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Current downturn a grim reminder of ’08

Copyright © 2020 Albuquerque Journal

The Great Recession for many seemed like a once-in-a-lifetime event, associated with economic insecurity and sky-high unemployment after years of growth.

Just over a decade later, however, a new crisis has emerged that has already begun to dwarf the recession of 2008-09 – both in terms of economic activity and of unemployment.

“Every indication we’ve seen is that the level of unemployment is going to be much more severe,” said Reilly White, associate professor of finance with the University of New Mexico’s Anderson School of Management.

Since mid-March, when the spread of the novel coronavirus reached New Mexico, the economic impact has been stark. From March 12 to April 15, more than 105,000 New Mexicans filed initial unemployment claims. That’s more than 10% of the state’s total labor force.

Although the economic crisis does not yet meet the traditional definition of a recession, typically recognized as two consecutive quarters of economic decline, experts agree that the economy may functionally already be in a deep recession, the scope of which likely depends on how long it takes to develop a vaccine.

“This is a crazy situation, and it really does depend on the spread of the virus,” said Jim Peach, a professor of economics at New Mexico State University.

During that same period, the number of weekly unemployment certifications jumped from a record low to 79,000, the highest total on record, according to numbers provided by the New Mexico Department of Workforce Solutions.

The sudden shock brought memories of 2008 and 2009, when a residential housing market collapse triggered a massive economic slowdown. White said the crisis, precipitated by financial institutions that bought and sold risky mortgage-backed securities, limited lending and undermined trust in banks for years after the crisis ended. In New Mexico, White said, unemployment peaked at 8.3% statewide in 2010. It decreased in the years following, but hasn’t fallen below the national unemployment average since.

Oil prices dropped precipitously at the start of the recession, as well. Peach said oil dropped from $147 per barrel in June 2008 to around $40 by Christmas the same year.

While the recent economic slide has a very different origin story, White said, it could end up having an even more disruptive effect for a state economy that in recent years had begun to grow.

“We weather recessions with difficulty here,” White said.

Even though economic activity slowed in 2008 and 2009, White said, the current drop came on more sharply, as New Mexico and other states ordered nonessential businesses to close to slow the spread of the virus.

Rules to restrict travel caused flights to the Albuquerque International Sunport to slow, and visits to local hotels plummeted. According to numbers from UNM’s Bureau of Business and Economic Research, Albuquerque hotel occupancy stood at 47.2% in March, down nearly 30% from March 2019.

Layoffs and furloughs have been concentrated in the leisure and hospitality industry, which accounts for nearly 25% of statewide unemployment claims.

But White said he sees the crisis growing to reach all corners of New Mexico’s economy, just as the impact of the housing market collapse did during the Great Recession.

Although Gov. Michelle Lujan Grisham recently said she intends to begin reopening businesses in mid-May, White said consumers could be cautious about returning to normal life without a vaccine in place, meaning once-crowded businesses could continue to suffer.

This, in turn, may make it less likely that businesses hire all their laid-off employees back after they are allowed to reopen.

“The expectation that these people will be hired back is really, really tough,” White said.

John Garcia, district director of the U.S. Small Business Administration’s New Mexico office, said small businesses, which employ 330,000 New Mexicans and typically operate with narrow margins, may bear the brunt of the economic challenges.

However, White said, the new economic crisis could provide an opportunity for large lenders to recover some of the goodwill they lost during the last recession. Instead of being a cause of financial strife, White said, they can be part of an economic solution by focusing on helping small businesses through grants or subsidized loans. He suggested either participating in new programs such as the SBA’s Paycheck Protection Program or expanding their own slate of financial resources for small businesses.

“I think technology’s going to play a major role,” Garcia said.

Making matters worse, the lack of activity worldwide has left New Mexico’s oil and gas industry in dire straits. Crude oil prices plunged into negative territory last week, which Peach attributed primarily to a lack of demand for gasoline and jet fuel.

Peach suggested New Mexico’s oil and gas industry could shed around one-third of its workforce, reminiscent of what the state experienced during a similar price plunge between 2014 and 2016.

“Times have changed, but I would guess we’ll lose, at some point, 30% to 40% of direct employment,” Peach said.

White added that skyrocketing unemployment and general uncertainty about the state of the world could also cause consumers to hold off on large purchases such as homes and cars.

This reluctance, combined with a rise in the number of people postponing their mortgage payments, could cause long-term problems for New Mexico’s real estate industry.

“We’re going to see the damage in this industry really hit hard,” White said.

White said New Mexico was slower than neighboring states to come out of the Great Recession. To avoid a similar fate from this downturn, White agreed with Garcia that the key will be the state’s ability to stem the spread of the virus, and adapt to changing consumer preferences once the virus is in the rearview mirror.

“It presents an opportunity for our small businesses to expand and develop and adapt in a way that exceeds other states,” White said.

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