Lessons from recessions past
Experience helped Massachusetts suffer less, rebound faster than other states
When the housing market turned south a few years ago, Rick Healey cut costs at his Leominster real estate firm, slicing staff as he prepared for a long, difficult slog. The moves were painful, he said, but they ultimately helped the firm emerge from the recession in solid financial shape, ready to ride a housing rebound that has boosted sales by about 20 percent from a year ago.
Healey, however, doesn’t claim clairvoyance. The recent crash wasn’t the first time he’d lived through a real estate collapse, with home prices plunging by about one-third and sales falling even faster.
While the historic downturn of 2008 and 2009 has become know as the nation’s “Great Recession,’’ here in Massachusetts the great recession occurred about 20 years ago. The epic collapse lasted nearly three years, destroyed more than one in 10 jobs, and spurred a massive migration from the state.
In many ways, the same elements that precipitated the recent Great Recession — overbuilding, over-borrowing, lax lending, and the attitude that good times would last forever — were key contributors to the state’s brutal downturn of the late 1980s and early 1990s.
In some ways, too, lessons learned from that searing experience helped Massachusetts come through the recent economic downturn in better shape than other parts of the country, and better than it has in previous recessions. For example, Healey, who had never seen home prices fall before, hesitated in the early 1990s to make tough cost-cutting decisions, believing the market would soon bounce back, and borrowing to keep the firm afloat.
In the end, Healey still had to cut costs and staff deeply, but in the meantime, he saddled the firm with debt that stunted its growth when the market recovered. It’s a mistake he wouldn’t repeat 20 years later.
“Experience prepares you,’’ said Healey, president of Foster-Healey Real Estate. “It told us that this time, it might not be over so quickly.’’
The Great Recession lasted nearly two years nationally, according to most economists, and is frequently described as the worst downturn since the Great Depression. But by several measures, it was Massachusetts’ mildest in almost 30 years.
The recent recession was shorter than the previous two downturns in the state, and resulted in fewer job losses, according to the New England Economic Partnership, a nonprofit research and forecasting group. The state shed about 170,000 jobs, or 5 percent of employment, during the 15 months of the last recession; 200,000 jobs or 6 percent of employment, during 24 months of the tech recession that began in 2001; and 350,000, or 11 percent of employment, during the 31 months of the early ’90s recession.
This recession also marked the first time the state fared better than the nation as a whole since the double-dip recessions of the early 1980s. The downturn was shorter here (15 months compared with 19 months nationally) and job loss less severe (5 percent of employment compared with 6 percent nationally), according to the New England Economic Partnership.
Perhaps more important, the state is recovering more quickly. The Massachusetts economy has expanded faster than the national economy in each of the last four quarters, and is adding jobs more quickly, too, according to the University of Massachusetts. Over the past three months, employment in the state has grown at a 4.5 percent annual rate, double the national pace.
The reason: the state’s mix of industries. The economy here relies more on technology and business spending, which have recovered strongly in recent months, and less on consumer spending and housing, which led the nation into recession and from which it continues to struggle.
The state also avoided the worst excesses of the housing bubble.
It didn’t experience the kind of overbuilding that devastated economies in states such as Arizona, Nevada, and Florida. And, for the most part, Massachusetts banks didn’t engage in the kind of risky lending that has led to nearly 300 bank failures across the nation. Only one occurred in Massachusetts.
That prudence may well have its roots in the early 1990s, when a generation of bankers, many now top executives, lived through the consequences of the easy lending that fueled rampant, speculative building. As Healey recalled, “Anyone with a pickup truck was a developer.’’
When that bubble burst, 44 Massachusetts banks failed, including one of the largest: Bank of New England. Dorothy Savarese, chief executive of Cape Cod Five Cents Savings Bank of Harwich Port, recalled arriving at the bank as a commercial loan officer in 1993, and being handed a portfolio with several troubled loans that needed to be worked out.
“People who were commercial lenders saw what led up to that recession, and became determined not to get caught up again,’’ she said.
In Lowell, not long after Enterprise Bank opened its doors in 1989, founder and chairman George Duncan watched local banks fall like dominoes. Comfed Savings failed in 1990; Lowell Institution for Savings in 1991; and Central Savings Bank in 1992. Bank of New England, which had a large presence in Lowell, went down in 1991.
“We knew there were clouds on the horizon when we opened, but we didn’t know there was a typhoon coming,’’ Duncan said. “They took risks they shouldn’t have. You have to assess risk and assess opportunity, and therein lies the trick of the trade.’’
Builders, too, became more cautious. Even in the recent housing boom, permits for residential construction in Massachusetts peaked at half of what they did in 1980s, according to the US Commerce Department. Gary Ruping, president of Ruping Cos. of Bedford, said he does less speculative building than in the 1980s and maintains a lower inventory of new homes to be sold. Also, he’s built a larger capital reserve to get through tough times.
“I don’t like this recession any better than the last one,’’ he said. “But more builders and developers are better capitalized and banks are more diligent.’’
New England’s Great Recession differs from the nation’s in some key aspects.
First, lending problems were concentrated among developers, rather than individual homeowners. In addition, the national housing and financial bubbles were fueled by cheap and widely available credit. In New England of the 1980s, a booming technology industry inflated the speculative bubble, said Fred Breimyer, who was then chief economist at State Street Corp., and is now a director of the New England Economic Partnership.
Minicomputer makers such as Digital Equipment Corp., Wang Laboratories, Prime Computer and Data General created a miracle in Massachusetts, transforming it from a dying Rust Belt state to a technology powerhouse.
Their spectacular success, said Breimyer, led to a “fair amount of hubris’’ and a sense that the state had “struck it rich, and it would go on forever.’’
Ultimately, these firms, which had dismissed Silicon Valley and the personal computer, collapsed, taking with them the support that had propped up the real estate and lending boom.
“We were definitely chastened and humbled, and we did learn lessons,’’ said Breimyer. “The period involved a lot of building, and a lot of expansion, and it’s a lot harder to build here today. Sometimes, being slow to the parade is not always a bad thing.’’
Robert Gavin can be reached at firstname.lastname@example.org.