2009 Economic Report

While it's likely the recession is technically over, for many it doesn't feel that way and won't until unemployment stops climbing and job growth returns. And that is at least a year away.

The problem is that employers resist hiring and firing at turning points in the economy, meaning unemployment is always a lagging indicator of economic activity. As a recession begins, firms reduce employee hours before laying off staff. And as the economy expands, businesses grow over time before making the commitment to hire new people. Since this so-called Great Recession is marked by its severity, unemployment rates will stay high even as the economy improves, and will probably not decline until the second half of 2010. Increasing unemployment rates during the recovery are to be expected because firms are trying to produce more with fewer people.

Based on data through July 2009, it is likely that the Consumer Price Index will decline this year, the first decline in this broad measure since 1956. While lower inflation may sound attractive, workers expecting a cost-of-living increase next year may be disappointed.

Declining housing prices across the United States are being felt here in the Granite State as well. During the last recession in the early 1990's, housing prices declined in New England, but were largely unaffected elsewhere in the country, making housing comparably more affordable in NH. That meant homeowners could sell a home outside of New England and move here for less money. But now housing prices are falling everywhere.

Also, a significant number of homeowners are upside down, owing more on their mortgages than the home is worth. That locks up available sellers. All of this portends a lower rate of migration into the Granite State as the economy recovers.

The shape of the recovery remains in question. Is it a V shape, with a rapid bounce out, or a slower U shape? Some forecasters have even suggested an L shape, which would mirror Japan's "lost decade" of the 1990's. There is also a risk of a double dip recession if the private sector doesn't follow the government stimulus and bailout with investments of its own-and even then the recovery will be slow.

The Road to Ruin

So how did we get here? After all, in the last five years the U.S. economy withstood a host of destructive threats, each of which could have slowed economic expansion. Corporate malfeasance, wars in Iraq and Afghanistan, off-shoring and outsourcing, rising energy prices and interest rates, and the falling value of the dollar, could all have slowed economic growth, or thrown the economy into reverse. In 2005, Hurricane Katrina ravaged the Gulf Coast, causing energy prices to spike in the U.S. and around the world. Still the economy moved forward.

With the benefit of hindsight, we now know that massive amounts of financial capital funneled into mortgage markets, investments in subprime loans and exotic financial instruments were really driving the economy.

When those ground to a halt, that eventually led to the December 2007 announcement by The National Bureau of Economic Research that the recession officially began.

As early as 2006, residential housing, which had pumped billions of dollars into consumer pocketbooks through sales of new and existing homes, refinancing and home equity loans, began to falter. In most of the country, hot real estate markets cooled off through 2007 and 2008 as the real estate sector began the great unwinding.

Then came March 2008. Global investment bank Bear Stearns went bankrupt under the weight of bad debt tied to the sub-prime mortgage crisis and the Federal Reserve loaned funds to assist that company's sale to JP Morgan, an unprecedented move at the time. But more bailouts followed. In late summer 2008, the U.S. Treasury Department brokered the $200 billion taxpayer bailout of Fannie Mae and Freddie Mac, the largest residential mortgage holders in the country. Add to that the $85 billion federal loan to American International Group (AIG), the largest U.S. insurance company, followed by the failure of Lehman Brothers. Some say the federal government's refusal to help Lehman Brothers turned the U.S. financial crisis into a full blown, worldwide financial panic.

And it went downhill from there. By the fall of 2008, financial markets were cliff diving since banks were unable or unwilling to lend to each other. That was evidenced in the spread between three-month U.S. Treasury bills and the LIBOR (London Interbank Offering Rate), which tracks the interest banks charge to lend each other money. Economists have nicknamed this difference the TED spread. The bigger it gets, the less lending occurs. The spread increased from a historical difference of about 0.5 percent to between 5 and 6 percent by Oct. 10, 2008. As financial market liquidity evaporated college students couldn't get loans, the Manchester airport couldn't refinance its debt, some small businesses couldn't meet payroll and municipalities worried they couldn't finance road construction or pay for plowing. The lifeblood of the economy dried up, and that halted economic growth.

Thanks to unprecedented monetary and fiscal policies by the federal government, the TED spread has now fallen back to its historical norm of 0.5 percent-meaning
financial panic has ended. The American Recovery and Reinvestment Act (TARP), and other financial rescue programs were part of that intervention.

Economic Indicators

The national slowdown in economic activity in 2008 was mirrored in NH's economy. According to the Bureau of Economic Analysis, NH's real Gross State Product grew 1.8 percent between 2007 and 2008, higher than the national growth rate of 0.7 percent in the same period, but still below the long-term average of 3 to 4 percent.

The Granite State Productivity index, calculated using the ratio of NH Gross State Product per person compared to the national ratio, shows a leveling off in the long term. It measures productivity gains in NH relative to the United States, and indicates that NH saw even faster productivity growth during the 1990s than did the rest of the country. However, Granite State productivity gains have been close to the U.S. average through the economic recovery years since 2001.

New Hampshire's electric sales declined by 2.3 percent in 2008, after increasing by 1.3 percent in 2007. The state currently has enough in-state generation to be a net electric energy exporter to other states.

Bankruptcies totaled 3,875 in 2008, well short of the 6,058 all-time high in 2005 due to a change in bankruptcy laws that had residents "rushing to the exit" to file before the October 2005 change. Almost 1,800 bankruptcies were filed in October 2005 alone. Based on data through July 2009, NH will likely have less than 5,125 bankruptcies for 2009, the second highest annual filing number in the last two decades behind 2005.

Employment and Wages

There is rarely good news on the jobs front in a recession, and this time around was no exception. The Granite State gained no net jobs between 2007 and 2008. Losing industries shed 5,600 jobs and other industries gained an equal amount. Manufactured non-durable goods and construction accounted for the most job losses and hospitals accounted for the most gains, followed by local government.

The Jobs Index for NH, New England and the United States shows that since the official beginning of the recession (December 2007), the U.S. job base has shrunk by 5 percent. New England lost 4 percent of the jobs held in December 2007, while NH lost only 3 percent.

Average weekly wages in NH were highest in Hillsborough County, but the fastest weekly wage growth was in Strafford and Cheshire counties between 2007 and 2008. Among industry sectors, real estate wages increased the fastest between 2007 and 2008, followed by wage increases in information, professional, scientific, and technical services.

Economists use location quotients to analyze a regional economy relative to a larger area in order to determine the region's most important industries. A location quotient is the ratio between the local economy and the economy of some reference unit (usually the nation). The ratio is calculated for all industries to determine whether the local economy has a greater share of that industry than expected. If it does, then that extra industry employment is assumed to be critical because those jobs are above what a local economy should have to serve local needs. Location quotients show manufacturing is still a critical industry in NH- but high tech is even more critical. Other critical sectors for NH are trade, transportation and utilities, education and health services, and leisure and hospitality.

Another way to examine job change in NH is to look at employment by occupation.

Business/finance professionals, health care professionals, information technology professionals (computer and mathematical occupations), and many others have seen gains in both jobs and wages from 2003 to 2008. Office and administrative support, food service, and health care support occupations have seen more jobs, but wages have not kept pace with inflation. Worse off are manufacturing occupations, which have seen declines in number of positions and real wages.

Income growth in NH was well above the rate of inflation prior to the recession, and slowed considerably in 2009 as the national recession took hold. Recent personal income growth in NH averaged about 5.5 percent annual growth prior to 2008. New Hampshire's total personal income hit $56 billion in the first quarter of 2009, down 0.5 percent from the last quarter of 2008.

Migration

While the populations in Connecticut, Massachusetts, and Rhode Island would hardly have grown at all between 2000 and 2008 without international migrants, NH has other states to thank for its growth. New Hampshire has by far the most net domestic migration, the difference between United States residents moving in and out of a state, than any New England state.

Data from the most recent American Community Survey (2007) estimates that less than half (44.8 percent) of NH residents born in the United States were actually born in NH. That means that more than half of the native-born residents now in NH moved in from another state. By comparison, only one quarter of Massachusetts residents are from another state.

As people from other countries tend to move into Connecticut, Massachusetts and Rhode Island, the current residents of the Nutmeg, Bay and Ocean States tend to move out. Net internal migration has been negative for all three states since 2000. Maine and NH have experienced more domestic immigration than international immigration.

The Census Bureau also estimates inter-state migration in the non-census years by using tax return information from the Internal Revenue Service (IRS). This data seems to show that NH's in-migration is slowing and out-migration is increasing. New Hampshire had a net gain of almost 64,000 tax filers from Massachusetts in the last eight years. The migration between NH and Vermont is about equal. However, there are more NH people moving to Maine than the other way around-a reversal of the trend in the 1990s. And NH's net out-migration to southern states, primarily Florida, seems to be accelerating. Granite State residents also seem to be moving in increasing numbers to other southern states like North Carolina, South Carolina, Arizona, Georgia, Texas and Virginia.

Looking at NH's migration patterns by county, Hillsborough County receives the greatest number of international migrants, perhaps because that county contains the two largest urban areas-Manchester and Nashua. Merrimack County receives the largest number of domestic migrants, followed by Rockingham, Belknap and Hillsborough counties.

The population, and thus the workforce, is older in NH's rural counties. In two of the state's rural counties, the number of deaths in the last eight years exceeded the number of births, leading to a negative "natural increase" in the population. The metro counties have more births than deaths, implying a younger metro workforce with more families. The state's metro counties are Hillsborough, Rockingham and Strafford, while its rural counties are Belknap, Carroll, Cheshire, Coos, Grafton, Merrimack and Sullivan.

Financing and Business Statistics

Financing is never an easy thing to come by in a recession, a fact echoed by recent business statistics. The expansion of the high-tech sector was fueled in part by venture capital, with U.S. venture capital investment reaching a high of almost $27 billion in the second quarter of 2000, according to a MoneyTree survey. But it quickly decreased to an average of about $6 billion per quarter between 2001 and 2007. It fell again during the recession, with venture capital investment reaching a low of $3 billion in the first quarter of 2009.

Venture capitalist investments into Granite State firms averaged about $150 million per quarter through 2000 and fell by an order of magnitude in the early quarters of 2001- to a little over $10 million per quarter. Except for the $100 million invested in the second quarter of 2004, recent venture capital investment in NH has not approached the levels seen at the beginning of the decade.

In the banking sector, NH's insured institutions continue to be profitable despite pressure on net interest margins, according to the Federal Deposit Insurance Corporation. Non-performing loans have been on the rise, while the net interest margin has fallen, indicating that while NH banks are not in trouble, they are having more difficulties with non-performing loans and thus profitability. The ratio of past due and non-accrual loans to total loans has increased consistently from 2005 to 2009.

Tourism

Travel and tourism is NH's second largest export industry in terms of jobs and attracting dollars from out of state. Direct spending in NH by visitors in 2008 reached $4.5 billion. For fiscal year 2008, every dollar spent by the NH Division of Travel and Tourism Development resulted in $8.84 returned in the form of state and local taxes and fees. Traveler spending is most important to NH's White Mountains region, bringing in more than $17,000 in traveler spending per resident in 2008.

Real Estate and Housing

A prime cause of the recession, real estate is still working to recover from its fall. Sales of existing homes in NH declined by 2 percent in 2008, compared to the same period in 2007, according to Multiple Listing Service data collected by the Northern New England Real Estate Network. Prices fell by 13 percent in 2008, compared to 2007.

Housing permit data indicates that building activity in NH and New England declined between 2006 and 2009. Total construction contract awards appear to be steady, but commercial real estate markets locally and nationally will continue to cool down, as they generally lag residential market trends by about 18 months. Also, building activity will no doubt continue to decline.

After increasing in every year since 2005, the number of recorded foreclosure deeds declined between June 2008 and July 2009. Cumulatively, the first seven months of 2009 account for a more modest increase in foreclosure deeds than for the same time period in 2008, from 4,818 to 5,418. The current trend suggests that 2009 overall will have fewer foreclosure deeds than 2008, but still will be the second worst year for foreclosures on record.
The highest rents and home prices in the state are in Southern NH. During the last five years, rents have grown fastest in Coos, Cheshire, and Sullivan counties, and slowest in Hillsborough County.

In a balanced housing market, the purchase price of an existing home should increase at about the same rate as the median rent for apartments. After all, houses and apartments are just different products in the same market. Between 2000 and 2006, home purchase prices have increased faster than rents in most areas of NH.

Preliminary data for 2009 shows that housing prices and apartment rents are returning to the trend seen between 1990 and 2003 when they were more closely aligned, the result of a 22 percent decline in housing prices and a moderate increase in rents from 2006 to 2009.

Looking at NH home price to rent ratios by county reveals that some of the most active housing markets have the highest home price to rent ratios. That ratio is highest in Rockingham County at 1.66, implying the county's real estate market is more out of balance than other parts of the state and may face a greater decline in home prices. Coos County in the extreme northern part of the state had the lowest home price to rent ratio and thus has a more stabilized housing market.

Regional Data

While NH has challenges ahead, regional statistics offer
many bright spots. Looking at the last few years, NH had the fastest population growth compared to other New England states. From 2003 to 2008, NH's population grew by 1.8 percent, twice as fast as the 0.7 percent average for New England.

Granite State exports showed great strength in 2008, hitting an all time high of $3.7 billion. However, as world demand for consumer goods and electronics softened with the recession, NH's exports declined in 2009 by 21 percent, a performance mirrored in every other New England state. Between 2004 and 2008, Granite State Gross State Product growth was below the New England average, and ahead of only Maine and Rhode Island.

New Hampshire's Economic Scoreboard for 2009 looks at cost and quality of life factors, comparing NH to the other 50 states and the District of Columbia. New Hampshire has the lowest tax burden in the country, a high standard of living, a well-educated labor force, and a high quality of life. New Hampshire is also the safest state in the country, according to the most recent FBI statistics on state crimes per capita.

The Federal Reserve Bank of Philadelphia calculates an Economic Activity Index for each state in the country. Components of the index include: total non-farm employment, monthly unemployment rate, average number of hours worked in manufacturing, and wage and salary disbursements from personal income accounts. Data through June 2009 showed NH's economic activity slowing compared to the previous year, reflecting the national and regional experience. The hope now is that as the post-recession economy recovers, the Granite State will return to better days ahead.

Dennis Delay is an economist at the NH Center for Public Policy Studies in Concord. He is also the NH forecast manager for the New England Economic Partnership, a
nonprofit organization dedicated to providing objective economic analyses and forecasts. For more information, visit www.nhpolicy.org, call
(603) 226-2500 or e-mail ddelay@nhpolicy.org