Maine’s Economy: Making Progress MEREDA’s Annual Forecast Conference January 26, 2006 SLIDE 1 Introduction Good afternoon! What a pleasure to be here once more – to have this opportunity to talk with you about Maine’s economy and the outlook for real estate. As I prepared for this meeting, I was, once again, humbled by the prospect of coming before you for the 13th time and trying to find anything interesting to say. Since there are so many factors that play into the health of Maine’s economy and I’m never really sure what will be of the greatest help or interest to you, I decided to take you on a whirlwind tour. 1) I’ll start with a fairly brief overview of the current condition of and outlook for the national economy and Maine’s economy, 2) Then I’ll focus more directly on real estate trends and factors that will likely affect your world in the months and years ahead, 3) Finally, I’ll touch on the major initiatives that MDF is involved in and will welcome you to join us in moving Maine forward. Before I launch into the economics, I want to note the title… “Maine’s Economy: Making Progress” So frequently, we focus on all that is wrong rather than all that is right about Maine’s economy. We talk about
- Remember when, or - What a shame we’re losing all of our industry, - Or, my personal favorite, why can’t we be like New Hampshire? Over the past few months, I’ve been struck by just how discouraged folks seem – more discouraged, in fact, than what the economic data justifies. I’ve had a chance to visit many parts of Maine and see, up close, all that is going on in Maine. Yes – we’ve suffered some blows – But there is growth, – There is excitement and – There is ample reason to hope. SLIDE 2 Old Computer Check out this picture. The caption reads… “Scientists from the Rand Corporation have created this model to illustrate how a home computer could look like in the year 2004. However the needed technology will not be economically feasible for the average home. Also the scientists readily admit that the computer will require not yet invented technology to work, but 50 years from now scientific progress is expected to solve these problems. With teletype interface and the Fortran language, the computer will be easy to use” Think of the progress we’ve made technologically – far beyond our imaginations. So today, I’m here to ask you to have some faith in Maine. And while we may not be growing as fast as we’d like and while we do have some major issues that need our attention, Maine is making progress.
SLIDE 3 Let’s begin our journey… • • • • Real GDP is the best measure of economic health. In the mid-late 90s, the US enjoyed a very strong expansion. Earlier this decade we had an exceptionally mild recession. Since then, we’ve had decent growth in the 3-3.5% range.
SLIDE 4 S&P 500 Much of the recent national experience has been driven by the stock market • The market soared through the late 90s – with the technology boom. • Took 3 major hits: - 2000 – Technology bust - 2001 – Sept. 11 terrorist attacks - 2002 – Accounting scandals • Markets recovered through he end of 2004, and • Stalled in 2005 SLIDE 5 As the stock market plummeted, - the Fed reacted with a vengeance, - slashing interest rates several times - to historic lows by 2004. Although rates have risen in the past 12 months – still relatively low.
SLIDE 6 CPIU The Fed’s actions did keep the economy on track and inflation under wraps. In fact, for a record 14 years, inflation has been below 4% - which is virtually unheard of. SLIDE 7 Oil Prices Of course, the Fed’s ability to control inflation will be tested by the sharp run-up in oil prices. West Texas Crude doubled over the past 2 years – putting a wet blanket on the economy. Forecast to subside from the current level of $56 to the mid- $30s in a year or 2. If prices are brought under control, the national economy is expected to continue growing at a modest pace of 3-3.5% through 2009. SLIDE 8 Population Growth – US Regions While the nation as a whole will expand at a modest pace, growth across the regions will vary widely – based in part on population growth. It is important to note, over the past 15 years, New England’s population has only grown 5%, making it the slowest growing region by far. In fact, some regions have expanded 4 to 6 times as rapidly. Population growth will have a significant affect on the pace of growth in Maine’s economy and real estate.
SLIDE 9 ME W&S Employment Following the deep recession of the early 90s, Maine’s economy grew steadily. In 2000, we stalled out, went into a holding pattern and have finally begun to grow once more. Despite our paltry performance, Maine has outpaced both the region and the nation! SLIDE 10 W&S Employment by Sector While this chart is a little difficult to follow, starting at the bottom portion of each bar, we see - that manufacturing jobs have steadily declined, - retail trade has grown at the same pace as overall employment, contributing over 14% of all jobs, - the healthcare and tourism sectors have expanded in both real terms and in their contribution to the employment mix, together providing 25% of all jobs and - government employment has stagnated SLIDE 11 Employment Sector Growth The most recent data suggests that these trends are continuing. While Maine’s employment base expanded 1.2% in 2004, manufacturing declined and retail trade and health services grew at 2 and 3 times the average, respectively. SLIDE 12 Unemployment Rates For nearly a decade, Maine’s rate of unemployment has been below the US – creating tight labor market conditions in much of Maine.
In recent months, the Local and national jobless rates have converged at a very reasonable 5% level. SLIDE 13 Mortgage Rates Like the US, Mainers have enjoyed plummeting Mortgage rates which has allowed for an extended period of building, buying and re-financing. SLIDE 14 Gas Prices While interest rates have spurred growth, the sharp run-up in gas prices has hit households and businesses alike. In 2005, prices at the pump shot up by over 50%, taking an immediate toll on Maine’s commuting population and the transportation sector as a whole. Prices have subsided a bit – although we seem to now have a warped sense of normality. I found myself excited to pay only $2.20 at the pump a while ago and, after feeling like we’d been had, I now feel like a genius for locking in at $1.99 for heating oil. SLIDE 15 US Canadian Exchange Rate On the brighter side – those geographic areas and industries that compete for Canadian trade are finally getting some relief. The exchange rate has fallen from a high of $1.60 to the current $1.18. This is great news for: • border communities • tourism and
• natural resource-based industries SLIDE 16 ME Consumer Retail Sales While increased gas prices are likely muting sales growth, overall consumer sales have remained fairly strong in Maine for some time. SLIDE 17 ME Building Supply Sales And building supply sales growth patterns reflect a solid real estate market for a number of years, with some minor slowing in recent months. SLIDE 18 CMP Residential Customers As we assess the outlook for economic activity and real estate growth going forward, there are a couple of indicators that give me some indication that the rate of growth may be slowing a bit. For years I’ve used Central Maine Power Company’s year over year customer gains as a leading economic indicator since CMP serves roughly 80% of the state’s population. As this chart shows, customer gains have been increasing slowly in recent years, but the rate of growth began to dip through 2005 from a high of 8,500 to the current 7,400 level. SLIDE 19 CMP C&I Customers Similarly, CMP’s commercial and industrial customer gains have slowed markedly from an exceptionally strong rate of increase near 2,000 to the current 600 net new customer level – likely a reflection of slow regional economic growth.
SLIDE 20 New Business Starts Statewide, new business starts in Maine outpaced the New England region in 2004, but over the past decade and a half, the rate of new business starts in Maine has been virtually identical regional expansion. SLIDE 21 Cost of Doing Business Maine’s ability to attract investment and stimulate new business births will be influenced, to a certain degree, by our ability to bring the cost of doing business in line with regional and national averages. While a much fuller description of our costs will be released at a press conference February 1st as the Maine Economic Growth Council’s 12th edition of its Measures of Growth report will be presented to the Governor and Legislative Leadership, I would note that we are making some progress in this critical area as well. By both the Economy.com and the Milken Cost of Doing Business indices, Maine’s ranking relative to other states is improving. SLIDE 22 ME Bankruptcy Filings Real estate activity going forward will undoubtedly be influenced by the financial viability of households and businesses. One indicator of financial health is bankruptcy filings. Despite fairly stable economic conditions, the numbers of Maine people and businesses that have filed for bankruptcy during 2005 have increased fairly sharply. While it is important to keep in perspective that 5,000 entities is a relatively small portion of our human and business population, the trend remains a concern and it serves as an indicator that there are a number of people who are living near the edge.
SLIDE 23 Per Capita Bankruptcies by State Putting Maine in context, we see that per capita bankruptcies in Maine are among the lowest in the nation. So while it is certainly important to keep and eye on this trend, it should not evoke feelings of panic. SLIDE 24 Maine Bank Non-performing Loans And perhaps one of the most comforting statistics, from my perspective, in assessing the potential for growth in real estate going forward is the strength of our financial institutions. While non-performing loans shot up prior to the recession of the early 90s heralding a real estate bust, this has been a non-issue for years. Virtually all of Maine’s financial institutions are profitable as well which bodes very well for growth. SLIDE 25 Non-current Loans by State As this map depicts, the degree of nonperforming loan activity across the US is more of a concern in other regions. SLIDE 26 Contract Construction Awards And my favorite leading indicator of real estate activity, Contract Construction Awards, appears to be very strong, driven by residential contract awards but supported by non-residential and non-building activity as well. This bodes very well for construction work over the upcoming 12-18 months.
SLIDE 27 Maine Employment Forecast Overall, the outlook for Maine is a decent one. According to the Consensus Economic Forecasting Commission, employment growth will continue at a fairly unexciting pace – expanding at a rate that is slightly less than 1% each year for the foreseeable future. Slow population growth and modest regional gains will keep Maine’s rates of increases in check. SLIDE 28 County Forecast - Employment Over the longer term, employment gains will vary widely by county. Not surprisingly, the State Planning Office projects that the most rapid employment growth will take place in the southern and mid-coastal counties with the exception of Sagadahoc which is expected to struggle as BIW faces increasingly competitive conditions. Central inland counties will experience job gains that are more representative of statewide averages, while the rim counties will continue to lag in the degree of employment dynamism. SLIDE 29 Maine Personal Income Forecast Continued income growth in the 5-5.5% range is forecast through 2009. Tight labor markets will keep some pressure on wages as employers battle to attract and retain workers. SLIDE 30 County Forecast - Income As with employment growth, income increases will vary by county as well with the lion’s share of growth occurring in southern and central Maine.
SLIDE 31 County Forecast – Retail Sales Retail sales are projected to grow at near 5% annually, with above average increases accruing in southern Maine and much slower retail activity in the Rim counties. SLIDE 32 Maine Housing Unit Permits I’d now like to focus our attention on real estate indicators. Housing activity has been strong for a number of years in Maine and has, only recently begun to abate. While it took well over a decade to recover from the bust of the early 90s, even with a slowdown in 2005, permitting activity remains at a historically high level near the 1989 peak. SLIDE 33 Number of Existing Maine Homes Sold The number of existing homes sold has also increased through the past decade – though at a slower rate than new housing expansion. As this clearly depicts, the sales of existing homes have also dropped off during 2004 and 2005, likely due in part to rising interest rates. SLIDE 34 Units Sold Sept – Nov 2005 The most recent reports of the number of units sold from September through November shows the magnitude of difference across the counties with the sheer volume of real estate activity in York and Cumberland counties accounting for the vast majority of statewide sales. SLIDE 35 Maine Repeat Sales Home Price
While the volume of sales in both the new and existing home markets has slowed, prices have continued their relentless ascent!! The Maine repeat sales home price index grew at a torrid pace over the past year. SLIDE 36 Percent Change in Median Price Sept – Nov 2005 While Maine’s median price increases in excess of 8% during the last quarter did not keep pace with the 13.5% increases endured nationally, a glance at the price increases across Maine’s counties suggests that housing price pressures are mounting in the rural reaches as well. SLIDE 37 Median Sale Price Sept. – Nov. 2005 It will undoubtedly take a good long while for housing prices un northern and eastern Maine to near southern Maine levels, it stymies me that median prices in York, Cumberland and Lincoln counties rival those of the extremely expensive northeastern US – exceeding a quarter of a million dollars! Yikes! Even the lower statewide average of a mere $195,000 is a lot of money on a Maine income! SLIDE 38 Home Price Growth by State Whereas Maine’s volume of sales is in the lower quartiles, both Maine and the New England region are experiencing above average price inflation. SLIDE 39 Affordability Comic And rapid price increases combined with modest income gains have led to significant affordability issues in the Pine Tree state!
In the comic, while this poor couple takes a few moments to decide, the nice young lady from Arm and Leg Realty informs them that the price has risen another 17.4%. While Maine’s situation is not quite that dire – it certainly has emerged as a major issue and one that will be noted in the Measures of Growth report coming out next week. SLIDE 40 Housing Affordability Whereas Maine was once a real bargain for house hunters, the competitive advantage that we once held has sadly eroded. This measure of affordability developed by the Maine State Housing Authority shows that the average Mainer’s ability to secure affordable housing, rather through the purchase of a home or through renting, has diminished greatly since 2000 and has tracked both regional and national trends. In this index, a measure of 1.0 or reflects affordable housing options. Unfortunately, over the past 5 years, Maine’s index has fallen from the affordable range of 1.01 in 2000 to the current estimate of 0.78 in 2005. SLIDE 41 Homeowner Affordability Of greater concern and likely surprise to many, would-be homeowners across the entire state are all facing affordability challenges. Recent estimates show that whereas 13 counties were near or well above the 1.0 mark as of 2000, now only 3 counties, Aroostook, Piscataquis, and Somerset provide affordable options. So why have prices risen so much over the years? Well, there are a number of factors that have played into this phenomenon including zoning laws, limited supply and sprawling patterns of development, but
one of the greatest factors appears to be our appetite for bigger and bigger houses! Americans have “super sized” their housing purchases in the same way we’ve super-sized our fast food! A wonderful article in Common Wealth magazine’s 2006 Growth and Development edition speaks to our building of McMansions! SLIDE 42 More Bedrooms In fact in his one page article entitled “Statistically Significant”, author Robert Sullivan notes that from 1974 to 2004, the number of new homes with more than 3 bedrooms rose 15 percentage points. SLIDE 43 More Bathrooms He goes on to state that in 1974, only 19 % of the new homes nationwide had more than 2 bathrooms, whereas by 2004 – 57% of new homes contained multiple water closets! And in the northeast – we really love our potties as a whopping 74% of all new homes have more than 2 bathrooms. You can draw your on conclusions as to what that says about what we’re full of up this way! SLIDE 44 More Floors And the housing starts today include more floors, more garages and much more square footage than those of yesteryears. All that adds up to significantly higher prices.
SLIDE 45 Maine Population Growth In addition to the economic trends that will influence real estate activity in the years ahead, I would be remiss if I didn’t remind you of the major demographic shifts that are taking place. I realize that I have been reporting on these same trends for 13 years now – but they are simply too important to ignore – so I’ll be brief… Maine’s population is growing SLOWLY: While population growth picked up to 8/10s or 9/10s of a percent earlier this decade, the 90s were abysmally slow and the forecast is for growth to subside. SLIDE 46 County Forecast - Population And as I’ve highlighted throughout this talk, regional differences will be significant, with virtually all population gains accruing in the southern and mid-coastal counties. And, according to the State Planning Offices long range county forecast, there is the potential for continued population erosion in the far northern and eastern regions. SLIDE 47 Maine Live Births Maine’s population is growing OLDER. Here’s the tidal wave of baby boomers that are about to crash on the shores of retirement, and we can simply not afford to ignore how this major demographic shift will touch every family, community, business and institution in Maine. It needn’t be a problem if we plan for it now.
SLIDE 48 Old Ladies Bowling Here’s my subtle reminder that by 2025, 1 out of every 5 Mainers will be over the age of 65 – whether we are ready or not! They will be healthier, wealthier, more active, more independent – but they (I should say - WE) will be old nonetheless! Will we have the appropriate housing, transportation and health care options to serve this population? SLIDE 49 % Population Living in Service Center Maine’s population is growing EXPENSIVELY as we continue our sprawling ways! Recent figures from the State Planning Office illustrate that our movement away from our service center communities continues, adding financial and environmental pressures and eroding quality of life. SLIDE 50 Farm/New Houses There is no place where those development pressures are more evident than in southern Maine, where new housing and business growth consume the natural resource base of farmland, forests and water frontage, creating a clash between growth and traditional industries. Fortunately, a much greater understanding of the causes and costs of sprawl has evolved and many in this room are engaged in efforts to protect the treasure of Maine. SLIDE 51 Leadership Maine Before I wrap up, I want to very briefly tell you a bit about the Maine Development Foundation which is a unique non-profit created in statute
over 27 years ago to serve as a partner with State Government in long term economic development. You may be familiar with our flagship program, Leadership Maine. MDF believes that if you bring together 1,000 Maine leaders, • Equip them with leadership skills, • Immerse them in the Maine economy, • Excite them about the future and • Empower them to take action – they can move mountains. That’s why we run Leadership Maine. We’ve now graduated 480 and we’re currently recruiting our 14th Class. SLIDE 52 Maine Economic Growth Council MDF believes that if you provide Maine people - With objective, non-partisan information about the performance of Maine’s economy, - The level of debate will rise and sounder policies will be developed. That’s why we staff the Maine Economic Growth Council and publish the annual Measures of Growth report card which will be released next week. SLIDE 53 Policy Leaders Academy MDF believes that taking new Legislators - On an intensive economic bus tour of Maine, - Introducing them to business people around the state
- And letting them see, first hand, how their public investments in transportation, education and other public systems drives economic development – - Grounds and enriches the policy making process. That’s why we run the Policy Leaders Academy. SLIDE 54 Maine Downtown Center MDF believes that vibrant downtowns • Can be an economic engine of growth, • Can serve as an attractant to young people, creative economic ventures, retirees and diverse populations, and • Can mitigate costly sprawling land use development patterns That’s why we run the Maine Downtown Center so we can focus investment dollars from such partners as the Betterment Fund, and the USDA into Main Street Maine communities. SLIDE 55 Employers Initiative MDF believes that post-secondary education is absolutely critical to Maine’s future and has recently been hired by the Compact for Higher Education and funded by the Ford Foundation to research and promote best practices in Maine employers encouraging their employees to seek college degrees. SLIDE 56 Capital Riverfront Improvement District MDF believes that Maine’s Capital City is on its way to becoming a true hub of cultural and heritage-based tourism and will be a source of great pride for all Maine people. This is why MDF is providing
- Administrative and technical support to the Capital Riverfront Improvement District and - Is working to aid in the development of Edwards Mill Park and the national historic Arsenal. SLIDE 57 Realize!Maine MDF believes that organizing and empowering Maine’s young workingage adults will increase excitement and encourage young people to stay and work in Maine. That’s why we have agreed to champion the statewide Realize!Maine initiative launched by the Baldacci Administration 2 years ago. SLIDE 58 Workforce Development Mapping Project MDF believes that a thorough assessment of how Maine’s limited workforce development resources are being spent will help policy makers better target important investments. SLIDE 59 Regionalization Services MDF believes that one key to relieving Maine’s tax burden is to find a new, more cost-effective way to deliver public services. That’s why MDF is administering State Government’s $1 million grant fund to encourage the efficient delivery of local services. SLIDE 60 Growth Council Vision At MDF – we can imagine a future for Maine where the economy is strong, the communities are vital, the environment is healthy and all Maine people do enjoy a high quality of life. It is within our reach. Just imagine if others discover…
What Inc. magazine did when they named Portland and LewistonAuburn among the best places to do business in the US? …Or what Direct Foreign Investment Magazine did when they named Maine as having the Best Quality of Life in the US? Just imagine all the possibilities for Maine if Richard Florida, and Thomas Friedman, and Michael Porter are right – That with technology, people can live anywhere in the world Just imagine if we take the steps necessary now to nurture and sustain Maine’s natural resource based economy and it grows once more? Yes, we have important challenges that demand our attention, but Maine is, slowly but surely progressing, and if we continue to focus on the important issues, we can set Maine on a more prosperous path.