Thursday, Jan. 31, 2008

A recession would hurt, but state has a cushion

Economists: Maryland can withstand a recession better than most

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Because of high levels of federal spending and its strong health care industry, Maryland may weather a recession a little better than most states, say economists and fiscal policy analysts.

Even so, the state will still be hurt if a recession — as many predict for this year — emerges, economists say.

Recession fears have risen in various quarters, from company conference calls where executives speak about earnings and stock-price declines, to the Maryland legislature. Many economists blame the slowdown on the ongoing housing and credit crunches that have seen home foreclosures skyrocket in recent months, plus high energy costs and the growing trade deficit.

The two leading economic engines in Maryland — federal spending and health care — are not subject to the same cyclical forces affecting finance, construction and other business segments, said Anirban Basu, chairman and CEO of the Sage Policy Group, a Baltimore economic and policy consulting firm. Education and health care led the state’s sectors in job creation in the first half of 2007, while government services was second, according to a state report.

‘‘The federal government, in fact, will be looking for ways to stimulate economic activity,” he said. ‘‘That’s good news to leaders in Maryland.”

An emergency interest-rate cut of three-quarters of a percentage point by the Federal Reserve last week and an economic stimulus package promised by President Bush and leaders of Congress amount to too little, too late, said Peter Morici, a professor of international business at the University of Maryland, College Park. On Wednesday, the Fed cut the federal funds rate an additional half a percentage point.

‘‘Cutting interest rates alone won’t do it,” said Morici, who formerly was director of economics at the U.S. International Trade Commission. ‘‘2008 will not be a good year.”

More should be done to fix structural flaws in the U.S. banking system, particularly the way Citigroup and other Wall Street banks bundle loans into securities to resell to investors, said Morici, who appeared on C-SPAN last week and Canadian network CTV last week. Last week, Citigroup, which has a significant presence in Maryland, reported a $9.8 billion net loss for the 2007 fourth quarter — compared with $5.1 billion in net income a year ago — primarily related to losses on mortgage-backed bond products called collateralized debt obligations.

‘‘They resell mortgages over and over to generate a lot of fees,” Morici said. ‘‘We need to simplify the mortgage-writing process.”

Basu said the infusion of construction projects and jobs from the Pentagon’s military Base Realignment and Closure program will not help much in Maryland this year, as most of the changes will not occur for at least two more years.

A key difference in a potential recession this year from a relatively mild one that occurred about seven years ago — which some economists consider among the shallowest downturns in U.S. history — is that this one would be more consumer-driven, Basu said. Consumers might not be able to spend as much this time, he said.

‘‘The prospects for a deeper recession this time are greater,” said Basu, who is also an economic adviser to the Baltimore-Washington Corridor Chamber of Commerce and an executive committee member of the Maryland Business Council.

Others cite more potential mortgage-related losses by Wall Street investment firms, as well as housing and stocks still being fairly expensive, as other reasons why a recession this year could be deeper than in 2001.

There are some positive aspects, even to a recession, such as falling oil prices, Basu said.

Value of rebatesis questioned

Economists at the Economic Policy Institute in Washington, D.C., said in a report last week that Bush’s plan would send most of the rebate funds to the wealthiest Americans who don’t need the money as much as those on the lower end. They advocated targeting the rebates to lower-income working families and investing about $40 billion in repairs to bridges, schools and roads, as well as more aid for the long-term unemployed and states.

Maryland merchants favor a stimulus package that would boost consumer spending, said Thomas Saquella, president of the 600-member Maryland Retailers Association. Holiday retail sales nationally increased by only 3 percent in 2007 over 2006 to $469.9 billion, which was the lowest increase since 2002, according to the National Retail Federation. That group had forecast a 4 percent holiday sales increase.

The Maryland Retailers Association projected only a 2 percent increase this year across the state. Holiday retail sales in Maryland might not have reached even that, Saquella said.

‘‘It was pretty grim news,” Saquella said. ‘‘One company that hasn’t laid off employees before did so recently. Companies kept tight control of their inventory, which helped.”

The first half of the year, in particular, will be tough, he said. ‘‘We’re hoping the third and fourth quarters will turn around,” Saquella said.

The American Bankers Association’s Economic Advisory Committee expects real economic growth to slow to 1.25 percent in the first six months this year and rise to 2.25 percent in the second half. The panel projects the national unemployment rate rising ‘‘moderately” to 5.3 percent by the end of the year, while consumer prices should not increase as much as last year.

Steps were being taken by monetary policymakers to address the downturn before this month that should have a positive impact late this year, Basu said. But he agreed the first half of the year will be difficult.

‘‘I expect most business people to adopt a conservative attitude in hiring,” Basu said. ‘‘Job creation is looking to be quite slow.”

Maryland’s job growth averaged about 1.1 percent last year, slightly lower than the nation’s 1.3 percent employment growth rate, according to a report released last week by the Maryland legislature’s Office of Policy Analysis. That differs slightly from figures from the state Department of Labor, Licensing and Regulation, which showed a 1.4 percent payroll gain in Maryland in 2007.

‘‘Maryland seems to be weathering the market churnings much more favorably than the nation,” Labor Secretary Thomas E. Perez said in a statement.

Last week, Warren Deschenaux, director of that office, advised lawmakers to take a cautious approach in spending this session partly because of uncertainty over the economy. Also this month, Maryland Comptroller Peter Franchot (D) also urged fiscal restraint in a speech given at Chevy Chase Bank headquarters in Bethesda to business and political leaders. He called for more focus on high-paying industries such as biotechnology.

‘‘While Maryland is blessed with a strong economic foundation, we know that we are not immune to national trends and understand that things are likely to get much worse before they get better,” Franchot said, according to a transcript of his speech from his office.

Jorge Ribas, president and CEO of the Mid-Atlantic Hispanic Chamber of Commerce in Germantown, said he has heard from numerous local companies that are hurting. ‘‘Many companies have been in a recession for the past few months,” Ribas said.

Interest rates are expected to fall to historically low levels, leading to more homeowners refinancing their loans, according to Carl M. Freeman Cos., the Olney parent of First Republic Mortgage Corp.

This report originally appeared in The Business Gazette.