Saturday, December 27, 2008

Local economists called for growth in 2008

In February the Register Guard asked local economists what was on the economic horizon for 2008 (no link to the article). Keep in mind that the recession started in December 2007. I held off posting this at the time because I wanted to compare their predictions to what actually happened.

When it comes to predicting what the economy will do in 2008, the only certainty is uncertainty, said members of The Register-Guard’s Board of Economists.
It’s clear that the national housing slump and related credit problems are dragging down national, state and local economies, the board said, but how long the slowdown will last and how severe it will be are hard to tease out. So many questions are hanging.
A major one is whether the nation will fall into recession.
“The chances of slipping into recession this year are bumping closer to 50 percent,” said board member and state economist Tom Potiowsky.
Board member Bill Conerly, an economics consultant based in the Portland area, puts the odds at about 40 percent.
The recession started two months before this interview was conducted yet both Potiowsky and Conerly couldn’t see the beginning of the biggest recession in their professional careers.
Tom Potiowsky isn’t your run of the mill consultant; he is The State Economist for Oregon. He is a state employee and his office is responsible for developing and disseminating quarterly state economic and demographic forecasts and estimating General Fund revenue for the State of Oregon. He is also an economics professor at PSU.
Bill Conerly is a member of Governor Ted Kulongoski's Council of Economic Advisors.

“The most likely direction is up,” said board member John Mitchell, former US Bank economist who is now an economic consultant in the Portland area.
“There’s a lot of drags out there — housing and the credit situation — but we’ve got strength in trade, and initial unemployment claims are not signaling a recession,” he said, referring to the national economy.
The same is true for Oregon and the Eugene-Springfield area, Mitchell said.
The board, on average, estimates that Eugene-Springfield will eke out employment growth of 0.6 percent in 2008, and the state will gain 1 percent in employment.

Mitchell called for the economy to improve, instead it fell apart. Last month he was one of the keynote speakers at the Home Builders Association 2009 Housing Forecast where he predicted 2009 would be the bottom of the housing slump. Here is a slide from his presentation with my comments.
Another pressing question, the economists said, is whether the credit crunch will move beyond real estate.
“My biggest worry is of the housing market problem flowing into the financial market and that causing more extensive (credit) problems,” Potiowsky said.
Conerly said he shares that concern.
“The thing I’m watching most carefully is whether credit remains available for non-real-estate purposes,” he said. “If the credit problems are contained within the construction sector, then we’re home free.
What I’m worrying about is that businesses that are used to financing their inventories and receivables suddenly can’t get credit.”
Conerly said he’ll also keep an eye on the availability of consumer credit.
“There’s a possibility that major lenders (after suffering losses in housing) would simply lack capital,” he said. Or nervous bank executives could decide to tighten lending standards, he said.
“I don’t see that happening, but that’s what I’m worried about,” Conerly said.
The national housing slump has been a drag on the economy for the past two years, and is now entering a third.
“People did a lot of silly stuff with the expectation that prices would rise at very high rates,” Mitchell said.
Mortgage rates, which are tied to long-term interest rates, rather than the short-term ones that the Federal Reserve Board controls, shouldn’t shift dramatically this year, the board economists said.
Some, such as Mitchell and Conerly, believe mortgage rates will drift up by the end of the year. Others, such as Potiowsky, think mortgage rates could come down a bit more this year.
On average, board members predict that housing permits in the Eugene-Springfield area will drop almost 11 percent this year and Oregon permits will drop 8 percent.
Building permits dropped 50% in March 2008.
Board member Ed Whitelaw, president of ECONorthwest, an economics consulting firm in Eugene, said the board’s tight focus on a small number of indicators, such as job growth and housing permits, fails to recognize broader economic trends. “To limit (discussion) to the indicators we’ve got misses a lot of the underlying criteria that average folks think important when talking about their economic welfare,” he said.
A trend that Whitelaw says he finds troubling is the historically unprecedented inequality in incomes and wealth in the United States. The widening gulf between the haves and the have-nots is especially worrisome during an economic downturn, he said because
more people are “operating at the edge” financially.
“The downturn will affect a larger number of folks more seriously and the economy … will be less resilient than it would be if the income and wealth … were distributed more uniformly,” Whitelaw said.
Ed Whitelaw is also a professor at the University of Oregon along with Tim Duy and Mark Thoma who blogs at Economist's View.