Business

Ky.'s recession to last through '09

The recession won't begin to end before late 2009, but the kind of growth Kentucky was experiencing before the recession won't return until 2010 or later, economists agreed at Tuesday's 20th Annual Economic Outlook Conference.

"I think the weather will get a lot warmer before the economy warms up," said Sara Johnson, managing director of Global Macroeconomics, a Massachusetts forecasting firm.

Ken Troske, director of the University of Kentucky's Center for Business and Economic Research, said Kentucky's economy will continue to "struggle" in 2009 but it will remain stronger than the nation's as a whole.

And the Lexington metro area will outperform Louisville and Northern Kentucky because the major employers in Lexington — UK, hospitals and governments — are not laying off workers and suffering financially, Troske said.

"All you have to do is drive down South Limestone and see all those cranes," he said, referring to construction at UK.

Even the largest manufacturer in the Bluegrass, Toyota, is doing better than most of its peers, Troske said.

The speakers also agreed that unemployment will remain a problem even after economic growth resumes and that credit markets are likely to recover very slowly. Loans will continue to be hard to get for many borrowers.

On the positive side, consumer buying power has rarely been better, and inflation is "yesterday's problem," Johnson noted.

But the opposite problem of deflation, involving long-term falling prices, is "a reasonably good prospect," said UK economist Don Mullineaux.

And that's not necessarily good news, he said. As prices fall, consumers tend to waiti for even lower prices, and "that makes the recession even worse."

Mullineaux also rejected a popular theory that the recession was caused by deregulation of the banking industry.

A more likely cause was "innovation," he said.

To get money for new mortgage loans, lenders began bundling mortgages for sale to investors.

They also began making so-called subprime loans to borrowers with low incomes or credit problems. The loans had adjustable rates that began rising, sending many borrowers into foreclosure because they couldn't make the higher payments.

Investors were left with bundles of mortgages, or securities backed by mortgages, worth less than their purchase price.

In response to a question from the audience, Troske said he was "a little skeptical" that the proposed $900 billion economic stimulus package being considered by Congress "will have a major impact" on economic growth.

It might reduce unemployment, but it will push up the federal debt by nearly $1 trillion — money that has to be borrowed and ad taken out of the economy.

Troske also said the tax cuts sought by Republicans in Congress should be called "tax postponements" because the lost revenue will have to be found somewhere else.

If rebates to taxpayers are involved, Johnson said, "a lot of it will be saved" and not be spent as Congress intends.

The stimulus package probably will contain money for highways and other construction projects, which will keep underemployed workers on the job, she said.

One risk is make-work projects that aren't worth the cost. She cited the proposed bridge in Alaska that would not be connected to a major highway. Congress considered the project, but scrapped it.

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