N.E. may stay afloat in stormy economy

Because of its diverse economy and the strength of its life sciences and technology industries, New England is better positioned to weather an economic downturn than other parts of the country, economists and business leaders say.

Yesterday, the Federal Reserve surprised investors by lowering its benchmark interest rate half a percentage point to 4.75 percent, its first rate cut in four years. Analysts had predicted a smaller reduction of a quarter of a point. In taking a bolder stance, Fed policymakers acknowledged that problems in the housing and credit markets are spilling over into the larger economy, increasing what they termed "the uncertainty surrounding the economic outlook."

"Right now we think there's a 40 percent probability that the US economy will be in recession in the next six to twelve months," warned Gus Faucher, director of macroeconomics at Moody's Economy.com, a research and forecasting firm in West Chester, Pa.

Despite soaring home prices, New England avoided some of the worst excesses of the housing bubble of the early part of the decade. Speculators built fewer subdivisions full of new homes because land is scarcer and prices are higher than elsewhere the country. "We're less prone to some of the shocks than the country as a whole because new housing construction isn't a large part of our economy," said Alan Clayton-Matthews, economics professor at the University of Massachusetts in Boston.

And some sectors of the region's economy, like technology, healthcare, and life sciences, are less vulnerable to a domestic slump because they sell many of their products in global markets, Clayton-Matthews said. The region's professional services firms, which sell research and consulting worldwide, are similarly insulated from a US slowdown, he said.

The region's telecommunications companies sell software and hardware "invented here in Massachusetts, but deployed in the world's communications network," said Hassan Ahmed, chief executive of Sonus Networks Inc., a telecommunications company in Westford. "The growing international presence we have is driving a substantial part of our growth."

"We are not seeing any decrease in customer spending as a result of an economic slowdown," said Neil Moses, chief financial officer of Parametric Technology Corp., a Needham company that sells its computer-aided design software to all corners of the world.

Many businesses say they have taken such steps as broadening their product lines and reaching into new markets to position themselves for a downturn. "The housing slump, credit woes, and slower retail sales seem to be creating the perfect storm for slower economic activity," said Thomas F. Ackerman, chief financial officer at Wilmington biomedical company Charles River Laboratories International Inc. "Fortunately, the life sciences industry seems to be riding out the storm."

But some economists warn that Boston, especially, might be strongly affected if sagging investor confidence leads to a sharp drop in financial markets. Companies that sell stocks or mutual funds or manage buyouts and initial public offerings could suffer, said Faucher at Moody's.

"Massachusetts and the New England region are likely to be more affected because of the concentration in financial industries," he said. "The banks, the investment companies, the mutual fund companies all could be hurt by this and could lay off workers."

A recession is defined by the National Bureau of Economic Research, a nonpartisan organization in Cambridge that has become known as the arbiter of recessions, as a significant decline in economic activity - measured in gross domestic product, employment, industrial production, and consumer sales data - lasting more than a few months. The last US recession ran from March to November in 2001.

Over the past few weeks, a drumbeat of bad news has heightened fears the national economy is sliding into a recession.

Retailers reported weaker-than-expected sales for August. Employers cut 4,000 jobs last month, the first monthly job loss in the United States in four years. And yesterday, crude oil prices hit a record $81.51 a barrel on the New York Mercantile Exchange.

Jeff Bertman, manager at Rogers Jewelry in Quincy, doesn't need an economist to tell him that the retail business is slowing. "The lower end of the market is struggling," he said. "Guys are still buying $5,000 diamond rings. But the self-purchases - the woman who walks in the store and buys a gold bangle bracelet for $650 - are falling off."

The recent economic contraction began early this year with a wave of loan defaults and foreclosure filings stemming from subprime mortgages sold to people with poor credit ratings in 2005 and 2006.

Defaults already have pushed dozens of lenders into bankruptcy and tightened credit across the board for consumers and businesses.

But because many of the low-quality mortgages were written with variable rates, economists say the full extent of the problem won't be known until those mortgages are reset at higher rates over the next six to nine months.

"Wall Street doesn't know, and the Fed itself just doesn't know, how big this credit problem is," Clayton-Matthews said. "This could be a short-term problem that passes relatively quickly. But it may be that many financial companies fail and many homeowners lose their homes. I don't think we're going to know until the first half of next year."

The biggest fear is that the subprime mortgage wounds will bleed into other parts of the economy. "So far we're not seeing any fallout from the credit crisis in the subprime market," said Mark Erlich, executive secretary-treasurer for the New England Regional Council of Carpenters in Boston, which represents unionized carpenters on projects throughout the region. "That could change on a dime."

Robert Weisman can be reached at weisman@globe.com. Carolyn Y. Johnson, Hiawatha Bray, and Todd Wallack of the Globe staff contributed to this report.