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January 9, 2012 | last updated January 10, 2012 12:27 pm

Five economists share their predictions for Maine in 2012

Charles Colgan, professor of public policy and management, USM's Muskie School of Public Service
Amanda Rector, Maine state economist
Jonathan Reisman, associate professor of economics and public policy, University of Maine Machias
Garrett Martin, executive director, Maine Center for Economic Policy
J. Scott Moody, chief economist, Maine Heritage Policy Center

Reflections on 2011 predictions

Charles Colgan:

Forecast for 2011: "The recovery should hold but fiscal policy will turn toward contraction and away from stimulus, and the European debt crisis will limit export growth, which is the key to expanding GDP in the next few years. The hangover from a weak 2010 will last through the first half of 2011."

Accounting: The Arab Spring and the run-up in oil prices, the European fiscal crisis and the summer debt debacle in Washington all combined to kill off any acceleration in 2011. All of these hang over the economy in 2012, meaning another weak year with a return to job losses at least in the first half.

Jonathan Reisman:

Forecast for 2011: "Income and output will slowly improve, but not fast enough to significantly reduce unemployment and create momentum."

Accounting: I think I had it about right, maybe a bit too optimistic as it turns out.

J. Scott Moody:

Forecast for 2011: "Thanks to muddled federal monetary and fiscal policy, the economy will also continue to muddle its way forward. For example, how will the switch in political power affect the actions of the Federal Reserve or the fate of Obamacare? These are big issues with big uncertainties that, in the end, keep businesses wary of creating new jobs."

Accounting: The political and economic uncertainty certainly kept businesses wary of creating new jobs with Maine's flat-lined employment growth in 2011. Unfortunately, there have been no signs of reining in the Federal Reserve, which continues to come up with new and creative ways to print money. The politicization of the Federal Reserve to help fund the federal budget deficit (including Fannie Mae and Freddie Mac) is setting a dangerous precedent.

Amanda Rector and Garrett Martin weren't part of the 2011 5 on the Future forecast. So we asked what surprised them most about Maine's economy in 2011.

Rector: The level of uncertainty consumers and businesses were feeling in relation to the economy was unexpected. Between continued turmoil in the euro zone, the repeated last-minute deals and failures to act by Congress, and a volatile stock market, confidence levels fell dramatically over the year. Back in January, it seemed that perhaps 2011 would be the start of a serious recovery; instead, we had a year that felt like a roller coaster ride.

Martin: There were few economic surprises. The biggest surprise was the willingness of political leaders to put politics (and ideology) ahead of people (and facts). The debt ceiling debate brinksmanship and ongoing budget battles have created greater uncertainty and undermined prospects for recovery.

Every year, Mainebiz asks five prominent Maine economists to give us their predictions for the upcoming year. Given we're still trying to crawl out of the worst economic hole since the Great Depression, we're really putting them to the test.

This year, our panel of experts (introduced below) see threats from economic turmoil in Europe, a paralyzed Congress and lackluster movement in Maine's housing market and job creation. They don't call it the dismal science for nothing. On the upside, consumer spending should trend upward. Check out the forecasts.

Warning: You might want to keep the Prozac handy.

Our experts:

Charles Colgan, professor of public policy and management, USM's Muskie School of Public Service

Amanda Rector, Maine state economist

Jonathan Reisman, associate professor of economics and public policy, University of Maine Machias

Garrett Martin, executive director, Maine Center for Economic Policy

J. Scott Moody, chief economist, Maine Heritage Policy Center

What's in store for Maine's economy next year?

Colgan: Another year much like 2011 with little or no economic growth until the second half of the year at the earliest, and even that depends on a great many things going right.

Rector: 2012 will likely play out much the way 2011 has: lots of ups and downs with little movement towards a serious recovery. The uncertainty in the global economy will continue to cause heartburn for Maine businesses and residents who will remain cautious in hiring and spending next year.

Reisman: Anemia, more green crony capitalism, Canadian inroads and a mini-bonanza for Maine media companies stemming from a large increase in independent political expenditures from both the left and the right.

Martin: Federal gridlock, state-level austerity measures and European Union upheavals likely mean that Maine's economy will remain in neutral or even shift into reverse.

Moody: Thanks to the European sovereign debt crisis, the chances of recession — even a global one — are rising daily. This macro factor, combined with Uncle Sam's financial woes, will weigh heavily on Maine's economy which is already in an anemic state.

How will the failure of the Super Committee to come up with a deficit-reduction plan play out in Maine?

Colgan: Substantial spending reduction is already programmed in (of course another recession would decimate revenue growth and increase the deficit). Under current law, Maine will begin to see substantial reduction in federal money in 2012 with acceleration in 2013 and beyond. The defense cuts may significantly affect BIW and other Maine companies. The net result in terms of economic growth will be, as it has been this year, continued and accelerating job losses in the public sector and most likely a major slowing, if not reversal, of growth in health care.

Rector: It's really too soon to say — Congress could still make some changes before the automatic cuts take place in 2013. In the short term, it adds another level of uncertainty to the economic picture, which won't help matters any.

Reisman: Class warfare rhetoric from Washington will exacerbate tensions between Gov. LePage and the displaced left in Maine. Reps. Pingree and Michaud will blame the GOP, the Tea Party and Grover Norquist; Sens. Snowe and Collins will blame extremists unwilling to compromise, and the Maine Peoples' Alliance and the Occupiers will blame the wealthiest 1%, except for Rep. Pingree's husband Donald Sussman. Mainers may finally begin to recognize that the political class has no interest or intention of actually reducing the statist footprint on our backs.

Martin: Huge. Fewer federal dollars coming into the state has a direct impact on the daily lives of Maine's people and economy.

Moody: The failure of the Super Committee could lead to across-the-board cuts in spending, including the military. That could mean cutbacks at Bath Iron Works and Portsmouth Naval Shipyard, not to mention other military suppliers and contractors, which would compound Maine's employment woes.

What are the chances of another recession?

Colgan: [The] major threat now is Europe, which will probably be in recession in the first half of 2012 (or so close as to make no difference). A major crisis in the financial markets would sink us all, and there would be no response as there was in 2008. Europe and America have jointly disarmed fiscal policy as a means to fight a recession, our monetary policy has only minimal effect and Europe has rejected a monetary policy that would save them in the event of a recession.

Rector: Fairly high at the moment — probably around 40%. It really hinges on what happens with Europe: A severe recession there would certainly cause the United States to enter a recession, while the United States might escape a mild European recession. Also increasing the risk of a U.S. recession is the question of whether or not the payroll tax cut and extended unemployment benefits are further extended by Congress.

Reisman: 75%. There are no additional expansionary policy alternatives available to counter the coming European debt reckoning, and the president's misguided energy policies have only made things worse.

Martin: Domestically, we've bottomed out and are seeing signs of improvement. Europe is the 800-pound gorilla. If they fall back into recession, demand for U.S. goods and services will suffer. Combined with continued weakness in domestic spending due in part to rising energy and food costs outpacing income growth, this could mean a double dip is in the offing.

Moody: That depends on Europe. If only Greece goes under, it's a 50% chance of recession in 2012. If Italy and/or Spain also go under, it's an 80% chance of a recession. Otherwise, we'll continue to muddle through with very slow growth.

What are the top three economic factors that will influence the 2012 presidential elections?

Colgan: Jobs, jobs, jobs. That's the economy; don't discount the politics and the campaign. They may make much more difference than people think when they consider just the economy.

Rector: The European debt crisis, growth in the U.S. economy (commonly measured through GDP) and the unemployment rate, although the public's perceptions of each of these will be more important than the factors themselves.

Reisman: Unemployment — U6 will be still be in Depression-era ranges close to 20% or more. Entrepreneurial dynamism will not return to the American economy until after the 2012 election, if at all. Housing psychology — the housing market stays in the dumps, perhaps permanently damaged by a Fannie/Freddie/ Community Reinvestment Act hangover that has left most Americans wary of purchasing assets that seem likely to lose value rather than appreciate.

Martin: Jobs, jobs, jobs.

Moody: By the time the presidential election rolls around, the European crisis will likely have boiled over. How the U.S. markets react to that will determine the direction of unemployment and interest rates — the two components of the "misery index" that have played a huge role in past presidential elections.

Where do you see economic impact from Gov. LePage's policies?

Colgan: Like all governors, his policies will have much more effect on the long term than the short term. During a governor's term, the national economy overwhelms everything, particularly in a small state like Maine. If his policies are successful, Maine will recover faster from the recession later in the decade.

Rector: Gov. LePage's focus on regulatory reform will make it easier to do business in the state, leading to increased employment opportunities as economic growth takes hold. Further work toward reducing energy costs and the tax burden will increase the disposable income available to residents and businesses in the state.

Reisman: If energy prices can be brought down by throwing out 30-plus years of the environmental left's anti-growth and anti-prosperity policies, our economy and prospects can be turned around. If crony capitalism and the excessive risk aversion of the green nanny state prevails, not so much. The governor is trying to reverse a socio-demographic trend that has seen fewer and fewer Mainers productively pulling the cart and more and more Mainers content to sit in the cart and be pulled. Apparently it's a right — just not a sustainable one.

Martin: The LePage administration's short-sighted budget policies will cost jobs, result in higher health-care costs particularly in rural areas, and jeopardize Maine's future prosperity. The refusal to issue bonds or exercise existing bonding capacity costs jobs now and will result in higher future borrowing costs. We must find a better balance between spending cuts and stabilizing revenues to maintain critical investments in infrastructure, education and work-force development; maximize the potential benefits offered by federal health reforms; and avoid cost shifting.

Moody: Gov. LePage's pension reforms helped the state to dodge the pension bullet for a few more years, though more needs to be done such as implementing a 401(k)-style plan for state workers. The drop in the top personal income tax rate to 7.95% from 8.5% provides a much-needed boost to Maine's small businesses.

What's your forecast for state job growth?

Colgan: -0.6% year over year, down about 3,000 jobs from 2011 on an annual average basis.

Rector: Maine is unlikely to see significant job growth or loss next year — employment levels will probably be on par with 2011 levels, which will unfortunately drive the unemployment rate up as additional job seekers enter the labor market. Growth in the health-care sector will continue to offset losses in other sectors such as government and construction.

Reisman: With a recession likely, expect Maine to lose up to 5,000 jobs next year.

Martin: Anemic at best. Based on October 2011 Maine Department of Labor statistics, Maine lost 4,800 jobs since January 2011. Prospects for the coming year aren't much better. Recently proposed budget cuts will result in another nearly 4,500 job losses.

Moody: Job growth was flat in 2011 and, at best, will be flat again in 2012.

For the housing market?

Colgan: Another year of very weak housing starts (only about 3,000 v. 2,500 this year). Existing home sales up slightly, prices little changed from 2011.

Rector: The housing market remains weak as the lack of employment and income growth provide little traction for housing sales. Some increases in existing-home sales may be driven by pent-up demand as extended co-habitations (adult children living with parents, for example) become less palatable.

Reisman: Declining prices and sales. One ironic consequence of the housing bubble has been to actually make housing more affordable.

Martin: Housing may turn positive in 2012. Prices are down substantially from pre-recession highs and bargain hunters, many paying more in rent than they would to own, will start returning to the market.

Moody: There is no fundamental recovery in sight for housing as the lack-luster jobs and income picture will drive housing demand, but with a plentiful supply of housing already on the market, or waiting in the wings, a flat housing market is the best one can hope for. Yet, the housing market might see temporary upswings as people pull their money out of the stock market (due to European turmoil) and put it into real estate.

For the energy sector?

Colgan: Oil prices will remain high, but trend down somewhat over the first half of the year. Gas prices might fall by 20-30 cents/gallon, but will be highly vulnerable to shocks throughout the year because of continued turmoil in the Mideast.

Rector: Oil prices will remain relatively high due to continued unrest in the Middle East, but reduced demand in Europe due to a second recession there will prevent prices from spiking too much.

Reisman: War. The environmental left is pushing a referendum to up the renewable portfolio standard, thereby raising energy prices and rewarding green crony capitalists. Gov. LePage and part of the GOP is pushing for Canadian hydro, natural gas and an energy and environmental policy based on sound science, markets and capitalism as opposed to religion, cronyism and socialism. It's not at all clear who will win.

Martin: The Consensus Economic Forecast is that 2012 oil prices will remain around $90 per barrel.

Moody: Thanks to new technology increasing domestic energy supplies and falling domestic demand, energy prices will be flat or, even continue heading down.

For consumer spending?

Colgan: Up moderately in consumer durables as purchases postponed through most of the recession have to be made to replace/repair houses, cars, appliances, etc. Little if any growth in other discretionary purchases and overall income growth restrains a sustained retail recovery.

Rector: Spending will increase as consumers continue to make purchases they had put off during the past few years (replacing cars, clothes, appliances), but this will be restrained as consumers continue to be wary of economic shocks.

Reisman: Will take a big tumble if/when the recession hits. Energy bills and worry are reducing discretionary income.

Martin: Spending by wealthy consumers will remain strong. For everybody else, personal income growth will be slower than in 2011 and rising food, energy, health care and education prices will absorb any "excess" consumer capacity. Consequently, policymakers should act to put more money in the pockets of low- and moderate-income consumers through targeted tax relief and extending long-term unemployment insurance.

Moody: Consumer spending will continue to be weak, especially if the sovereign debt crisis in Europe forces up unemployment and/or interest rates.

Where will Maine see the biggest gains?

Colgan: Three sectors are still slated to see the biggest job gains: health (though at a much slower rate than in the past because of restraints in public-sector spending), professional and business services, and leisure and hospitality. Some job growth in manufacturing may occur if the national economy can get sustained modest GDP growth.

Rector: There have been some recent gains in retail sales, which will continue into next year. We could also see another decent tourism season if the weather and oil prices cooperate. Personal income should see some gains and corporate profits should remain high. Unfortunately, the economy will really just continue to slog along without any dramatic increases next year. On the bright side, there shouldn't be any dramatic decreases either.

Reisman: Health care and media.

Martin: Advanced manufacturing shows promise in Maine and the U.S. as a source of jobs, income and exports. Capitalizing on opportunities in this area requires good infrastructure, continued investment in research and development, and specialized worker training opportunities.

Moody: Unfortunately, any Maine industry that sees flat-line growth in 2012 will think that's a good year.

What will be Maine's biggest challenges?

Colgan: Taking any serious efforts to lay a foundation for future economic growth in the fourth year of the worst economic crisis in 80 years.

Rector: If the U.S. falls into another recession due to European turmoil, Maine's economy will struggle to stay afloat. Also, Maine is very reliant on oil for gasoline and heating oil, making high prices a great concern.

Reisman: Our aging population, crony capitalism, the stealth implementation of the Precautionary Principle [the overly cautious policy stance of the environmental left] in Maine (because it's been implemented without actually mentioning it), high energy prices and the environmental left.

Martin: How we weather the coming budget battles and reflect the interests of all Maine people in the process will largely determine our potential long-term economic prospects. We have a choice. We can continue the ideological divide and bitter partisanship that have come to define our political landscape or we can return to our tradition of working together toward solutions that best serve the interests of Maine people. We must acknowledge those things over which we have little or no control and identify solutions consistent with facts, not politics.

Moody: The biggest challenge will be balancing the state budget without tax increases. Already the federal government is cutting back on Medicaid matching funds, which have created a funding crisis in MaineCare. Other federal cutbacks are looming, especially if an across-the-board cut becomes reality.

Read more

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