Economic & Policy Resources of Williston, in conjunction with the New England Economic Partnership, has issued its November 2009 economic forecast for the state of Vermont, which indicates that while the economic downturn will bottom out in the fourth quarter of this year, jobs will decline through the second quarter of 2010 and economic growth will not return to normal levels until at least 2011.
Forecast in Brief
The November 2009 Vermont forecast for NEEP expects the Vermont economy to
experience a “bottom” during the fourth quarter of calendar 2009. However, the
pace of recovery will be slow and state labor markets will experience the lingering
effects of the “Great Recession” through the third quarter of calendar 2010.
o As in the May 2009 NEEP forecast update, more “normal” rates of growth
for most of the state’s key macro-variables will not return until at least
calendar year 2011, and as late as calendar year 2012 for some others, when
the effects of the housing market downturn and the long process of global
financial and household de-leveraging have fully run their course.
Among the major macro-variables for the Vermont economy over the next 4+
calendar years, it is expected that:
o Payroll jobs will decline for a total of 11 consecutive quarters, or through the
second quarter of calendar year 2010.
o The total decline will be 17,900 jobs from peak non-farm employment levels
in the second quarter 2007 (an improvement from the NEEP forecast outlook
of last May where deeper payroll job losses were expected), and the pace of
recovery will be halting and insecure.
o When the recession has run its full course, payroll job losses in Vermont will
be larger in percentage terms than either of the payroll job losses
experienced at the national and New England regional level in 2009. Since
the pace of job recovery in Vermont is expected to be slow, the pace of
recovery will also lag the U.S. and New England regional economies in
calendar 2010, with the pace of recovery for Vermont jobs slower than the
U.S. average through calendar year 2013, but slightly stronger than that at
the New England regional level over the same out-year time frame.
o The unemployment rate in Vermont will rise to levels not experienced since
calendar year 1983, while both the U.S. and New England regional
economies will likewise post 10 to 20 year unemployment rate highs.
o However, despite the punishing recession and the relatively slow pace of the
state’s recovery once it in fact begins, Vermont’s unemployment rate will
continue to remain among the lowest in the New England region throughout
the forecast period.
The housing market downturn nationally, regionally, and in Vermont, is still
underway, although the pace of house price declines has clearly slowed and by some
measures some housing prices have even seen some increase. The existence of
substantial inventory, the real possibility of additional foreclosures, and the near
certainty of relatively tighter lending standards will likely continue to place
downward pressure of prices. Indeed, the weak character of housing markets is a
source of considerable downside forecast risk in this NEEP forecast revision.
o It is expected that additional foreclosures and a substantial inventory of
unsold units will continue to put downward pressure on house prices at the
national level through the fourth quarter of calendar 2010.
o So far, although delinquencies have risen substantially in Vermont, they
have not risen to the levels where foreclosures and forced liquidation sales
have pushed housing prices down significantly. Compared to other New
England states and states in other regions, house prices in Vermont have
fared relatively well with only modest declines.
o The forecast expects housing prices in Vermont to decline to a lesser degree
than those in the other New England states, and relative to the U.S. average
overall, but they will not begin to recover until at least calendar year 2011.
Oil prices have once again increased to above $80 per barrel representing another
source of downside risk in this revised NEEP forecast.
o Vermont households and businesses enjoyed the relief provided by relatively
low energy prices last Winter and Spring, however relatively high energy
prices sustained at the current level could reduce other forms of household
and business spending and slow down the rate of the expected historically
slow rate of recovery.
o Vermont is particularly sensitive to energy costs due to its rural nature, its
dependence on vehicle-based tourism and visitor traffic from the
northeastern region of the U.S., and the energy cost-intensive nature of its
key manufacturing sectors. Therefore, the level and pace of any energy
price increases over the forecast period are a point of considerable concern
and potential downside risk.
Overall Gross State Product, will decline in 2009 and 2010, and experience a bounce
back in 2011 and 2012, and then resume a more normal rate of growth in 2013.
o Real Personal Income in Vermont is expected to remain flat in 2009, decline
in 2010 and 2011, and then resume an upward track in 2012 and beyond,
with recovery in this variable lagging behind that of both the regional and
national recoveries.
The Current U.S. Situation—A “Great Recession” Indeed…
a. Current Conditions: The November 2009 NEEP forecast for Vermont was completed in
a time (September through mid-October) when there were somewhat mixed signals from most key economic indicators. Despite their mixed nature, it appears that the preponderance
of the data show the economy has pulled back from the precipice of a much more serious
downturn and is at worst nearing what will be considered a “bottom” if it has not yet entered
the initial stages of a modest turnaround (this will become clearer in the near future). The
third and fourth quarter (so far) of calendar 2009 have seen encouraging movements in
several key indicators, such as slowing declines in house prices, slowing jobs losses, and
moves towards “normalization” in credit and financial markets. Once initial estimates for
third quarter Gross Domestic Product are released, it is likely that U.S. inflation-adjusted
output actually grew during that quarter simply because factors such as inventory liquidation
have become markedly less negative.
However, despite these encouraging signs that the economy is in the process of bottoming,
whether or not the U.S. economy has begun a turnaround is merely a technical argument for
the economists. Given the depths to which the U.S. economy has fallen in many areas (e.g.
housing consumer confidence, and many types of manufacturing—such as vehicles), there
needs to be dramatic recovery (e.g. gains in excess of 25% to 50%) in many parts of the
economy before economic conditions could once again be termed “normal”—much less
“good.” In addition, there are several significant downside risks moving forward, including
(although slowing) still hefty losses in the labor market, the likelihood of another spike in
mortgage foreclosures, big trouble in commercial real estate markets, tepid consumer
confidence and spending, and oil prices that have now crept back up to the $80 per barrel
level for crude oil.
b. An Especially Troubled Labor Market: Among the trouble spots for the economy,
none is more evident that the U.S. labor market as shown in the chart below. From April
2007 through September 2009 conditions have deteriorated dramatically, and the
unemployment rate has reached 9.8%, a 26 year high. The U.S. unemployment rate is
expected to go higher, peaking at 10.1% in the second quarter of 2010. While monthly job
losses have slowed over the last 6 to 8 months, to be this far into the current economic
downturn with continuing losses over 200,000 jobs per month is unprecedented in post-war
history. For the 22 months since the onset of recession, a total of 7.2 million non-farm jobs
have been lost—or 5.2% of total non-farm employment peak in December of 2007.
Similarly, the unemployment rate has jumped 4.8 percentage points over that same period.
The official unemployment rate of 9.8% for September does not reveal the entire labor
market picture. The so-called “U-6” unemployment rate currently stands at a very high
17.0%. This measure is a more comprehensive picture of the state of labor markets in that it
includes workers “marginally attached” to the labor force, individuals working part-time for
economic reasons, and discouraged workers. The U-6 measure of unemployment is at a
record high since the data series was first collected back in January 1994. Some analysts
argue the U-6 rate is a better gauge of labor markets as it gives a more accurate feel for what
is happening on the street, measuring those who would like to work but are not able to find
positions or sufficient hours. The green line in the graph below is the difference between U-3
and U-6 rates. From 1994 to early 2009, the difference between the two rates was relatively
stable. Since late 2008 and early 2009, the difference has increased significantly. This likely
is a reflection of employers’ attempts to cut costs but retain workers (e.g. by moving workers
from full-time to involuntary part-time work status). According to the chart below, this
difference between the U-3 and U-6 unemployment rates appears to have reached a plateau
in the past three months.
Even more disappointing is the preview of the benchmark employment numbers due out in
February 2010. According to the BLS’ analysis of QCEW1 data, the U.S. lost an additional
824,000 jobs over the twelve month period ending March 2009—a total above and beyond
what has already been reported in the payroll jobs data. This would bring total job losses over
that time period from 4.8 million to 5.6 million. An additional 824,000 job losses added to
the current total job loss from peak nonfarm employment in December would equal 7.8
million jobs or a whopping total of 5.6% of payroll jobs from pre-recessionary peak job
count levels.
1 QCEW means Quarterly Census of Employment and Wages—which is a compulsory employment and wages paid report filed by each business in every state covered by state unemployment insurance laws. The QCEW data comes available about 5-8 months after the close of a calendar quarter depending on the state (Vermont reports five months after the close of the quarter).
In addition, the geographic breadth of the job losses are similarly breath-taking, with the
number of states losing jobs on a year-over-year basis in most major sectors of the U.S.
economy totaling above 40 states in all but two NAICS supersectors (see Table 1). Unlike
previous economic downturns where the jobs losses were more geographically concentrated
and more sector specific, there is no regional or sectorial “safe-haven” for this downturn.
Workers cannot migrate to other regions or change jobs this recession as a solution to their
unemployment. Quite simply, there is no place to go for unemployed workers and their
families. Only in the Education and Health Services and Government industry super sectors,
are fewer than 40 states reporting year-over-year job losses.
c. Declines in Consumption: Reflecting the severity of the current downturn and the
widespread pain in labor markets, consumption indicators have shown that households have
significantly reigned in their spending. The chart below shows real retail sales (adjusted for
inflation) appear to have bottomed out at 11.8% below levels of the prior year. Over the past
three months, inflation-adjusted retail sales have “regained some ground” to the point where
they are “only” 5.8% below where they were at this time last year. The second chart below
shows real retail spending levels, which have fallen to levels last seen in 2001. A strong
recovery will be unlikely without American consumers propelling it forward. However,
households still have significant levels of debt on their balance sheets and just how much of a
contribution they will be able to make is still unclear. Progress has been made to bring down
household debt, but there is still work to be done to get to a more reasonable level of debt
(see the chart below), and this would suggest tepid spending looking forward.
Consumer sentiment is also an important factor affecting consumer spending. The Consumer
Confidence Index has reached a somewhat of a plateau after coming off of the bottom earlier
this Spring. However, Consumer Confidence readings over the last 6 months remain
relatively weak when compared with “normal” readings (see the chart below). The
Expectations Index subcomponent was essentially flat over the month, while the Present
Situations Index subcomponent fell from 25.4 to 22.7. These historically low readings are
indicative of on-going concern on the part of consumers over income and job security issues
(e.g. they currently are only a bit less than “completely frightened”), especially in the context
of continuing substantial job losses of greater than 200,000 per month over the last several
months.2
It seems apparent that the American consumer still is not “sipping the recovery is
imminent or underway Kool-Aid.” Moreover, even if that were the case, households may
be “tapped out” and are simply not in the position to increase spending. Many households
have lost a significant amount of wealth through equity market and house price declines and
this is important to those who are already carrying a substantial amount of debt. The
historically weak financial position of consumers and their lack of confidence suggests that
there will be significant constraints on consumer spending as the U.S. economy begins its
climb out of the current deep “recession hole.” Small improvements once the recovery gets
moving are going to be viewed as technical in nature since the economy will need to improve
significantly before it will begin to have the “feel” of recovery to many participants.
At least some of the recent encouraging news in spending has been driven by government
incentive programs such as “Cash for Clunkers” or the first-time home buyer rebate of
$8,000—which ironically has apparently been claimed by some who neglected to actually
purchase “a home.” The extent to which these incentives have a lasting impact is not yet
clear, and there are real concerns that their effects may only be temporary. Cash for
2 As has been mentioned in the past, such 200,000+ job losses only look good against a background of job losses exceeding 500,000 per month that were experienced last Winter.
Clunkers, officially called the Car Allowance Rebate System (CARS), ran from July 1 to
August 25th, with a strong consumer response. The original $1 billion appropriation was
supplemented with an additional $2 billion after the program quickly exhausted the original
budget. A total of 690,114 vehicles were traded-in and sold—corresponding to a total of
$2.9 billion in rebates for an average rebate of roughly $4,200 per vehicle. All of the top ten
vehicles traded in were trucks, SUVs or vans, and nine of the top ten vehicles purchased
were cars. Overall, 84% of the trade-ins were trucks and 59% of new vehicles purchased
were cars. The average trade-in achieved 15.8 miles per gallon, while the average mileage for
new purchases was 24.9 miles per gallon, an increase in efficiency of 9.1 miles per gallon—a
58% improvement.
This shift to more fuel efficient vehicles was one of the stated goals of the program, and in
this sense the program may have been somewhat effective. While the media and the
government have been full of praise for the initiative and declared the cash for clunkers
program “wildly successful”, there may be some still-undetermined effects. First, after the
trade-in the old vehicles were required to be disabled and while some were dismantled for
spare parts, many were destroyed. This will reduce the quantity of vehicles available in the
used car market, and therefore is likely to push up prices in that market. The increased price
for used-cars may make it cost prohibitive for some buyers—particularly those in the lower
end of the household income scale and those with bad credit who likely were already priced
out of the market for new cars.
Second, the incentive to purchase a car during the program in the months of July and August
may have simply encouraged consumers to change the timing of their purchase. Those that
would have purchased in June may have simply waited amidst talk of the program “soon to
be implemented,” and those that would have purchased in September and October may have
actually done some forward-buying. If vehicle sales were simply concentrated in the two
month period, essentially stealing consumption from the months before and after, there
would be no “new demand”--just a change in the timing of demand. While September
vehicle sales do appear to be relatively low, data on vehicle sales in the fall months will help
test that conclusion.
Third, with many car dealers desperate to clear out their inventory, any additional sales
generated by the program may have just served to reduce existing inventory. The real
economic stimulus would come from an increase in orders to the auto manufacturers which
would lead them to ramp up production, hire more workers and order more of the inputs that
go into vehicle production. Simply drawing down existing inventory might help dealers
reduce costs, but would not spark more production at the factory level. Therefore, despite the
program’s apparent “success” there are concerns that any positive impact will be only
temporary. Looking forward, the key question will be whether or not the government
incentive will have any lasting impact on increased production. The chart below shows
monthly vehicle sales through September.
d. Housing Markets: Key indicators for U.S. housing markets suggest that price declines
have begun to abate, and by some measures have even turned positive. In part helped by the
first-time home buyer $8,000 tax credit, these gains in housing are fragile and may depend on
an extension of the incentive. The Case-Shiller Index for 20 major metropolitan markets has
had positive movement for 3 consecutive months, as shown in the chart below. These
monthly price increases came after 36 consecutive months of flat or negative changes in
housing prices going back to June of 2006. Despite the month-to-month growth in prices, on
a year-over-year basis, the index is still down by 11.4% as shown in the chart below.
New single family housing is the most important segment of the housing market, and
indicators for Single Family Sales and Starts also appear to have leveled off, and perhaps
may have even begun the process of “turning the corner.” First time home buyers have likely
been enticed into the market by attractive prices and the tax credit, and this activity has
boosted sales. Developers appear to have taken cues from sales data as Single Family Starts
have ticked up as well, but this may not necessarily be a good thing for the housing that is
already struggling to work down excess inventory. With so much excess inventory,
additional units added to supply may only serve to place continuing downward pressure on
prices. If potential buyers expect prices to continue to slide, they may be encouraged to delay
their return to the market—to the further detriment of prices.
e. Are We There Yet?: In September, Federal Reserve Chairman Ben Bernanke stated that
the recession was very likely over from a technical standpoint. The Organization for Economic Co-operation and Development (OECD) also stated in September that the recession has ended with “clear signs of recovery” in the seven largest economies as well as
the four important developing nations that make up BRIC (Brazil, Russia, India, and China).
According to data through the second quarter of 2009, the contraction in real output of
several of our key trading partners has slowed, and Japan and Germany have actually
returned to expansion, as shown in the chart below. These indicators from other major
economies are encouraging but also show that we are not quite “out of the woods.”
Looking forward for the U.S., although a positive GDP report seems likely third quarter of
2009, it is almost certain that labor markets will continue to struggle. Additional job losses
are almost a certainty, and this latest NEEP forecast is for the U.S. unemployment rate to
peak at 10.1% in 2010Q2 and come down only very slowly as the economy recovers.
In line with a bottoming/potential recovery in global economies, the Reserve Bank of
Australia raised its key cash interest rate. This marks Australia as the first country of the G-
20 to tighten in its monetary policy by raising key interest rates. It is important to note that
the Australian economy has so far avoided a drop into recession. Fed Chair Ben Bernanke
has suggested that states-side the Federal Reserve would keep the federal funds rate at or
near its current level—which is at a record low—for an extended period of time. The
European Central Bank decided to hold interest rates steady on Oct 8th, with little indication
of raising rates until at least the middle of calendar year 2010. Given the prospects for only a
slow, restrained turnaround in the U.S. economy and many of the economies of the western
world, it is unlikely that there will be a tightening in U.S. monetary policy any time soon—
perhaps as long a year to even a year and one-half. This is especially true given the huge
amount of excess capacity currently in the U.S. economy—as measured by the historically
large gap between current GDP levels (or production activity) and the non-inflationary level
of potential GDP. In 2009Q2, actual output was 6.8% below estimated potential output, a
slack in the economy not seen since 1982. This difference and a recovery scenario is shown
in the chart the below.
f. Near-term Recovery Prospects: Many economists and analysts are in agreement that the
U.S. economy has reached or will reach a bottom soon. Much less agreement surrounds
predictions on the shape on the recovery--whether it is a “V,” “U,” or an “L” shaped
recovery. A major concern going forward will be the timing and effects of the necessary
monetary policy pullbacks and slowing of federal government spending.
The Federal Reserve has slowed its purchases of mortgage-backed securities, which will total
$1.25 trillion. This has had the effect of keeping mortgage rates low in an effort to ease the
housing crisis. Other actions that the Federal Reserve will contemplate in the future are
raising the federal funds interest rate, withdrawing debt guarantees, and offering interest on
funds that banks hold in reserve at the Fed. The Fed will be forced to perform a delicate
balancing act with regards to monetary policy over the next 1 to 4 years. It will need to soak
up excess liquidity before substantial inflationary pressures take hold, yet at the same time
the risk of tightening too soon and choking off the recovery exists, perhaps even leading to a
second downturn—or the dreaded “W-shaped” recovery.
The beginnings of a recovery at the end of calendar year 2009 or in first half of 2010 is
grounded in the belief that by that time;
(1) The effects of the $787 billion Stimulus Bill continues to have positive
macroeconomic impacts;
(2) Credit and financial markets continue to normalize without further volatility
shocks;
(3) The correction currently underway in housing markets will run its course,
bottom and at least some regional real estate markets will begin to turn
positive, and mortgage rates do not spike which would lead to additional
downward price pressure;
(4) Unemployment rate increases begin to abate;
(5) Federal Reserve successfully completes its monetary policy balancing act,
without plunging the economy back into recession or encouraging
substantially higher rates of inflation.
Indeed, looking forward just how the unprecedented intervention by both fiscal and monetary
policy are withdrawn from the as the private sector recovers—and takes over—is one of the
key unknowns in the U.S. economic outlook. We remain in uncharted territory, and a
smooth transition to a self-sustaining economic recovery path will take deft execution of both
monetary and fiscal policy against a backdrop of comprehensive health care reform, efforts
for financial services reform, and the potential passage of a so-called “cap and trade”
proposal regulating emissions.
The Vermont Situation
a. Current Conditions: Vermont economic conditions have followed the national trend—
including thankfully an apparent slowing in the rate of economic decline in the state over the
last 3 to 6 months. As at the national level, the NEEP forecast expects a turnaround in
inflation adjusted output in 2009Q3, followed by a bottoming in labor markets (along with a
peaking in the state’s unemployment rate) by the middle of calendar year 2010.
Looking at the state major indicators, the impact of the recession in Vermont has been most
evident in the job market. So far during this recession, Vermont’s job losses have been high,
but have not yet reached the just-over-6% decline in non-farm payroll jobs that occurred
during the punishing 1990-1991 recession. That recession was a particularly harsh downturn
for Vermont and the New England region as a whole, and in many respects represented the
most severe economic and labor market downturn in Vermont dating back to the Great
Depression of the 1930s. Currently, nonfarm payroll jobs have contracted by -5.0%. Job
losses in Vermont have slowed over the Summer and through the Fall, and another sharp
drop off appears unlikely. The Construction and Manufacturing sectors have been hit
particularly hard, as second home construction has all but shutdown in the state, and the
already difficult situation in Vermont’s manufacturing sector were made substantially worse
by the recession and the continuing struggle the state has with elevated energy prices.
The chart below compares the decline from the peak in non-farm payroll jobs this recession
versus the previous 5 recessions in percentage terms. Note the downturns of 1991 and 2001,
which have been characterized as “Jobless Recoveries.” It took 60 and 42 months in 1991
and 2001, respectively, for the labor market recovery from those recessions to reach their
respective pre-recession employment levels (e.g. the point of full recovery). Previous
recessions were followed by much shorter periods of recovery. While this downturn has not
yet resulted in job declines as harsh as the 1990-1991 downturn, the substantial job losses
seen in the state in the last quarter of 2008 and beginning of 2009 far exceeded those of the
relatively short and shallow 2001 economic downturn.
In terms of the year-over-year change in payroll jobs through the month of September 2009,
the state ranks toward the bottom of the New England states. In total payroll jobs, Vermont is
down 4.1% from one year ago, and ranks 4th out of the 6 New England states. The state ranks
last in the region in Private Sector year-over-year job change, a decline of 4.9% percent.
Although it is true that no other New England states are in positive job change territory, only
the state of New Hampshire—with Total and Private Sector job declines of only 2.4% and
2.7%, respectively—cracks the “Top Ten” nationally in terms of its payroll job change
performance.
The unemployment rate in Vermont increased from 4.5% in May of 2008 to 7.4% in May of
2009, and has declined since then. The official rate sits at 6.7% as of September, although
there are substantial concerns with this data that appear to suggest labor markets in the state
have improved. As a small state, Vermont is always subject to the possibility of a small
sample size affecting statistical estimates, which would only be revised at a later date. There
are also seasonality adjustments that may over- or under- adjust the raw data, especially with
a relatively small sample size. The decline in the unemployment rate could partially be due to
changes in the labor force, however there is little data to support this notion. Data show the
month of July saw a large increase in both jobs and employed Vermonters, although there is
little to corroborate such job growth. Despite the recent decline in the official rate, the NEEP
forecast expects unemployment to increase through 2010Q3.
Source: Economic & Policy Resources. 11.10.2009