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Edward Deak is a Fairfield University economics professor, formerly head of the department. He is also the Connecticut model manager for the New England Economic Partnership, which produces a semi-annual New England forecast, the latest report released last week.

Harlan Levy: What’s the likely course of the U.S. economy, especially regarding jobs and housing?
Edward Deak: The U.S. economy is most likely going to pick up the pace of recovery from what happened in the first quarter of this year. What happened was gross domestic product increased at only 1.8%, mostly because of the winter conditions in the U.S., concern over the Japanese nuclear crisis, and rising energy and commodity prices. Most of those headwinds should abate as we go into the latter portion of this quarter and the second half of 2011.
GDP for the year should grow at about 3%, and with a bit of luck we may see 4% growth in 2012 and 2013, which means that job creation should stay on track at about 200,000 to 250,000 new jobs per month and maybe a bit stronger as we head into 2012 and 2013.
The unemployment rate is going to be slow to recede, because, as conditions improve, people will enter and reenter the workforce, but all of that is expected as part of a reasonable economic expansion.
The housing market is still at the national level under considerable pressure from foreclosures and short sales, and is not likely to show much strength until at least the end of 2012. The weak housing market, particularly for new construction, is a major headwind keeping the national and state economies from recovering at a faster pace.
H.L.: Based on what happened after the first quantitative easing by the Federal Reserve, a 15% to 20% drop in stocks is likely after June when QE2’s purchases of $600 billion in Treasuries ends. Do you agree?
E.D.: It’s unlikely. At this point it appears that the stock market is well aware of the end of QE2 and has likely priced in most of the adverse consequences.
That said, QE2 is really composed of the $600 billion purchase of new Treasury securities spread over an eight-month period and the reinvestment of the "run-off" of security obligations that are being repaid to the Federal Reserve over time. That amounts to about $300 billion. So the total of QE2, new money plus run-off, is about $900 billion over eight months. I would not be surprised if the Fed ended the new purchase of securities in June as planned but continued to reinvest the runoff. The Fed would do that publicly to add further stability to the stock market. And as well as stabilizing the stock market, ending the new purchases should help stabilize the dollar.
H.L.: Does artificial support for the bond market and equities, which is what quantitative easing does, mean that we are looking at asset-price bubbles that may come to an end before the year is over?
E.D.: Not necessarily. The Fed’s action is designed to support the overall U.S. expansion. If the expansion continues and picks up speed, the growth in jobs and output will justify and re-enforce equity and bond values. If the Fed gets it right in terms of timing and amount, its policy over the next 12 months may be sufficient to support a non-bubble, non-inflationary expansion in U.S. GDP and employment.
My concern is what happens in 2013 and beyond. Will the Fed be able to gradually ease itself out of excessive financial market involvement without creating an inflationary bubble, or removing the major tailwinds supporting the recovery? That’s the tricky question.
H.L.: What market sectors look good?
E.D.: I always think that exports are good. Connecticut is an exporting state with manufacturing products, so that’s going to help Connecticut. Products tied to technology and Internet software and healthcare are the hot areas of the early 21st century.
H.L.: What’s Connecticut’s outlook in jobs, housing and the budget?
E.D.: Connecticut is making some headway against the 119,000 jobs that it lost. As of the latest report we’ve gained back a bit over 30,000. In total, for 2011, the New England Economic Partnership looks for a job gain in Connecticut of around 16,000, with another 15,000 in 2012, and another 22,000 in 2013: good gains, but not spectacular.
Through the end of the forecast in 2015, we should recover almost all of the 119,000 jobs we lost. Not surprisingly, the majority of those job gains will be in the healthcare industry, along with professional and business services, and leisure and hospitality.
Goods production, which includes construction and manufacturing, will play a much smaller role, and therein lies an interesting story for Connecticut. We should be gaining manufacturing jobs at Pratt & Whitney and its supply-chains in the state because of the awarding of the 4,000-engine tanker contract for about a dozen years and the single-sourcing of the F-35 fighter engines to Pratt.
While defense contract work has to be done in America, there’s a question as to how much will be done in Connecticut as opposed to other Pratt sites, particularly in Georgia. That affects not only the big Pratt sites in East Hartford and Middletown but also the local supply-chain firms.
Also, Pfizer (NYSE:PFE) is moving 1,100 jobs out of the New London-Groton area and relocating these well-paid research positions to Cambridge, Mass. And there’s unconfirmed speculation that UBS (UBS) will be reducing the size of its workforce in the Stamford area. That’s the big global trading operation, and if that happens it would not be good news for the lower Fairfield County area.
If these job relocations were not to take place, the Connecticut economy would appear much stronger in 2012 to 2014. That’s a wait-and-see.
H.L.: What about unemployment?
E.D.: The state’s unemployment rate should follow job creations with a lag, so that as jobs are recovered, the rate will fall. However, as state conditions improve, workers will reenter the labor force, keeping the unemployment rate uncomfortably high for a period before the new job opportunities finally pull it down from the 8% to 9% range.
H.L.: How about housing?
E.D.: Connecticut’s new-home permits are bouncing off Depression-like lows. New permit traction will be slow to take root until the excess supply of existing homes is whittled down. Sales are expected to grow in Connecticut for 2011 and 2012, but prices should stay flat or decline another 1% to 2%, reflecting foreclosures and distressed sales.
When new-home construction gets going, this will provide an important and sizeable tailwind for the economic expansion, which is likely in 2013 and 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Economist Edward Deak: Drop in Stocks After QE1 Won't Repeat When QE2 Ends