GERARD S. CASSIDY – ‘Pockets of strength’

While the economic outlook for 2001 isn’t pretty, Massachusetts will not likely be the state to suffer the worst of it.

According to Gerard S. Cassidy, managing director of equity research at Tucker Anthony in Portland, Maine, recent consumer confidence in the economy has actually resulted in pushing the coming slowdown lower in the trough.

Cassidy spoke on the economic outlook for the coming year at a Massachusetts Mortgage Bankers Association membership luncheon last week.

“Nationally, the economy has changed dramatically over the last six months,” said Cassidy to the group of 170. The steady growth rate the country was experiencing has essentially stopped, he said, and the question now becomes whether the needle will go up or down over the next six months.

“It will turn negative,” predicted Cassidy, adding that it won’t be quite as bad as the hard landing experienced by the nation in the beginning of the 1990s.

Several factors have contributed to the coming downturn, including the much publicized “tech wrecks” of former sterling dot-coms tarnishing and their stocks crashing.

Additionally, the country’s ability to produce more goods has increased substantially, but demand is not there. Cassidy described the situation as “pushing on a string.”

“What you’re going to see out of Congress … is acts [designed] to stimulate buying, but the [consumers] won’t do it,” he said. If consumers aren’t spending, industries outside the technology sector consequently will be affected, said Cassidy. And when they are, he added, there will be more layoffs. He cited the recent announcement by Polaroid about a layoff of workers in December and its decision to suspend dividend payments.

“With collectively all these events taking place today, the economy is slowing down. Whether it will result in recession no one knows, but consumer confidence is down,” he said.

While the Federal Reserve has lowered and is expected to continue to lower interest rates, Cassidy said that may not have enough of an effect to subvert a declining economy.

“Rates impact the size of the car or house you buy, but the core decision is based on whether or not I think I’m going to have a job,” he said.

With the substantially increased numbers of people playing the stock market, the recent failures in the dot-com market have had far-reaching impact, he said.

“There’s been a considerable amount of loss in people’s portfolios. So if you feel less wealthy, you are not going to be as confident [in spending].”

Another telling indicator impacting the all-important consumer confidence factor is the help-wanted index, which analysts watch closely. If the national numbers continue to fall, it is only a matter of time before low help-wanted numbers reach the state, he said. Consumer confidence is at a level near to levels in 1989 before the dramatic fall in 1991.

Currently the national unemployment rate is 4.2 percent, and New England is lower than the average at 2.3 percent. “I would suggest that we’re going to see a higher percentage,” said Cassidy.

But while he predicts seeing unemployment claims rising to as much as 5 percent, that remains a historically low number. It may still have a detrimental effect on consumer confidence, however.

“We’re more comfortable with seeing it go from 10 percent to 3 percent rather than 3 to 5. So the direction’s as important as the actual level.”

The housing-starts index has also slowed some since 1999 levels. “We would expect to see this continue to slow down as the economy slows down,” Cassidy said.

As far as existing home sales, the anecdotal evidence points to a slippage of home prices, he said. “The multiple bids on the homes you saw last spring, you won’t see this spring,” he said. Besides the slowdown, the numbers will decrease because of the aging Baby Boomer generation, which will not demand new homes as much as when they were younger. But again, there is no reason for panic.

“All of these numbers are coming down to [still] very impressive numbers, based on what they were five years ago,” he said. “There will be pockets of strength. This is not the calamity of 1990, but it [won’t be] the boom times.”

Cleansing Process
However, one of the key factors that will determine whether the slowdown will produce a hard or soft landing is debt, both household and commercial.

Even if rates go down, if consumers are so wracked with debt they can’t buy, it won’t matter, Cassidy said. Nationally, household consumer debt is at 13.7 percent of disposable personal income.

“Consumers are going to have to look towards paying down debt,” he said, adding that the “purse strings are going to be pulled tighter,” because debt is high.

While consumers may struggle, banks supplying high-end loans to industry may be faced with tough times as well. “Corporate debt outstanding is at all-time record levels,” said Cassidy. Fortunately, many companies have recognized the slowdown is coming and have “pulled back” from creating more debt, he noted.

“We’ve got to go through a process of cleansing and … paying down the debt levels,” and then the economy will rebound, said Cassidy.

The one area of debt that isn’t rising is the government’s. “Government debt is declining because they are running huge surpluses … obviously, if the economy slows” that will affect the surplus, he said. But the federal government may slow down the repayment of that debt to ensure the government securities market, he said.

Although the predictions are hard to face after years of great economic forecasts, he doesn’t predict that the downturn will be as extreme as the period from 1989 to 1990.

“It took us almost eight or nine years [to get back] what it took two years to lose,” he said. Part of the reason is due to the diversification of industries in the state, whereas during the last downturn much was real-estate-related.

“The biggest risk to this environment is financial services,” he said, pointing out the changes inside the Route 128 beltway. “There are more people working in the mutual fund industry than technology,” he said.

If mutual fund growth slows, then there will be layoffs, he said.

Another area of concern is asset quality among banks. Although Cassidy predicts the Fed will lower interest rates another 25 basis points by the March meeting, he said the falling rates will be “overwhelmed” by the increase in bad loans.

In addition, loan-loss reserves as a percentage of total loans has shrunk from 2.1 percent in 1992 to 1 percent as of the third quarter of last year.

“The number is a decent number, but it is not high enough to offset the increase in problem loans,” said Cassidy.

Cassidy predicts that over the next 15 years, a continued dwindling of the number of savings banks and consolidation among the commercial banks. Eventually only two types of banks will make up the bulk of the industry, he said: “The Home Depot [type] at one end and the ‘mom-and-pop’ hardware store at the other.”

For banks, the slowing economy means lower earnings this year and lower stock prices. There will be the necessary tightening of belts, “[and] when the excesses are wrung out, it will come back,” Cassidy said.