State economists: Slow, tentative recovery still a worry

Tom Kavet

The state’s two economists say the Vermont economy is recovering, but the climb out of the three-year recession will be slow and uneven.

Economists Jeffrey Carr and Thomas Kavet, in a joint presentation of the consensus revenue forecast to the Emergency Board, predicted that the state’s revenues will increase only very slightly this year and will likely gain some momentum in fiscal year 2012.

They described their suggested changes to the state revenue projections as “technical adjustments.”

In fact, Kavet and Carr predict only a $3.8 million increase in state income from tax receipts for the General Fund in fiscal year 2011, which began on July 1. (The total General Fund revenues estimate is $1.09 billion, including the slight uptick.) Next year, the economists foresee a $15.4 million increase in the state’s budget revenues.
Any increase – even a small uptick — is good news for the state. But it won’t go very far in the next budgeting cycle, as the state still faces a revenue gap of roughly $115 million, according to Steve Klein of the Legislature’s Joint Fiscal Office. The deficit comes on top of three years of budget cutting.

Kavet told lawmakers the consensus forecast does not take into account a possible double-dip recession. Though national economic models aren’t predicting a second recession, Kavet warned that the European financial crisis and a potential sudden withdrawal of federal stimulus funding could convulse the nation’s fragile recovery.

“We’re still in a situation of uncertainty,” Kavet said. Much depends, in his view, on how the federal government withdraws funding for states and what the “capacity of the private sector is to fill that void.”

The stimulus funds from the feds pumped $1 trillion into the national economy and represented 7 percent of gross domestic product during the recession.

Kavet said the spending is the underpinning of the economic rebound, and as it slows to a trickle, “it could make the recovery uneven.”

There is a 20 percent to 30 percent risk that the nation could go into a second recession in the first quarter of next year, he said.

Both Carr and Kavet said the situation bears close attention. On the other hand, they see encouraging signs in Vermont’s economy.

“We’ve had so much bad news so long that there is an accepted sense of pessimism that exists,” Kavet said. “Just like when people think good times are never going to stop. I’m seeing things in leading indicators that we could see meaningful growth.”

Jeffrey Carr

The economic indicators are split. Here’s the good news/bad news:

The good news: U.S. corporate profits are up by 40 percent since the economy bottomed out in 2008 because of heightened worker productivity levels. Carr and Kavet say that means businesses will likely begin hiring again soon.
The bad news: Most of the growth is among large companies that can rely on corporate bonds and stock offerings to raise capital. Small businesses, which are the backbone of the economy, must borrow from banks to make capital investments and business credit is still very tight, according to the two economists.

The good news: Businesses are already hiring temporary workers, and historically, that means full-time permanent employees won’t be far behind. Another good sign: the work week is lengthening, Carr said, which means that employment rates may tick up.

The bad news: Nationally, long-term unemployment (workers who can’t find jobs for more than six months) represents half of the 9.5 percent of Americans now out of work. This will inevitably have an impact on social services. “If the separation goes on longer than that, you have to worry about workers losing skills,” Carr said.

Consumer spending

The good news: Consumer confidence is up from its lowest point in the recession.

The bad news: Consumer spending, which represents 70 percent of the economy, is still only at 2003 levels, the economists say.

Real estate

The good news: Property owners in the state are still coming out ahead; Vermonters who purchased housing 10 years ago are still seeing an 80 percent return on their investments. In Michigan, property values have remained static over the same period.

The bad news: The real estate market is flat and will continue to take a long time to rebound in Vermont and elsewhere. Carr says the nation has reached a 13-year low in mortgage lending.

Carr, who has been an economic analyst since 1980, ended the presentation with this bit of perspective on what he referred to as the Great Recession in his report: “I haven’t seen anything like what we’ve been through in the last two years.”

Gov. Jim Douglas, a member of the Emergency Board, said he is relieved that the economy is “out of freefall.”

“Obviously, this is still going to be a challenging (situation) for budget writers,” Douglas said. “Even with the adjustment, we have a $100 million budget gap.”

After spending time recently with his colleagues in the National Governor’s Association, many of whom balanced their budgets on stimulus funds from the federal government that now look unlikely to materialize, Douglas said: “I feel relatively good about where we are.”

Vermont budget writers hoped to use $62 million in enhanced Medicaid funding to help the state make investments that will save money down the road. For example, it had set aside $3.1 million for community housing and other programs for prisoners and $13.5 million for the Agency of Human
Services caseload reserve. Nolan Langweil, of the Joint Fiscal Office, told lawmakers earlier in the day that the state may still receive some funding from the feds, but it will likely be $30 million to $40 million.