Thursday, Jan. 31, 2008

A bumpy road, but state has 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 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.

‘‘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.”

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.

‘‘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) 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.