State economy unlikely to rebound in 2009
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By Peter Hirschfeld Vermont Press Bureau - Published: January 11, 2009
BURLINGTON – Leading economists say the state's jobless rate, already at a 15-year high, will climb further in 2009 before rebounding from the deep recession in 2010.
And home values in Vermont, which until now have held relatively steady, are expected to see double-digit deterioration in what many are calling the worst national downturn since the Great Depression.
The predictions were part of grim fiscal tidings at the 18th annual Vermont Economic Conference on Friday, where economists from around the country prepared an audience of about 200 bankers, businessmen and elected officials for rough waters ahead.
"This is a very serious downturn, and it's only going to get worse," said Gus Faucher, director of macroeconomics at Moody's Economy.com. "This is going to be the worst downturn since the Great Depression."
For Vermont, though, the ill-effects may be less pronounced than the infamous recession of the late 1980s and early 1990s. During that downturn, according to UVM professor of economics Art Woolf, Vermont saw 6 percent of all its jobs disappear.
"That was the mother of all recessions for Vermont," said Woolf, who served as state economist at the time. "It was right after a major housing boom, followed by a huge housing bust."
By comparison, only about 2 percent of Vermont jobs have fallen victim to the current downturn. Woolf said Friday that Vermont lost 5,000 jobs in 2008, many in the manufacturing and construction sectors. The state will likely lose another 4,000 jobs in 2009, he said, bringing cumulative job losses to somewhere on the order of 3 percent.
Because of erosion in the private sector, the state's unemployment rate will likely climb to 7 percent, Woolf predicted – well short of the 9 percent jobless rate anticipated nationwide. The latest statistics peg Vermont's unemployment rate at 5.7 percent.
"We're predicting continued job loss and about a 3 percent total decline in jobs," Woolf said. "That would make this the second worst recession since World War II, and we're not even predicting when we'll regain all those jobs."
Woolf and other economists said the hemorrhaging will likely abate sometime in 2010, but not before home prices in the state experience a precipitous decline. Faucher said home values in Vermont have fallen only by about 2 percent from their peak, which compares favorably with the national average of 23 percent. Outlooks for the housing sector remain grim, though, according to Faucher, and he said Friday that the data suggest further deterioration.
"The big difference this time is the decline in house prices is much larger than in previous downturns," Faucher said. "We expect to see a peak-to-trough decline of houses in Burlington of about 20 percent."
The audience found little room for optimism Friday as nearly every economic indicator pointed downward. Median family income, which hit a record high in 2007, according to Woolf, will drop for the first time in decades in both 2008 and 2009.
"The news is really bad," Faucher said. "I feel terrible telling you all this."
The recession has wrought havoc on state revenues as well. Woolf said the $150 million budgetary shortfall expected for Fiscal Year 2010 in Vermont is largely the result of plummeting capital gains. The richest Vermonters, he said, pay the lion's share of income taxes, and Vermont's revenue projections rise and fall with their fortunes.
In 2000, residents earning more than $100,000 paid less than 50 percent of all income tax. In 2007, the same income bracket contributed more than 60 percent of all income tax revenue.
Much of that income is derived from capital gains, and the distressed financial markets have hammered the portfolios of Vermont investors. Though no data for Vermont is available yet for 2007 or 2008, Woolf said capital gains have almost certainly been on a precipitous decline.
"That's why the situation is so dire in Vermont," Woolf said. "The state of Vermont relies disproportionately on a very small slice of people for income taxes, and that disproportionately is coming from capital gains, which are extremely volatile. We rode the wave coming up, and now we're paying the price when it's coming down."
Elected officials of various stripes were on hand for the presentations Friday. Though many of them agreed on the cause-and-effect analysis offered by Woolf and other economists, they differed in the extreme on how to mitigate the impacts.
Gov. James Douglas devoted his 20-minute opening address to the education reform package unveiled in his inaugural address earlier in the week.
"This is a tough time for state government obviously," Douglas said. "The challenge I think is to look at public expenditures honestly and decide how best to allocate them."
Douglas said because one-third of all tax dollars are spent on public education, it is an appropriate place to trim. The Education Fund, he said, until now untouched by budget-cutting exercises, must undergo the same scrutiny as other public programs. To that end, he will try to sell the Legislature on a plan to freeze per-pupil spending next year at 2009 levels.
"A third of public resources go to K-12 public education," Douglas said. "And that has been more or less exempt from the stress other public programs have been enduring … My recommendation is to level fund public education expenditures next year. Compared to what we're doing in state government, that's a pretty good deal."
Senate President Peter Shumlin on Friday called the plan a shortsighted way to deal with Vermont's budgetary woes.
"I strongly disagree with the governor's conclusion that the financial mess we're in is the fault of the children in Vermont we're trying to educate," Shumlin said. "We could not disagree more vehemently with the source of the problem."