Mark Zandi, chief economist for Moody’s Economy.com spoke last week at the New England Economic Partnership outlook conference.
It’s not a recession – it’s just going to feel like one.
Banks in particular may be feeling it more than others, too, if the latest forecasts from the New England Economic Partnership hold true. More losses from bad loans are looming, as are projected cuts in employment for the financial sector.
In 2008 alone, the Bay State stands to lose 2,500 finance-related jobs, according to Alan Clayton-Matthews, NEEP’s forecast manager for the state. Over the next five years, the sector will shrink by 7,000 jobs, the University of Massachusetts Boston professor predicted.
Meanwhile, more losses from bad loans are expected.
Nationally, banks have already reported, collectively, about $275 billion in such losses, driven largely by residential mortgages, but also including commercial mortgages and both corporate and consumer loans, said Mark Zandi, chief economist for Moody’s Investment Services’ Economy.com. Those losses will likely keep climbing past the $400 billion mark, Zandi said.
The economic woes are being led by consumers – particularly highly leveraged consumers, Zandi said. The national amount of household debt in delinquency or default has more than doubled in the past two years, reaching over $700 billion, he said.
“Conditions are eroding,” Zandi said. “They’re not stabilizing to any significant degree.”
Tight Credit Market
There are two basic consumer groups, with each representing about half of the population, he said. One group is managing its finances fairly well, but the other group is facing lots of liabilities and “they’re struggling,” Zandi said.
In Massachusetts, the residential mortgage delinquency rate has more than doubled in the past four years.
Looking at the dollar value of delinquent mortgages, compared to the total value of all mortgages in the state, the delinquency rate has risen from 1.5 percent in 2004 to nearly 4 percent in 2008, Clayton-Matthews said.
And despite the Federal Reserve Board easing the monetary policy by lowering rates, credit-worthy borrowers are still facing a tight credit market.
“There is, effectively, no longer a private mortgage securities market,” Zandi said.
As the annualized amount of new mortgage securities has been dropping from nearly $2 trillion in 2005 to $1.25 trillion in 2008, the chunk contributed by private label companies has all but disappeared, according to Moody’s data. The government-sponsored enterprises Fannie Mae and Freddie Mac, which had issued about half of the total in 2005, account for nearly all the mortgage securities issued in 2008, according to the data.
The federal government’s efforts to expand the GSE’s lending abilities, along with those of the Federal Housing Administration, have helped “fill in some of the void,” Zandi said. “But they’re not going to be able to completely fill it.”
The good news for Massachusetts is that the state’s economy is bigger than the financial and housing market-related businesses.
Even though those sectors will take a hit, Clayton-Matthews said that the knowledge-based sectors, such as science and research, will grow and help offset job losses. His forecast calls for the state’s total employment to grow at an annual rate of 0.4 percent through 2012.
“I think Massachusetts is going to skirt a recession,” he said.
