Charlie Colgan started off his annual economic forecast this year with a light-hearted joke, remarking, “the large attendance today is actually really bad news.”
Colgan, a professor in the Muskie School of Public Service, went on to explain to the more than 500 member audience that the large number could only mean that things must be getting “a little dicey” in the economy. After a laugh by the crowd, he quickly got down to business.
With all the talk of recession in the news lately, it’s no wonder that this year’s forecast breakfast on Jan. 9 drew such a large crowd.
The word “recession” is everywhere you turn, and people seem to be working themselves into a panic that the country will actually fall into one. For those who might be unsure what a recession is, all of this panicked chatter can be rather daunting.
“That’s all right, most economists don’t know what it means either,” said Colgan to a student who asked him to clarify the word. He explains that in its most basic definition, a recession is when the country has two consecutive quarters of decline in gross domestic product-the final value of a country’s total goods and services.
A recession can also be the start of an economic depression if it lasts long enough and includes a larger decline in business activity.
This is the major source of fear that has accompanied talk of a recession: that it could slip even further into a national depression.
While Colgan believes that the national economy will fall into a brief recession in 2008, he does not believe Maine will be hit as hard as other states.
“Maine and New England as a whole are not really going to be taking it on the chin this time,” said Colgan.
At a national level, the real hard hit areas will be New York City, Washington D.C., southern Florida, and throughout California. These areas are where the current housing crisis and sub-prime mortgage scare is most significant in scale.
The majority of New England, except for perhaps the Boston area, will make it out a little better off.
This forecast should be of great interest to Maine students who will be graduating in the next couple years. Colgan senses that the 2008 class will see a job market that’s not particularly easy to enter, but not the worst, either.
He says that it will be somewhat on par with the past couple years, especially for jobs here in Maine. Employment growth in Maine has remained rather slow and steady and doesn’t show as many potential dangers as elsewhere in the country.
Colgan says that the idea that there are no good jobs in Maine is a myth.
While the job market in Maine and New England may not be as bad to come into as elsewhere in the nation, there will be a few areas that will get hit harder than others. Retail and construction sectors will see the biggest effects.
Colgan explains that there are three groups of college graduates: those immediately hunting for a job in their field, those who take time off after graduating, and those who take a job in retail, construction, or a similar field for the summer while they hunt for employment in their field for later on.
He says that while the third option has been viable in the past, it will be a risky strategy for the next couple years.
The national trend toward a recession has been driven by a few key factors. The most evident of which is the sub-prime mortgage shock.
Sub-prime lending is the practice of making loans to borrowers who do not have a sufficient credit rating and might be unlikely to pay it back.
From 2004 to 2006, about 21% of mortgages were sub-prime in the United States, up from 9% between 1996 and 2004. Many homeowners around the country are now beginning to default on their loans. Maine has been on average with the rest of the country in this respect.
The second most obvious factor driving the recession has been the close correlation of retail sales growth and house price growth.
Colgan explains that when home prices go up, homeowners feel that they are getting wealthier and spend more in the economy. He also explains that homeowners have been making cash withdrawals from borrowed equity.
Colgan says that this trend isn’t sustainable and will have to be ended.
“The ATM in your house is now closed,” said Colgan.
Although the country may see at least a brief recession as we recover from the housing mess and as oil prices remain high through the year, it will not be as bad as it may seem in the news each night. Maine and New England in particular will be shielded from a good portion of the blowback and should remain balanced in comparison.
Colgan finished his forecast by remarking, “Maine is going to get hit, but not much boom, not much bust.”