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Friday, November 20, 2009
N.M. Falls Hard Into Recession
By Winthrop Quigley
Journal Staff Writer
The mood of business in New Mexico is grim, and for good reason, a Federal Reserve System official said in Albuquerque on Thursday.
New Mexico entered the national recession later than the rest of country, then went downhill quickly, said Mark Snead, the Federal Reserve Bank of Kansas City's economist and lead officer for the bank's Denver Branch.
"New Mexico hasn't experienced a meaningful recession since World War II," Snead told about 80 people at a morning meeting of Economic Forum. "New Mexico either has steady growth or rapid growth."
"Conditions turned quickly and hard," Snead said. "What caused it? The energy cycle."
While economic data are trending up nationally, energy-producing states in the Federal Reserve's Kansas City district are struggling, he said. New Mexico, Colorado, Oklahoma and Wyoming are as reliant on energy production for state-level economic growth as they were in 1982. At the same time, the oil and natural gas industry "is in a free fall," Snead said.
"I think we hit the life-time low in oil prices last summer," he said.
Meanwhile, natural gas prices are being depressed by abundant new supplies coming from shale deposits in Texas, Arkansas and the eastern United States. "The variable costs (of exploiting shale deposits) is lower than they ever imagined," Snead said. "It's easier to extract gas than they ever imagined."
Gas hit a $1.90 per mcf (1,000 cubic feet) spot price earlier this year. "That's shut-down levels," Snead said in reference to when operators are tempted to close down a well. "Gas prices drive (economic growth in) the region." There is nothing out there that looks like it will reduce output, he said. "I'm very concerned about that."
Low energy prices have helped the national economy recover, he said. "We have well below normal energy prices. It's been a boost to non-energy states. It has been a real drag on energy states."
Real estate conditions are also worse in New Mexico than elsewhere in the Kansas City district, which includes northern New Mexico, Colorado, Wyoming, Oklahoma, Kansas, Nebraska and the western third of Missouri. Southern New Mexico is in the Dallas Federal Reserve Bank's district.
New Mexico had a much bigger housing bubble than Colorado, Snead said. "You are experiencing (problems) more like Arizona and Nevada than Colorado. Housing in Colorado looks pretty good. New Mexico is by far the weakest in the (Kansas City Fed) district."
Nationally, housing has probably turned around, prices are stabilizing and residential real estate lending has resumed, Snead said. "We've seen that at the national level. We've seen it in all of the district's states except maybe New Mexico." Federal unemployment numbers have probably misled New Mexico into believing conditions have been better than they were, Snead said. Unemployment data are "dirty," he said, and are always being changed, so the Federal Reserve doesn't use them when forecasting economic conditions.
Federal unemployment numbers "tend to be very wrong in energy states," he said, adding that New Mexico was probably never growing as fast as the data showed it was.
At the national level, "the carnage is over," Snead said. He expects the economy to be recovered in the third quarter of 2010.
The consumer sector has turned up in the past two quarters. Depleted inventory is being replaced. Trade is rebounding. Stagnant international trade was "a problem we thought was almost insurmountable," he said. "It was solved in nine months."
Severe recessions typically take twice as long to end when the financial sector is in trouble at the same time, he said. This recession appears to be resolving in much the same manner and time frame as the 1974 and 1982 recessions.
Business investment and employment are always the last areas to recover, but business investment turned upward in the last quarter, Snead said. He said he expects business investment to hit a higher and sustainable level in the second or third quarter.
Even when recovery is complete, Snead said it could take three to five years before employment reaches the levels the nation experienced before the recession began.
As the economy recovers, some economists and business people are starting to worry about a surge in inflation. Snead doesn't expect inflation to be a problem.
"Inflation is not a short-run phenomenon," he said. "It takes a number of years of continued stimulus. There is so much slack in the system, inflation like that is almost impossible. The fundamentals are not in place to make it happen."
The bigger problem is whether the government has the stomach to withdraw the fiscal and monetary stimulus it began introducing late last year when economic growth gathers speed. "Putting it in is stimulative. Taking it out is restrictive," he said. "I'll leave it at that."
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