Economist: Virginia near recession, part of U.S. is already there

NORFOLK

Mark Zandi minced no words: Part of the nation is already in a recession. The rest of it is headed that way. And U.S. economic conditions will grow worse this year before they get better.

"My talk isn't going to be a happy one," warned Zandi, co-founder and chief economist of research firm Moody's Economy.com Inc. His luncheon speech Wednesday followed a presentation of the Old Dominion University 2008 Economic Forecast.

Zandi, one of the nation's more widely quoted economic forecasters, asked the audience of about 300 business executives whether they felt happy or worried. "You should be worried," he told them.

The housing crisis and concurrent crash of the lending industry bear the brunt of the blame, causing a wide ripple throughout the rest of the economy. In December, the unemployment rate surged by 10 percent from the prior year, Zandi said, and when that has occurred in the past, the country ended up in recession.

"When you get into recession, there is no guarantee that it will be short or mild," he said.

The color-coded map in Zandi's presentation showed that California, Florida, Arizona, Nevada and Michigan have fallen into recession, which Zandi defined as a broad-based decline in economic activity. The economic output of those states represents 25 percent of U.S. gross domestic product, he said.

Virginia stood in the "near recession" category, with its economy growing but at a slower rate, Zandi said. The housing market in Northern Virginia has caused most of the drag on the state, he noted.

The forecaster had some good news. A federal economic stimulus package under consideration should help temper some of the damage. A $150 billion package of incentives for consumers, businesses and social services won't stop a recession but could make it shorter and less severe, he suggested.

Until then, the economy will continue in its tailspin. The drop in both housing prices and construction at the end of 2007 hasn't been that dramatic since the Great Depression, Zandi said. Only a pullback in home-building and further price reductions can put a dent in the current level of excess housing inventory, and that won't happen for another year.

"Subprime shock" worsens the situation, adding foreclosures to the available housing stock and taking many homeowners out of the market. The securities market that backed those subprime loans, which accounted for more than half of mortgages in 2006, has fallen apart, he said.

As homeowners default on loans, the losses are likely to pile up for lenders.

"You get the sense that there's a significant amount of pain to come in the banking system," Zandi said.

Hampton Roads has seen fewer subprime problems than the nation and relatively stable housing prices, making the local horizon slightly less cloudy, Zandi said after his talk. "It's insulated from the financial storm that's affecting the rest of the country," he said of the region. "You're going to weather very well."

The credit crunch, though, squeezes every consumer. It reduces borrowers' ability to get car loans, school financial aid, credit card accounts and refinancing options.

"Without any credit, lenders can't lend," Zandi said.

And without credit, companies can't invest in new jobs. Average monthly job growth slowed to 75,000 from 100,000 jobs by the end of 2007, Zandi said.

Many of those still employed have lost their overtime or have seen wage increases dwindle. "People pack it in, psychologically and financially, and rein in their spending."

Add to all this the wild cards of the global economy and the oil markets. If gasoline doesn't start to fall from $90 a barrel by the heavy-travel days of summer, it's likely to climb to $4 a gallon at the pump, Zandi said.

"That's $100 billion sucked right out of the economy."

The government's economic stimulus, including a proposed rebate for taxpayers, could start to turn the tide by the second half of the year, ultimately adding 1.5 percentage points to the annual growth of gross domestic product, Zandi said. He said he would like to see money go to states to bolster spending on Medicaid, education and transportation projects - providing immediate benefits to families, workers and contractors.

"When we do a stimulus," he said, "we want something that can go into the economy today."

Carolyn Shapiro, (757) 446-2270, carolyn.shapiro@pilotonline.com