Raquel Frye

It’s a new year and a chance for us to present our yearly outlook for the economy. The Regional Economic Studies Institute (RESI) hosted its 14^th annual Economic Outlook Conference on February 16, 2011 at the BWI Hilton Hotel.  As in years past, the conference provided a platform to present RESI’s economic overview and forecast. The theme for this year’s conference was Are We There Yet? The phrase—commonly used by kids during long car trips—highlighted the question mark surrounding the economic recovery and our eagerness to finally bounce back from the woes that have afflicted over the last three years.

There are many indicators that help us gauge whether the economy is back on track and while many continue to show signs of distress (i.e. the labor market) the road ahead is looking a lot brighter than it was a year ago.  While we may not be “there” just yet, at least we know that we are not headed in the opposite direction anymore.  If you are interested in seeing the presentation and getting a little more detail please see this link.

As I indicated during my last post, this year, RESI participated in a crowd-sourcing activity that involved getting feedback from attendees regarding what they would do if they had power over fiscal, monetary and housing policies.   The top answers submitted by attendees were revealed family feud style.   In my opinion, it was a great opportunity to learn about what people feel are the best ways to tackle the significant challenges that we are facing. 

In addition to DECO staff, the program was composed of several other distinguished guests.  For instance, Robert Hannon, President and CEO of Anne Arundel Economic Development Corporation welcomed us to Anne Arundel County with some facts and jokes.  Following the outlook presentation, Kathleen Snyder, President and CEO of the Maryland Chamber of Commerce gave us an overview of this year’s legislative session and the bills that the Chamber was supporting and opposing.  Last but not least, David Beck, Senior Vice President and Regional Executive and Robert Carpenter, Lead Financial Economist both from the Federal Reserve Bank of Richmond gave a very educational presentation about the Reserve’s dual mandate of promoting price stability and full employment.  They began their segment by giving a broad overview of the Reserve’s policy options and provided data and graphs to illustrate how the Fed’s balance sheet has evolved since the beginning of the recession. 

While I thoroughly enjoyed all the speakers that day, my favorite people that day were a group of extremely bright students.   As a special treat, we had several members of an AP Economics course from Arundel High School in attendance.  As someone who cares about economics education, I was delighted to see a group of students who seemed so genuinely interested in the presentations and eager to ask eloquent and thought-provoking questions.  I can only hope that we’ll be seeing these young people joining the ranks of economists in the near future!

Raquel

To give us your opinion!  Have you ever fantasized about what policies you would put in place in order to get the economy rolling again?  No?! Perhaps it’s something that only we economists like to do in our spare time.  I know I have plenty of ideas and suggestions.

Of course, it’s easy to be an armchair quarterback when it comes to difficult decisions but I think having an open dialogue where ideas and policies are challenged and discussed is extremely important.   In order for policies to have a shot at being successful, they should not be formed in a vacuum far from the people who must deal with the repercussions on a daily basis.

As part of our Economic Outlook Conference this year, we are asking your opinion and we really want to hear it!  You know what they say – sharing is caring. When you register for the conference, please take a few minutes to fill out three brief questions. Your answers will be gathered and shared during the conference in a fun way (hint: it will involve audience participation).   Here are the questions as they appear on our conference page:

• If you were in charge, what policies/programs/legislation would you put in place to lower unemployment?
• If you were in charge what policies/programs/legislation would you put in place to lower the deficit?
• How would you address the challenges facing the real estate market from underwater mortgages to the shadow inventory of homes?”

Even if you can’t attend this year’s conference (which is unfortunate) we are still seeking your input  You can submit your responses right away—HERE!

Check out what some local experts “would do” if they were in charge.

Hope to see you all at the Economic Outlook Conference on February 16^th!

Raquel

As we are approach the end of the year, Thomas and I thought this would be a good time to reflect on key economic events that happened during 2010.  Let’s start with health care reform.  In March, after months of bitter debate, President Obama signed the Affordable Care Act—more commonly known as the health care reform.  The law includes many provisions including prohibiting insurance companies from denying coverage or refusing claims based on pre-existing conditions, providing subsidies for insurance premiums and establishing a new competitive private health insurance market.  Aside from the impact to the health care industry and uninsured individuals, the act will also have overall economic impacts.   Although the actual impacts are cause for debate, according to the Whitehouse’s Council of Economic Advisers (CEA), we should see a number of positive impacts.  Below is a summary of the findings as outlined on the Council’s website.

• Slowing the annual growth rate of health care costs by 1.5 percent would increase real Gross Domestic Product (GDP) by over 2 percent in 2020 and nearly 8 percent in 2030.
• For a typical family of four, cost savings imply income gains of $2,600 by 2020 and $10,000 by 2030.
• Slowing the increasing cost of health care would lower the unemployment rate by approximately one-quarter of a percentage point for a number of years.

We must note that due to the complexities of the bill and all the possible ramifications across many sectors of the economy, this is just an overview of some of the expectations.    What it comes down to in the end is that, good or bad, businesses and people will be affected by this reform for years to come.

Photo Credit: T. Al Nakib

Another significant economic event during 2010 was the Federal Reserve Bank’s announcement that it would purchase approximately $600 billion worth of long-term Treasury bonds and assets by mid-2011 (also known as quantitative easing), in an attempt to stimulate a flagging and sluggish economy.  The Federal Reserve Bank has the dual role of keeping unemployment rate and inflation low (or at least at a reasonable level) via the means of monetary policy.  Short-term interest rates, the Fed’s usual means of monetary policy, were at nearly 0 percent and with the unemployment rate still hovering near 10.0 percent; the Fed had to resort to new methods.    Ben Bernanke, the current Federal Reserve Board of Governor’s Chairman, released an Op-Ed in the Washington post explaining the committee’s decision.

This approach [quantitative easing] eased financial conditions in the past and, so far, looks to be effective again.  Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action.  Easier financial conditions will promote economic growth…. we will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

Which leads us to one of the last battles that have been raging in Congress over the last few weeks.  As their expiration date was looming, Bush-era tax cuts as well as the extension of jobless benefits came to the forefront of political debate.  President Obama worked with congressional leaders on a tax cut deal that would ensure the extension of both.  The deal was mired by opposition particularly by Democrats.  However, late Thursday night, the House of Representatives gave the final approval and the bill was signed into law on Friday afternoon.

There are a number of tax breaks associated with a bill that will put additional money in our pockets.  For example, as a result of the payroll tax cuts, a worker with annual income of $40,000 would save about $800 a year. A worker with $70,000 in income would save $1,400.  The key in determining the overall impacts of these tax cuts will be just how much of that money is spent—further stimulating the economy—and how much will be used  for savings or to pay down existing debt.

As you can see, up until the last minute, several developments had a major impact on 2010 but will have a much stronger impact as we go forward.   What we all hope for in 2011 is a lot more positive economic activity to blog about.

Daraius

In the social circles that I often move in and amidst the cacophony of sounds one hears in most establishments that serve adult beverages , many individuals upon finding out what I do for a living ask me “when is the unemployment rate going to fall?”  After giving my usual two handed speech which leaves many individuals looking somewhat bewildered, I tell them it boils down to the housing market.

The goal of increasing the homeownership rate has been on the agenda of both the Republican and Democrat parties for many decades.  Both sides cite studies that supported the notion that increasing the homeownership rate will ensure stability in the communities as many homeowners mow their lawns on Saturday morning (not too early), crime would go down, and essentially all of the societal ills ascribed to a transient population would be eliminated.   As a result, many communities resisted through zoning or other means building additional rental units and pushed builders to build single family homes or townhomes.

However, we have traditionally been a nation built on mobility-“Go West Young Man” was a motto well into the 20^th century.  Moreover, this credo of mobility has enabled the workforce to move to where the jobs are and has resulted in the US economy enjoying continued growth and prosperity.   The great recession as it is now being titled had its origins in the housing crash and as a result profoundly changed the mobility of the workforce.

In regions of the country that are experiencing a nascent economic recovery, finding skilled workers has been challenging and in many  cases these positions  remain unfilled as ideal candidates are stuck in other regions of the country with a house they cannot sell. To be clear, it is often not the case that they cannot sell their home; it is more likely that if they are able to sell their homes they would still owe a substantial amount to the bank. It has been stated that at least 20% of the homes are underwater in terms of their mortgage in the US.   In this credit conscious society, abandoning your home to the bank, often referred to as a strategic default will not only affect the individuals’ ability to borrow again, but will affect their ability to get a job. The amounts are non-trivial often amounting to tens of thousands of dollars or more.

As a young child when I came across a deep hole, I would toss a rock in it and wait for the familiar splash of water, letting me gauge how deep the hole was.  I suspect that when it comes to the housing market, many people are on the edge of that hole waiting for the sound of the splash.  However, outside of the fact that the number one asset of most individuals has lost anywhere between 10% and 50% of its pre recession value, the lack of recovery in this market will continue to prevent labor from moving where it is needed and this one of the many reasons why unemployment will continue to remain persistently high in many locations for the foreseeable future.

Thomas

On October 21^st, 2010 the Maryland Economic Development Association (MEDA) will organize a conference on the business of health care in Maryland – a timely topic as 2010 has been marked with intense discussion on the enactment of a sweeping federal health care law (i.e. the Patient Protection and Affordable Care Act or Obamacare).   The conference though will not focus on the new regulations made by the new health care bill but the Maryland health care industry and its economic impact on the state economy.

I communicated with MEDA’s Executive Director Pamela Ruff to learn more about MEDA.  MEDA is a nonprofit organization of economic development professionals.  Their mission is to enhance the knowledge and skills of its members and encourages partnerships and networking among those committed to bringing jobs and investment to Maryland.  Established in 1961, MEDA members promote the economic well being of Maryland by working to improve the state’s business climate and the professionalism of those in the field of economic development. Towson University is a member and sponsor of MEDA and Dyan Brasington—the Vice President for Economic and Community Outreach (DECO) at Towson University—is a past president of MEDA and currently serves as the Chair of the Council of Past Presidents.  The MEDA membership includes economic development practitioners employed by government, business, chambers of commerce and other professionals with an interest in the economy of Maryland.  Through its regular meetings, special programs and projects, members address such diverse issues as local planning, workforce, transportation, international trade, tourism and finance.

The Fall 2010 Conference (the Business of Health Care – An Economic Driver for Maryland) may be attended by anyone interested in the health care industry, ranging from an IT development, real estate development, research, or service perspective.  The conference will include several speakers from the private, academic and public sectors providing facts on the Maryland health care industry and diverse opinions on possibilities and challenges for businesses to grow in the health care industry.  The health care industry in Maryland is indeed a large one as the employment level in the health care and social assistance sector was almost 319,000 in 2009 (representing 13% of total Maryland employment), employment growth from 2008 To 2009 was 3.2% (one of the few sectors to add jobs in the State) and the industry generated 8% of total Maryland GDP in 2008.   After an overview of the industry in Maryland, the conference will include two subsequent panels:

• Healthcare businesses – Info Tech (IT) opportunities and Hurdles
• How the healthcare and bio industries are developing

The conference will conclude with a luncheon keynote on the challenges and opportunities of Maryland’s health care delivery system.

While most of the discussion in media nowadays is on laws and regulations in the health care industry, this conference is more centered on business opportunities and job growth occurring in the sector.  The conference will be a great opportunity to learn more about the opportunities and challenges of the Maryland health care industry as well as network with influential professionals who have years of expertise in the sector.

Thomas

One of RESI-AEHS’s constant projects is to analyze and forecast the Maryland economy, specifically employment.  Lately, as you may be aware, the national economy has not performed well.  The latest available national unemployment rate in November was 10%, 3.2 percentage points higher than the rate posted in November 2008.  In the week ending Nov. 28^th, the preliminary figure for seasonally adjusted initial claims was 457,000, a decrease of 5,000 from the previous week’s revised figure of 462,000, according to the Department of Labor.  Yet, as we hear bad news regarding the national state of employment, Maryland’s performance has been more resilient.

• 7.3% of Marylanders who were actively looking for work were unable to obtain employment as of October.

This percentage is still high compared to October 2008’s unemployment rate of 4.8% and above what is considered the full employment unemployment rate of 3.0% (this is the lowest level of unemployment that can be sustained given the structure of the economy).  However, the 7.3% figure was lower than many States, such as California (12.5%) and Florida (11.2%).  Now, how is it that Maryland can outperform a State like California?

There are a variety of reasons for Maryland’s healthier performance when compared to California and following are two reasons.

• First, fewer people engaged in the rush of gaining profit by investing in the real estate industry.  The rate of foreclosed houses in California for October 2009 was 1 in 156 houses while in Maryland the rate was 1 in 348 houses.  A large number of houses were foreclosed in Maryland, but the number paled in comparison to California.
• Second, the governmental sectors, especially the Federal government sector, have an important presence in Maryland, causing a multiplier effect to other sectors.  In 2008, the government sector was the largest supplier of jobs in Maryland (18.6%).

This leads us to the question of; so what is the forecast of employment in Maryland?  In 2010, Maryland will continue to fare better than the national unemployment rate but not quite as well as in 2008 (In 2008, the Maryland unemployment rate averaged 4.4%).  The Maryland unemployment rate should decrease to the 2008 level in the year 2013 according to our forecast.

Thomas

One of the recurring RESI projects is the production of economic forecasts for different institutions.  One of my responsibilities is to forecast economic conditions for Maryland, Baltimore County, and Anne-Arundel County periodically.  Economic forecasting is not a straight-line science, so there can be some marginal errors in predictions.  Nevertheless, governmental institutions and businesses use economic forecasting to make policy and business decisions.

To produce a forecast, a lot of factors are needed; I have to rely on data coming from different sources, such as governmental agencies and some data that could provide a more accurate forecast is just not available.  Economists are often compared to meteorologists.

• However, economic forecasts are frequently regarding outcomes that will occur several months in the future!
• On the other hand, meteorologists only produce forecast for the next several days and they can still get the outcome wrong.

How many times have I planned my weekend based on meteorologist forecasts and found that the weather ended up being quite different?  Still, RESI utilizes an economic model forecast to accurately predict forecasts that our clients can reliably use for their projects and planning.

Example: Personal Income Forecast

RESI has been forecasting personal income for the State of Maryland for many years.  The graphic below shows the accuracy of our economic model by comparing actual to forecasted quarterly growth rate.  The forecast is a complicated process that requires the use of different government data, statistical program software and statistical equations.  For this model, I use data from the Bureau of Labor Statistics, Bureau of Economic Analysis, Maryland Association of Realtors, Maryland State agencies, and other sources as needed.  While I do not pretend that our economic forecast is perfect, I believe that our model does provide an estimated outlook for our clients.