University of Southern Maine economist issues pessimistic forecast for 2012

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PORTLAND — A sustained economic recovery is at least a year away, according to University of Southern Maine economist Charles Colgan.

Colgan gave his economic forecast for the year on Tuesday morning. The presentation is an annual tradition at USM, where he is a professor of public policy and management and chairman of the school’s community planning and development program. Colgan has also served as Maine state economist and headed the state economic forecasting commission.

Colgan presented his forecast at the Hannaford Lecture Hall to about 300 members of USM Corporate Partners, a group of 100 businesses formed to support partnerships with the state university.

In each year since the housing collapse and recession in 2008, Colgan seen some light at the end of the tunnel. All his projections have included the beginning of a sustained recovery.

Until now.

Colgan said the case for pessimism is strong, convincing him to downgrade his forecast for the first time. While new claims for unemployment compensation have steadily declined since 2009, the average unemployed person today has been out of work for 40 weeks, Colgan said.

In 2007, it was only 15 weeks. 

“Until (the long-term unemployed) number comes down, we can’t say there’s a recovery,” he said. 

Plus, the percentage of people who are employed seems to have plateaued at 59 percent, down about 5 points from pre-recession levels. 

Income growth is weak and too narrowly distributed, Colgan said. Much of the growth in income has come to the top 1 percent of Americans, he said, with everyone under the 80th percentile looking at barely any growth at all over the past 30 years.

That’s a problem, he said, because the top 1 percent can’t spend their money fast enough to spur recovery. 

Compounding that problem is that the value of the U.S. housing market has fallen $8 trillion, from $14.6 trillion in 2006 to $6.3 trillion in 2010, Colgan said. Up until the recession, consumption was spurred by rising home equity and credit card debt, neither of which are working to pad the average American’s pockets today.

“Something aside from home equity and credit cards is going to have to be there to sustain growth,” Colgan said. “And it’s got to be income.”

But Colgan’s presentation wasn’t all doom and gloom. He said there are some positive factors working in the economy’s favor that would suggest growth and steps toward recovery may continue in 2012.

Steady, albeit meager, growth in gross domestic product and job creation since the height of the recession is a good signal for future economic health, he said, although Colgan said he’d like to see those areas growing faster. 

Maine has recovered 18 percent of the jobs lost since the recession, Colgan said. U.S. corporate profits are soaring to nearly $2 trillion, nearly double their lowest point during the recession.

Additionally, the housing market appears to be stabilizing, with U.S. home inventories appearing to have peaked, production up to about 600,000 homes per year and vacancy rates dropping. Demand for new homes is up to 1.35 million annually.

Plus, the average American’s shaken confidence has led to a huge increase in the percent of their paycheck saved, bringing Americans back up to saving rates unseen since the mid-1960s, Colgan said.

That’s a good thing, he said, but it’s also good that saving reports indicate people are opening up to spending a little of the money they’ve been squirreling away.

“We’re easing up on the brakes a little and pressing on the acceleration of consumption,” he said.

The picture for 2012 will depend on whether the positive forces of job creation and GDP growth outweigh the lingering downward pull of the recession. 

Then there are the “wild cards,” such as the European debt crisis, sabre-rattling in Iran over the Strait of Hormuz and ongoing political stalemate in Washington, D.C.

Colgan said 2012 will be a banner year for “fiscal follies” on Capitol Hill, with partisan bickering likely to hit a fever pitch as the 2013 budget is drafted, elections are held and with Congress needing to make a decision on the Bush tax cuts, which are set to expire after this year.

In this society, Colgan said, the question isn’t about economic growth, but about distribution of wealth. 

“There is no win-win solution,” he said. Furthermore, “there’s nothing in our politics today that suggests we’re even looking for win-win solutions. We’re looking for ‘win’ solutions, and if that means ‘I win and you lose,’ that’s fine.”

Colgan, perhaps made gun-shy by what he said were overly optimistic forecasts in the past four years, said his predictions are in line with the most conservative of forecasts offered by financial-research giant Moody’s Analytics. 

“So the best case for optimism is that (according to Moody’s), there’s a 95 percent chance my forecast is too pessimistic,” he said. 

Mario Moretto can be reached at 781-3661 ext. 106 or Follow him on Twitter: @riocarmine.

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Charles Colgan