and energy policy where the need for careful planning and prudent investment strategies is present in all six New England states. If New England is to become more competitive and once again lead rather than lag national economic growth, these issues need to be successfully addressed," Goodman concluded.
Mark Zandi, chief economist for Moody's Economy.com, opened the conference with a presentation on the U.S. economy's recent performance and current outlook. Zandi indicated that the economy is receiving a lift from the quickly narrowing trade deficit, and that concern that the falling dollar will fan inflation is overdone.
"There remains much to worry about, however," said Zandi.
"Global investors are correctly fearful that there are more losses to come in the U.S. residential mortgage market, and that financial institutions have still not fully accounted for the losses to date.
"And while there has been no discernible economic damage from higher oil prices thanks to a seasonal lull in demand for gasoline and home heating fuel, U.S. gasoline prices could conceivably rise near $4 per gallon, putting an overwhelming strain on household finances as negative housing wealth effects are at their most intense and the job market is at its weakest.
"The economy will avoid recession, but it will be especially vulnerable through next spring. If the financial turmoil boils over again; if oil prices don't recede from $100 per barrel; or if anything else doesn't go exactly right, then the expansion will unravel."
A detailed look at the six New England states was provided by a panel of experts representing the academic world and private industry.
Continued job gains are forecast for the Nutmeg State, with jobs up by 16,600 through August 2007 vs. August 2006, with some weakness anticipated later in 2007-08, according to Edward Deak, professor of Economics at Fairfield University and NEEP Connecticut Forecast chair.
"Connecticut's job losses started earlier, lasted longer and were relatively more severe than that of the United States as a whole," said Deak. "These gains should continue in 2007-08, albeit at a pace equal to the U.S. expansion rate as affected by the housing and financial market conditions."
Connecticut's Real Gross State Product (RGSP) rose by 2.6 percent in 2006, with gains of 0.5 percent and 2.0 percent expected in 2007–08, reaching $188.8 billion in Q4 08 (fourth quarter of 2008). Real personal income rose 2.5 percent in 2006 and is expected to advance by 4.7 percent and 2.8 percent in 2007–08.
The U.S. housing recession has affected Connecticut with non-prime loans exposure at or slightly below the national level. Rising delinquency and foreclosure numbers are possible through 2008, while stagnant or falling financial services bonus income could constrict spending in late 2007 and 2008.
"A study of growth and competitiveness challenges by the Connecticut Economic Resource Center revealed a number of growth-impeding deficiencies, including a trend towards work outsourcing, housing and education gaps, slow growth of an aging population, and relatively high business costs, along with an impoverished and under-trained urban work force," said Deak.
"Despite the problems, an interview with the heads of a few 'Connecticut Fast 50' firms indicated their ability to take advantage of the quality of the state's work force, the attractiveness of the environment, and the flow of STEM (science, technology, engineering, and math) graduates found in the state.
"While Connecticut has its competitiveness barriers, and can always benefit by overcoming them, the state is still an attractive place to do business for a wide range of 21st-century firms," he concluded.
Maine's economy will be notably slower in the period from 2008–2010, despite a slightly more optimistic outlook for 2007. Employment growth in 2008 is expected to fall to a barely perceptible 0.1 percent in 2008 and rise to just 0.6 percent in 2009. And housing will take a big hit.
Home sales fell 16 percent in September 2007 compared with 2006, and new housing permits are forecast to fall by nearly 25 percent in 2007 and another 19 percent in 2008 before rebounding in 2009.
"Even when the rebound occurs, however, it will be to levels nearly one-third below the peak activity of 2004," said Charles Colgan, professor of Public Policy and Management in the Edmund S. Muskie School of Public Service at the University of Southern Maine, and Maine Forecast chair.
"House prices are falling, with the median price dropping from $193,600 in 2006 to a forecast $178,100 in 2008.
"Maine can be seen as making definite progress along a path to become a much more innovative and competitive region within a rapidly changing global economy. It still suffers some cost disadvantages, in common with all of the New England states to one degree or another, and its small size and relatively remote location remain important disadvantages.
"But Maine is very far from being the uncompetitive, business-hostile state that it is often portrayed as being. A more robust and balanced national economy would work wonders for Maine's, and New England's, long-term competitive success," noted Colgan.
Massachusetts' economy will slow in 2008 due to the declining housing market and fallout from the subprime mortgage situation, then rebound in 2009.
The impact of a 10-percent housing price decline (peak-to-trough, as measured by the National Association of Realtors) will be countered, however, by growth due to national and worldwide demand for technology-based products and knowledge-based services supplied by the commonwealth.
And while the average annual rate of employment growth of 0.6 percent will remain below the national average, the state will continue to be a high income and high earnings state. Average wage and salary disbursements per worker at the end of last year were 22-percent higher than in the nation as a whole, and by the end of 2012, Massachusetts workers are still expected to be earning 17-percent more than the national average.
According to Alan Clayton-Matthews, associate professor, Cormack Graduate School of Policy Studies, UMass Boston and Massachusetts Forecast chair, the state is well-positioned to benefit from trends in globalization, and to retain its place at the high end of the economic spectrum in terms of technology, productivity and income.
"The concentration of a large, educated work force enabled Massachusetts to create a vibrant economy despite the loss of half of its manufacturing jobs since 1979," he noted "The state's new economy is based on technology products, asset management, medicine, science, engineering, and other 'knowledge' industries.
"The growing world economy requires high-skilled labor and financial capital, which are in relatively short supply, and therefore in great demand — that's precisely what Massachusetts has to offer," concluded Clayton-Matthews.
Private service producing employment in New Hampshire will grow by 2.1 percent annually through 2011. Professional and business services will post the highest annual job growth at 2.9 percent, followed by educational and health services at 2.5 percent, and a moderate annual job loss of about 1 percent per year is forecast for the state's manufacturing employment. Housing will experience the same decline as that of New England and the nation as a whole.
"New Hampshire, like most states, is probably closer to the beginning than to the end of the becalming of the real estate sector," said Dennis C. Delay, deputy director, New Hampshire Center for Public Policy Studies and New Hampshire Forecast chair.
"Delinquencies for non-prime mortgages and associated foreclosures will continue through the end of 2007, holding down real estate values until well into 2008. Even though housing prices so far have held up well, sales have tumbled from the highs seen in 2005, and sales show no signs of recovery," said Delay.
As for the state's ability to compete with others, he noted, "New Hampshire has the seventh best overall business tax climate in the nation and the best in the Northeast, according to the 2008 State Business Tax Climate Index Ranking from the Tax Foundation.
"New Hampshire's sales tax climate and individual income tax climate were also among the top in the country; however, the state's property tax, unemployment insurance tax and corporate tax indices were among the lowest in the country. Those facts coupled with the high quality of life and standard of living has made New Hampshire a competitive state in a slow-growing region," said Delay.
NEEP forecasters cited Rhode Island's budget deficit as a significant challenge facing the state in 2008. To combat state spending that has grown faster than revenue collection and inflation in the last 10 years, the governor recently announced a deficit reduction plan to reduce government expenditures and create jobs.
Slow job creation is foreseen for the Ocean State, except for certain sectors such as construction. About 4,000 jobs were added in 2007 and an additional 4,400 jobs tacked on to the state's roster in 2008, less than a 1-percent growth over 2007. Construction was among the greatest job creators, together with financial activities, professional and business services, and education and health services. In 2008, construction will also lead with the greatest growth, along with leisure and hospitality sectors.
Taken as a whole, Gross State Product is forecasted to grow 1.0 percent in 2008, compared to the other five New England states where GSP is estimated to grow by 2.1 percent from 2007 to 2008.
Commenting on the state's job creation ability, Edward Mazze, distinguished university professor of Business Administration in the College of Business Administration, University of Rhode Island, and Rhode Island Forecast chair, said, "Rhode Island was 50th nationally in job creation from 2003 to 2006, based on data from the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis.
"Job creation in the state is difficult due to the lack of affordable housing, high personal and business tax rates, and funds to support economic development activities," Mazze said.
"To remain competitive, Rhode Island will need to raise the skill level of its non-college-going population, develop partnerships between business, government, unions, and education to solve the state's economic problems, and promote the state's assets to attract and retain skilled workers and entrepreneurial businesses."
After slowing in 2007, Vermont's economy should realize healthier rates of growth throughout the remainder of the forecast period, according to NEEP.
Output growth is expected to have its second weak year in a row in calendar 2007, followed by rates of growth ranging between 2.5 percent and 3.0 percent over the rest of the forecast period. This will be accompanied by slow payroll job growth of between 0.5 percent and 1.0 percent throughout the forecast period, with labor force growth remaining very slow, nudging towards 0.5 percent towards the end of the forecast period.
In connection with job creation, manufacturing employment is likely to be slightly positive for the next two years for the first time in the last six years, but will be offset by declining construction employment over the same period.
Greatly affecting the Vermont forecast is the pace of housing construction, which has a disproportionate impact on the economy in Vermont, according to Jeff Carr, vice president and economist, Economic and Policy Resources, Inc., and NEEP Vermont Forecast chair.
"The housing market correction in Vermont remains as the most significant unknown and the largest source of downside forecast risk — given the current shakeout in subprime lending and the higher than average contribution that home construction (particularly that of second homes) made to Vermont's recent job and economic growth," he said. "On the upside, the fundamentals of the U.S. economy and the Vermont economy overall remain sound, and the global economy is experiencing strong, broad-based growth."
With regard to the state's ability to compete, he noted, "In Vermont, the question of 'affordability' and remaining competitive in the area of business costs has consistently been a source of policy tension for the greater part of the last three decades. It is likely to continue to be so for the foreseeable future as both business and personal costs in the state continue to rise.
"What is needed is a broad consensus for action among a broad array of groups that appear to have the same objective but differ on how specifically to get there," he reasoned.