Rough times remain for Maryland, but signs say the economy will quickly improve

By Bill Sheridan
MACPA Electronic Communications Manager

First, the bad news: This recession we keep hearing about? Its effects probably will linger a little while longer.

Now the good news: The economy will get better, and soon.

Maryland's economy, which side-stepped much of the pain felt nationwide during last year's economic downturn, will suffer pains of its own during the first half of 2002, according to a leading economist.

And then?

"This economy is going to turn around," said Anirban Basu, "and when it does, it's going to turn around fast."

Basu, director of applied economics at Towson University's Regional Economic Studies Institute (RESI), said increased spending on defense and biotechnology — each a Maryland-friendly industry — will drive the state's recovery in late 2002.

In the meantime, substantial layoffs at Maryland-based businesses like Black & Decker, Baltimore Gas & Electric and Ciena serve as warnings that the state isn't out of the woods yet. Maryland's unemployment rate in December 2001 was 4.1 percent, well below the national average of 5.4 percent but almost a full percentage point higher than the state's rate one year earlier — and a far cry from the economic joy ride of the late '90s.

"Maryland's 2002 looks pretty rough, especially the first half," Basu said. "Maryland's unemployment rate is going to rise and more jobs will be lost before we fully bottom out."

Going up

Still, evidence suggests that the "bottoming out" may already have begun.

In January, Federal Reserve Chair Alan Greenspan expressed optimism that the nation's economy might be on the mend. The Conference Board chimed in soon after, predicting the Gross Domestic Product would rise by 1.3 percent this year and 4.2 percent in 2003.
In February, President Bush's Council of Economic Advisers forecast a rebound by the middle of the year, leading to moderate economic growth and low inflation for much of the next decade.
Also in February, the Labor Department reported that the number of Americans losing their jobs fell to its lowest level in six months.
Then came news from the National Association for Business Economics, which recently reported that most of its economists believe the economy is growing again. "The economy has turned a corner and is recovering," economist Clifford Waldman told the Associated Press. "The only issue is the strength of that recovery."

That's certainly good news, considering the doomsday economic scenarios being tossed about after the Sept. 11 terrorist attacks.

"For the time being," said Gail Fosler, chief economist for The Conference Board, "the United States has weathered the crisis of Sept. 11 with relatively minor economic damage."

That doesn't mean the attacks didn't hurt the economy. On the contrary, Basu said the recession might have passed Maryland by almost entirely had it not been for Sept. 11. The nation's manufacturing sector was hit particularly hard by the recession, but Maryland, whose economy is driven less by manufacturing and more by the service sector, dodged the brunt of the early downturn.

Then came Sept. 11. Suddenly, Maryland's service sector-oriented economy felt the heat. BWI Airport, tourism and recreation, information technology, even Maryland's financial services industry — all were impacted by the attacks.

"Judging from the employment data, it does look like Maryland's economy, if not in recession, is very close to it," Basu said, "and it's because our service sector has been affected."

Impact from Annapolis

Political factors are putting the squeeze on Maryland's economy as well.

Legislative analysts have warned that Gov. Parris N. Glendening's latest budget proposal could put the state up to $1 billion in the red. To balance the budget, as required by state law, Glendening has asked to delay the final installment of a state income tax cut and spend $800 million of Maryland’s $1.3 billion in reserves. In response, leaders in the General Assembly have said they will look for spending cuts that would allow the tax break to remain in effect.

The result? "You're probably going to see a budget that is much smaller than one might have hoped for, given the economic conditions facing our people today," Basu said.

The state also has implemented an across-the-board hiring freeze among its agencies, further reducing the number of available jobs and increasing competition among the state's job hunters.

"That's very bad news," Basu said. "When the economy is weak, the last thing you want is for government to add to that weakness."

Getting defensive

But Maryland's economic funk shouldn't last long, thanks in part to a tragic bit of irony. The horrific events of Sept. 11 ushered in an era of increased defense spending, and Maryland is the second most defense-dependent state in the country. About 3.3 percent of our Gross State Product consists of defense procurement. Only Virginia's, at 5.5 percent, is higher.

"It's a heavily defense-dependent region, and that's good news at a time when defense budgets are growing," Basu said. "That probably will be one of Maryland's leading engines of growth in latter 2002 and as we enter 2003. That's one of the reasons the state will bounce back quickly."

Another is biotechnology. The industry was largely ignored by investors during the dot-com frenzy, but financiers now are looking for other attractive ways to spend their investing dollar. According to Basu, biotechnology is near the top of their list, and Maryland's biotech industry is the third largest in the nation, behind only Massachusetts and California.

What's a business to do?

Certain signs — declining financing requirements, better cash flow, rising availability of credit — point to an economic rebound for businesses as well.

According to Basu, that presents Maryland's business owners with a golden opportunity. Expanding a business during a recession can be a hugely successful endeavor. Rents are lower, construction costs are lower, the talent pool is larger — these are pluses for opportunistic businesses.

"This is the time when you can build up your business army so when the expansion does come, you're ready," Basu said. "Many businesses that turn out to be successful will employ that strategy.

"Of course the problem is, when the economy is bad you don't have the resources to do these things. I'm not a businessman. That's for great businessmen and businesswomen to figure out. But to the extent that you can employ that strategy, it's a strategy that makes sense."

Contact this Author: < William Sheridan > bill@macpa.org

This content has not yet been Rated.

To Rate content, please Login.