Where do they dig up all these dumb professional economist?
Economy may lag, but no recession
N.E. forecast sees wider class divide
By Robert Gavin, Globe Staff | May 31, 2008
The Massachusetts economy will avoid a recession, but high energy costs, the struggling housing market, and anemic job growth will make many people, particularly the poor and less educated, feel like they're in one, according to a new economic forecast.
The forecast, released yesterday by the nonprofit New England Economic Partnership, shows economic fortunes diverging sharply in the state. Those with the education and skills to work in technology, health science, and other knowledge-based sectors will largely prosper as employment in those industries continues to grow at respectable rates of about 2 percent annually over the next five years, said Alan Clayton-Matthews, a University of Massachusetts-Boston professor who prepared the forecast.
But those without such skills and education will struggle. Manufacturing and construction jobs, which have been on the decline in recent years, will shrink about 1 percent a year for each of the next five years, according to the forecast. As a result, older industrial cities, will struggle, too. These cities, such as Brockton and Lawrence, also have been among the hardest hit by the downturn in the housing market and rising home foreclosures.
"We really have a bifurcated economy," Clayton-Matthews said, "with one part doing well, the other poorly."
Overall, the outlook for the state and New England appears glum in coming years. Currently, the state and region are doing better than the nation, thanks to the robust technology and health sciences sectors. New England also did not experience the same speculative surge in housing construction that occurred in other parts of country, particularly in the South and West, and the economy here is less dependent on the sagging construction sector than other regions.
But once the US economy recovers, Massachusetts and New England will revert to their typical pattern of lagging the nation because of high costs, slow population growth, and vulnerability to rising energy prices, forecasters said. Over the next five years, Massachusetts employment will expand at an annual average rate of less than a half-percent, less than half the projected US average.
Such weakness means there's not much room for error, and economists said risks that could derail the economy remain sizeable. Chief among them: housing.
Home prices are forecast to hit bottom in Massachusetts at the end of this year after falling at least 12 percent from the peak reached in the fall of 2005. Prices then will recover slowly. By the fourth quarter of 2012, when the forecast ends, the state's median home price will still be about $10,000 below the 2005 peak of about $368,000, according to projections.
Foreclosed properties, which typically sell for 30 percent or more below market value, will keep prices down, economists said. In a speech at yesterday's partnership meeting, Eric S. Rosengren, president of the Boston Federal Reserve Bank, said the number of foreclosures in New England will remain high for several more years, based on Boston Fed research into the real estate crash of the early 1990s.
Even though foreclosures peaked in 1992 in that crash, they remained at elevated levels for much of the rest of the decade, he said.
The current situation, however, is perhaps more worrisome. The region has experienced foreclosure rates similar to the '90s even though the economy is much stronger, Rosengren said. Massachusetts unemployment, for example, is about half the 9.1 percent peak rate reached in 1991.
"Significant job losses would make the housing problem more serious," he said.
The housing slump, meanwhile, continues to threaten the broader economy, Rosengren said. Delinquencies are rising sharply for home-equity lines of credit, a sign of increasing stress among consumers, whose spending accounts for about 70 percent of national economic activity. These loans, tied to the equity built up in their property, typically are used to finance home improvements and major purchases such as cars.
Rosengren noted these loans are not considered subprime, risky loans made to people with spotty credit and few, if any, assets. Delinquencies in equity lines of credit, which represent about one-third of residential mortgages held by banks, are exceeding the rates of the early '90s, Rosengren said.
Other consumer loans, particularly in parts of the country hardest hit by the housing bust, also are experiencing rising delinquencies, Rosengren said.
Ultimately, if delinquencies spread across consumer loans, more banks will be put at risk. That could worsen the credit crunch contributing to the national downturn as banks try to protect capital by making fewer loans.
"While small- and medium-sized businesses have not generally experienced significant problems with credit availability to date," Rosengren said, "further deterioration in housing markets, if it occurs, could carry over."
Robert Gavin can be reached at rgavin@globe.com.
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