BNH's Annual Economic Report

The 2011 Economic Report shows a recovery that is stalling and in danger of collapse.

In skating over thin ice, our safety is in our speed. Those words, penned in 1841 by Ralph Waldo Emerson in his essay Prudence, speak volumes to our current economic situation. The U.S. economy is stalled on thin ice and could be on the cusp of falling into the cold waters of another recession.

During the Great Recession, NH fared better than many other states and the country as a whole, but we too are on thin ice. The state's unemployment rate has fallen steadily since the peak of 6.7 percent in late 2009/early 2010. As of August 2011, that figure stood at 5.3 percent-well below the national unemployment level of 9.1 percent, but still higher than the state's pre-recession level of 3.4 percent.

Housing has been a source of growth in every post-World War II recovery from recession, but that sector cannot be counted on this time. Housing prices and sales seem to have stabilized and at least retreated from the steep plunges of 2008 and 2009. But problems remain. As of the end of June 2011, nearly one-fifth, or 19 percent, of all residential mortgaged properties in the state were underwater, an 8.1 percent increase from the same period last year. The stalled housing market also hampers small business growth as many small businesses are financed with home equity loans.

Even in the worst previous recessions we were able to bounce back quickly and recover those jobs lost. This recovery, by comparison, seems in jeopardy. Because of tight government budgets and associated downsizing, the government retrenchment is a drag on economic growth. The American Recovery and Reinvestment Act delivered $1.5 billion in direct state and local government spending and tax incentives to NH, starting in early 2009. That's about six months before the recession officially ended. That money is now gone.

Nationally, the list of woes is long: Businesses have stopped hiring and households are spending more tentatively. Bankers are re-evaluating whether it makes sense to continue easing credit standards and wondering if instead they should be more cautious in their lending again. Declining stock prices and widening credit spreads suggest investors are also anxious about the future. High oil prices are sapping consumers' wallets of money that could be spent growing the economy. The debt ceiling debate in Washington this spring undermined people's confidence in the economy, and the European debt crisis has also affected the U.S. economy. In short, the U.S. economy could indeed be on the cusp of another recession.

Economic Indicators

Like the nation, NH's economy is suffering, though how much is a matter of debate. According to the U.S. Bureau of Economic Analysis, NH's real Gross State Product grew 1.3 percent between 2009 and 2010, lower than the national growth rate of 2.6 percent in the same period.  Those figures showed that NH had the most sluggish gross state product growth in all of New England, despite other economic indicators that seemed to contradict the federal findings. 

Russ Thibeault of Applied Economic Research in Laconia points to growth in NH exports, added manufacturing jobs, and the state's unemployment rate-which, at 5 percent, is New England's lowest-as indicators the state's economy is faring better than the Bureau of Economic Analysis numbers suggest.

One index indicates the answer is neither up or down, but a leveling off. The Granite State Productivity index, calculated using the ratio of NH Gross State Product per person compared to the national ratio, measures productivity gains in NH relative to the United States. Granite State productivity gains have exceeded the U.S. average growth from 2007 through 2010. 

Energy is another area where there is a mixed picture. There is a direct relationship between economic activity and energy consumption: With more activity comes more energy use. Electricity sales increased in NH by 2 percent in 2010 after decreasing in both 2008 and 2009. The state currently has enough in-state generation to be a net electric energy exporter.

Still, high energy prices are a significant threat to economic recovery, particularly in NH. Economist Brian Gottlob of PolEcon Research in Dover has estimated that high oil prices have drained more than $900 million from Granite State households during the last four years, a huge hit on consumer expenditures. Oil consumption in NH has fallen as a result, but the state remains heavily dependent on home heating oil as compared to other states.

Bankruptcies totaled 5,507 in 2010, just 500 short of the 6,058 all-time high in 2005 due to a change in bankruptcy laws. Based on data through July 2011, NH will likely have less than 5,000 bankruptcies this year.

Commercial vacancy rates increased in NH markets in 2010, another sign of a weak economy.  According to the CB Richard Ellis survey, the I-93/Route 3 office market saw a continued decrease in demand and increase in vacancy throughout 2010 as companies adjusted staffing levels to compete in the weaker economic climate. The overall vacancy rate in the I-93/Route 3 corridor has increased from 13.7 percent in 2008 to 16.7 percent in 2010. The overall Seacoast/I-95 office market vacancy rate has decreased from 2009's rate of 20.3 percent to 18.3 percent in 2010, which is comparable to its level at the end of 2008. 

Financing is never easy to come by in a recession. Venture capital investments nationally peaked at $27 billion in Q1 of 2000 and at $230 million in NH in Q4 of 2000. Since 2007, venture capital investments in NH have averaged $27 million a quarter, with a recent spike in the first quarter of 2011 when $40 million was invested in five deals.

Employment and Wages

Even though the recession officially ended in June 2009, the effects linger. The Granite State lost 3,700 jobs between 2009 and 2010, a huge improvement from the 22,000 jobs lost between 2008 and 2009, but cold comfort for people looking for good news on the job front. Manufacturing, retail trade and construction accounted for the most job losses while administrative support and health services topped the list of sectors gaining jobs.

The Jobs Index for NH, New England and the United States shows that since the official beginning of the recession in December 2007 to early 2010, the U.S. job base has shrunk by 6.5 percent, though 1 percent of those jobs were gained back as of July 2011. New England lost 2.8 percent of the jobs it had in December 2007 and NH lost 2.7 percent. Job growth in NH began in May 2010.

Looking geographically, average weekly wages in NH were highest in Hillsborough County, but the fastest weekly wage growth was in Belknap and Cheshire counties between 2009 and 2010. Among industry sectors, wholesale trade wages increased the fastest between 2009 and 2010, followed by wage increases in manufacturing, and transportation and warehousing services.

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 other professional occupations have seen job and wage gains between 2005 and 2010. Employment in personal care and health care support occupations grew, but wages have not kept pace with inflation. Worst off are construction, office support, and manufacturing occupations, where jobs and wages declined.

So what are NH's critical industries and which are ones we are not as dependent on? Some of the answers may surprise you. Economists use location quotients to analyze a regional economy relative to a larger area in order to determine the region's most important industries. 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, and education and health services.

Leisure and hospitality has a 2010 location quotient of 1.01 (1 and above is the cutoff for a critical sector). So, while tourism is the second largest revenue generator in the state, employment in that sector hovers just above or below the critical level. Direct spending in NH by visitors in 2010 reached $4 billion.  For fiscal year 2010, every dollar spent by the NH Division of Travel and Tourism Development resulted in $8 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 $13,000 traveler spending per resident for the year 2010. The White Mountain region's economy is disproportionately weighed toward accommodation and food service, recreation, entertainment and retail trade-all sectors driven by the tourism industry, which makes up a majority of jobs in the region.

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 5.9 percent annually prior to 2008. New Hampshire's total personal income hit $58 billion in the second quarter of 2008, but then declined through 2009. Since 2010, NH's personal income has been increasing once again.

Government

During the recession, government was the one place many people could turn for good news. That is no longer the case. Because of tight government budgets and associated downsizing, government is dragging the economy down instead of propping it up.

Signs on highways throughout NH reminded drivers that stimulus funds were fueling the economy, literally from the pavement up. Federal stimulus funds delivered $1.5 billion in direct state and local government spending and tax incentives to NH starting in early 2009.  These dollars were used to fund infrastructure, transportation and school district spending.

According to the state stimulus office, American Recovery and Reinvestment Act (ARRA) funds supported 2,036 full-time equivalent jobs during the last quarter in 2010. At its peak in the second quarter of 2009, the effect of the stimulus on NH personal income reached $303 million, after which it dropped precipitously.

Government spending supported the economy through most of the recession, keeping a bad situation from getting worse.  From December 2007 through June 2010 private sector jobs in NH decreased by 5 percent, while public sector jobs increased by 3.9 percent.

The end of ARRA funds and big deficits reversed that trend. In 2010, NH reduced its' 2012-2013 budget by several million dollars.  A series of budgetary footnotes tacked on the end of the state budget call for further reductions in spending. The single largest source of unspecified savings came in salaries and benefits for state workers.

Those cuts follow a decline in public sector employment that began last summer. New Hampshire private sector jobs grew by 1.4 percent, while public sector jobs decreased by 1.2 percent from June 2010 through August 2011. Those job losses are particularly hard at a time when insurance premiums are rising as public sector jobs in NH come with better health insurance, a pension and access to retirement
health care.

Without additional help from Washington, federal aid dried up at the end of the last current fiscal year, which was June 2011 for most states. Nominal state and local government spending will have to remain flat for the remainder of this fiscal year and next if states are to balance their budgets, even assuming moderate tax revenue growth. This suggests that declines in state and local government spending will remain a drag on economic growth at least through next year.

Real Estate and Housing

Recovery may be working its way into parts of the economy, but real estate is not one of them. Home sales began to increase again in 2009 after hitting a high in 2005 and taking a nosedive, and prices were up in 2010, but a full housing recovery by either measure has yet to materialize.  In inflation adjusted terms. NH home prices are back to where they were in the year 2000.

And that's not the only bad news. The number of underwater homes in NH rose more than 8 percent from 2010. A home is considered underwater when the amount owed on the mortgage exceeds the property value. At the end of June 2011, nearly one-fifth of all residential mortgages in the state were underwater. The report also noted that high negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery.

Residential foreclosures in NH remain at record highs, and foreclosure rescue plans to date have not significantly reduced the stress in the housing market. There continues to be a significant number of NH households that are delinquent on their mortgage. In addition, lenders have extended the period of delinquency prior to foreclosure by delaying document processing in hopes that the market will improve, mitigating their losses. These conditions set the stage for a protracted period when a significant number of foreclosed and distressed properties will slow the market's overall recovery.

The sharp decline in monthly foreclosures in late 2010, followed by the rise in early 2011, can be ascribed to the robo-signers scandal. Robo-signers were bank officials signing foreclosure documents without closely reviewing them. In the third and fourth quarters of 2010, a robo-signing scandal involving GMAC Mortgage and a number of major U.S. banks led to thousands of foreclosures across the country being halted because the signers had not actually reviewed the cases.

All these factors lead to a stalled housing market, and a stalled housing market hampers small business growth. The most recent Survey of Business Owners in 2007 (results were released this year), compiled by the U.S. Census Bureau, revealed that most businesses are started by people who dig into their own pockets for at least some start-up capital.  Roughly one in three firms that required capital launched their business with less than $5,000. Often this start-up capital came in large part from home equity loans.

That stall is evident in  the decline in building activity in NH and New England between 2006 and 2011. Total construction contract awards appear to be steady, but commercial real estate markets locally and nationally will continue to cool as they generally lag 18 months behind any residential market trends.

The highest rents and home prices are in Southern NH, which also has the least stable housing market. During the last five years, rents grew fastest in Sullivan County, and slowest in Cheshire and Merrimack counties. 

The housing stock is also a measure of what forces influence a region's economy. Overall, 10 percent of the state's housing stock is seasonal homes, but it is spread disproportionately. In the White Mountains, 36 percent of the housing stock is seasonal homes, the highest ratio in the state. Seasonal homes make up 29 percent of housing in the Lakes Region and 24 percent of housing in the Great North Woods. Comparatively, seasonal homes account for about 1 percent of housing in the Manchester and Nashua areas.

Regional Data

Data from various economic indicators show that NH, like New England, is struggling to recover from losses in jobs and wages, and decreased housing values and investment in business growth. By many measures, NH is near the middle of the pack, and different states are recovering in different ways.

Total number of construction contracts awarded is one area where those differences are clear. From 2009 to 2010 total construction contacts increased an average of 16.7 percent in New England, though by only 2.7 percent in   NH. But between 2008 and 2009 construction contracts in the region decreased by an average of 18 percent while NH's contracts increased 5.6 percent.

These numbers show that states that had sharp drops in activity between 2008 and 2009 like Massachusetts, Maine and Connecticut made up for those losses in the past year.

Exports, meanwhile, was one of the bright spots in 2010. World demand for consumer goods and electronics slacked with the recession and NH's exports performance was mirrored in every other New England state. After hitting an all time high in 2008, Granite State exports declined from $3.7 billion in 2008 to $3.0 billion in 2009.  However, NH exports increased again in 2010, to almost $4.4 billion-an all time record. The first two quarters of 2011 showed a decline in state exports, probably due to the slowing
world economy.

The Federal Reserve Bank of Philadelphia calculates an Economic Activity Index for each state. 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. Data through July 2011 showed NH's economic activity increasing 3.1 percent compared to July 2010, faster than New England regional or national gains in economic activity.

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 providing objective economic analyses and forecasts. To learn more, visit www.nhpolicy.org, call 603-226-2500 or e-mail ddelay@nhpolicy.org.