Road to Recovery

Colby’s annual economic forecast predicts a fast rebound for Maine’s service sector

By Kardelen Koldas ’15
December 15, 2020

Closed restaurants, deserted hotels, empty ski slopes. A service sector-induced recession was one of the many side effects of the pandemic. But if the right steps are taken, Maine’s economic recovery isn’t out of sight, a new Colby study found.

“We are forecasting a recovery in Maine, probably a little healthier than what some people are projecting,” said macroeconomist Michael Donihue ’79, Colby’s Herbert E. Wadsworth Professor of Economics, whose students forecasted Maine’s economic future by working through dozens of equations. “If we do get some sort of support from a fiscal policy on subsidies for small businesses and individuals, that’s going to help prop us up and return to more of a normal [economy], maybe quicker than other states.”

Since 1989, Donihue’s students have been producing the annual Colby Economic Outlook (CEO) and converting their classroom lessons to applicable post-graduate skills. In the past, the students have presented their work to policymakers, including Maine’s governor.

This year’s report, Colby Economic Outlook: Current Macroeconomic Conditions & Outlook through the COVID-19 Pandemic in the U.S. and Maine, was prepared by six students in Donihue’s Data Analytics and Forecasting course: Meredith Allen ’21, Olivia Greif ’21, Ping He ’21, DJ O’Donnell ’21, Sam Scott ’21, and Ruizhao Zhong ’21.

“My overarching purpose is to give real-world skills to students using credible statistical tools, but also their analytical understanding of how the economy functions,” said Donihue, adding that those skills have been very useful for students in the job market. “To estimate and forecast a structural model of the U.S. macroeconomy at the undergraduate level—that is pretty unique. I’m not aware of other places in the country to do that.”

This year, forecasting was a tough challenge because of the pandemic, which plunged unemployment to its lowest rates and caused the GDP to experience its biggest downward jump in decades. The keys to economic recovery were also wrapped up in politics. “So it was a fascinating time to be a macroeconomist, a fascinating time to be teaching a class like this,” said Donihue, “and the students just thrived in that.”

Using various forecasting methods and statistical diagnostics, the students predicted a recovery in 2021 with some assumptions: receiving a fiscal stimulus, a successful vaccine rollout, and the public adhering to pandemic guidelines. By the end of 2022, the study predicts, the country will be back to pre-pandemic levels of employment and economic output.

For Maine, the picture was even brighter.

Forecast for the Maine economy
The pandemic-caused declines in these areas bounce back up in the next two years.

“We’re a little bit more optimistic on Maine’s back-to-normal, although it depends on the indicator,” explained Donihue. “If you’re looking at income, then we’re probably a little more optimistic. If you’re looking at the level of unemployment—we’re about where the national average is—it’s going to take until well into 2022 before we’re back to that same level of employment, assuming that we don’t have any other shocks.”

The students carried out a specific analysis for a Maine economy heavily reliant on the service industry, including the tourism sector. They predicted that once those industries rebound, the state economy will too. Earlier in September, CNN and Moody’s Analytics’ “Back to Normal Index” signaled the same, placing Maine at the top of the list.

“Our model shows how once we get through this winter, we’re hopeful that with the vaccine and potentially further stimulus that tourism can return to the state and we’ll get back on track,” said Allen, an economics major who worked primarily on the report’s Maine section.

In the process of building the model for the U.S. economy, Allen brought in new equations relevant to the pandemic. For labor participation, for instance, she included females and high school graduates without college degrees as variables. While female participation recovered, Allen noticed that those without a college degree didn’t see a recovery at all in 2020’s third quarter (July, August, September). “That was really the only demographic group where we saw that,” she said.

Restaurants and Lodging Sales
Although the pandemic caused a V-shaped dip in restaurant and lodging sales, the report projects that these will grow by 33.35 percent in 2021 and then by another 8.03 percent in 2022, taking the state back to its pre-pandemic levels.

Making a county-by-county projection for Maine and seeing when each county might return to pre-pandemic levels was also crucial to their analysis, the students concluded. “To make a statement about Maine is to make a statement about sixteen counties, all of which have reacted differently to this pandemic,” said Greif, an economics and government double major who worked on the counties and was the report’s editor. “While some have seen a slow decline over the past ten years since the Great Recession, others have seen huge growth and will not feel the impact of COVID nearly as heavily.”

Coastal counties like York and Cumberland showed a sharp decline in employment given the pandemic’s impact on tourism, the study showed. But did the pandemic worsen employment in counties that had already been in a downward trajectory before COVID-19? They found that those areas would return to pre-pandemic levels. The analysis showed that employment in some counties, like Aroostook, Knox, and Lincoln, could decline through 2022, while others, like Cumberland, Franklin, and Piscataquis, can fully recover within a year or two.

The report also had a Maine-specific index called the “Colby Coincident Index” designed to assess the state’s economic health with four measures—total retail sales, total employment, turnpike traffic, and real personal income. The report projects that Maine will see a strong recovery, persisting through 2022.

Colby Coincident Index
The Colby Coincident Index uses state-specific variables to measure the health of Maine’s economy. Predicting a strong recovery, the students forecasted that Maine will see a 4.47 percent annual growth rate in 2021 and 2.12 percent in 2022.

But this scenario could unfold differently if Mainers don’t follow pandemic guidelines or if the state doesn’t get enough vaccines, for example.

“We do have a history in the state of taking a little longer to recover from national recessions,” said Donihue. But given the nature of this recession, it could be different this time. “If our tourism industry comes back—and we have a lot of reasons to think that it will—then this is the kind of baseline assumption we might expect. It may be a little optimistic, but it’s realistic for sure.”

For the nation’s general forecast, the students explored indicators like gross domestic product and consumption, income and corporate profits, the nation’s labor sector, inflation, and unemployment. While with most predictions it’s possible to see a significant dip and recovery during the pandemic—producing a V-shaped curve—they saw back-to-normal projections beginning in 2021 and extending into 2022.

But in case their assumed factors don’t happen, the team rolled out a “doomsday scenario,” complete with options. “Those are the kinds of things you can do if you build a model, you can actually move some levers inside the model to spin up those alternative scenarios,” Donihue explained. For financing the costly stimulus payouts, for example, the team proposed a solution from history: creating “pandemic bonds,” modeled after President Roosevelt’s war bonds during World War II.

“If we want to restore the economy, whether it’s in Maine, Idaho, or the nation, we have to responsibly approach how we’re going to deal with the pandemic,” said Donihue. “And that’s a lot more than just a vaccine. The vaccine will help a lot. But if people don’t take the vaccine, if we don’t roll [the vaccine] out the right way, if we have responses not well coordinated and leave some people behind, then it’s not going to help because the virus is still going to be here.”