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At the end of July, Vermont’s state economists said a recession looked unlikely in the next two years, as they projected a $56 million increase in state revenues.

Two weeks later, the U.S. stock markets had their worst day of the year, and the dreaded inverted yield curve — an indicator that investors expect an economic downturn — sparked speculation of a pending recession.

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If the U.S. is hit by a recession, say economic experts, Vermont is likely to feel the full impact. State revenues could dip as the need for state services increases; the market for Vermont-made products could shrink; and demographic challenges would likely be exacerbated as workers seek jobs elsewhere.

While economists say it’s impossible to predict what the economy will do globally or in Vermont, and investors hope stock markets will rebound from this week’s decline, there is cause for concern.

As Vermont economist Art Woolf put it, “There’s a whole lot of weird stuff going on.”

Woolf pointed to the recent contraction of Germany’s economy, unpredictable trade discussions with key partners like China, riots in Hong Kong, and recent mixed news about the growth of the U.S. economy. The Commerce Department reported U.S. retail sales rose in July, but manufacturing output dropped 0.4% in that period, Bloomberg reported.

“There are a lot of negative things going on, but that doesn’t mean we’re going into a recession,” Woolf said.

In the last recession, Vermont hadn’t seen the kind of housing frenzy — fueled by sub-prime mortgages and speculation — that spiraled out of control in a half dozen other states. So Vermont’s housing prices, which hadn’t risen as sharply as those in many other states, didn’t fall as significantly either. And local banks didn’t engage in bloated loan speculation.

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Eric Hanson, an investment adviser in Burlington, said Vermont was “insulated in that part of the recession; our banks did not fail.”

That was reflected in the jobless rate as well. While the national unemployment rate soared to 9% in 2010, Vermont’s rose as well, but not as high, reaching a high of 7% in 2009.

With the nation enjoying the longest economic expansion in history, predictions about the timing of the inevitable economic slowdown are a regular feature of policy discussions.

In late July, state economists told the state panel that sets official economic forecasts that there was no recession on the immediate horizon. A report presented to the state Emergency Board by Jeffrey Carr, the economist for Gov. Phil Scott’s administration, predicted that “current national and State economic upturns will continue,” adding it is “difficult to include a forecast of a recession over the next 24 months.”

A recession is defined as a period of economic decline that lasts at least six months. During the last one, which started in December 2007 and ended in June 2009, the nation’s GDP fell 4.3%, and unemployment rose from 5% to 9.5%, according to the Federal Reserve. Home prices fell about 30% nationwide, and the S&P index – an estimate of the stock performance of the 500 largest companies traded in the U.S. – fell 57% from October 2007 to March 2009.

Vermont has about $1.8 billion invested in pension funds and huge unfunded pension liabilities, but that isn’t where the state will be hurt if a recession starts, said Woolf, because that money is held for the long term – longer than any recession has lasted so far. General fund revenues will fall more quickly, and social service needs will increase, putting pressure on the state budget.

“That would have a real negative effect on the state’s fiscal situation,” Woolf said.

Some other demographic quirks set the state apart. One is that a relatively high proportion of Vermonters live on dividends and interest, not on a salary, according to tax data. While their stocks and bonds might go down, these Vermont residents aren’t necessarily working, so the recession might not affect them as much as those who rely on employment.

Another quirk: A higher-than-average proportion of Vermont’s GDP is in exports, according to the Joint Fiscal Office’s revenue forecast for next year. But that doesn’t necessarily make the state more vulnerable to changes in trade policy, Woolf said, because most of those exports are connected with the GlobalFoundries microchip plant.

“So really it isn’t so much what happens to the national exports; it’s what happens in that industry,” Woolf said.

A continuing problem – and one already linked to sluggish economic growth in Vermont – is the state’s declining population, a situation that employers and state officials have been trying to address with incentives for new workers and other programs. The state’s unemployment rate has hit a record low of 2.1%, making it difficult for employers to find workers.

While the U.S. population has expanded 5.8% since 2010, Vermont has grown much more slowly, gaining 5.1% in Chittenden County and losing population in more than half of its counties.

The state needs population growth in order to expand economically, and if a recession drives up unemployment, young people will likely leave the state to find work in more populous places. That means a problem that is big now might grow larger in a recession.

Reversing the population decline is key to helping Vermont thrive whether or not there is a recession, said Hanson.

“There are only two reasons that the economy grows in the U.S., or any place: There are more workers being put to work, and those workers become more productive,” he said.

Disclosure: Art Woolf is a VTDigger columnist and Eric Hanson is on the board of the Vermont Journalism Trust, VTDigger’s parent organization.

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