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Election-year economics: 10 essential questions

How will the economy do this year? How will the economy impact presidential race? Is Seattle really in an economic growth zone? Here are some answers to your questions about 2012 for the our pocketbooks, the nation, and Seattle.

President Obama delivers the 2012 State of the Union address to Congress.

President Obama delivers the 2012 State of the Union address to Congress. Pete Souza/White House

Boeing's 787

Boeing's 787 Boeing Company

President Barack Obama mentioned jobs 34 times in his State of the Union address. Mitt Romney and Newt Gingrich both have “jobs” or “jobs and the economy” listed on their web sites as the first of the issues they address.

No surprise, then, that jobs and the economy are going to be among the most critical issues in the presidential election this fall and could determine the eventual winner. And the news Friday (Feb. 3) on the nation’s jobs and unemployment picture likely means that the debate on the 2012 economy is now beginning.

Round one goes to Obama. The Bureau of Labor Statistics' report on Friday showed that total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent from 8.5 percent in December. “Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing.  Government employment changed little over the month,” the BLS said.

That’s good news for the Obama campaign, though there are numbers in the report that point to the tasks still ahead for the economy. There are 12.8 million still unemployed. The number of persons employed part time for economic reasons was 8.2 million, little changed from a month ago. There are still 2.8 million “marginally attached” to the labor force, essentially unchanged from a year ago.

The state Economic and Revenue Forecast Council, which met Thursday in Olympia, had an interesting number in its report that points to the continuing difficulties in the economy: Real gross domestic product, the sum of all the goods and services in the economy, is now above its pre-recession peak, but it is being produced with 6.2 million fewer jobs.

What’s ahead? Here are 10 questions about the economy in 2012.

1. Will the economy continue to expand? Yes, but.  Yes, the economy should continue to post very modest growth for 2012, perhaps about 2 to 2.5 percent or so on average for the entire year. The “but” comes from a number of what economists call externalities — unknown events that might happen that could affect the economy.

The list of worrisome externalities is substantial — the fate of the euro; European debt, especially that of Greece, Spain and Italy: a European recession (which seems likely now); slower growth than expected in China, India, and Brazil, another round of weather-related disasters; and congressional inaction on a number of pressing issues, including the pre-programmed fiscal tightening that grew out of the budget battles last year. The Organization for Economic Co-operation and Development (OECD) in Paris, which monitors major industrial countries, said inaction “could tip the economy into a recession that monetary policy can do little to counter.”

The OECD puts economic growth in the U.S. at 2 percent for 2012 and 2.5 percent for 2013.  And there does not seem to be anything on the horizon to boost those growth prospects, especially in an election year.  The Blue Chip Consensus, used by the state for its forecasting,  puts growth at  2.2 percent and 2.6 percent for 2012 and 2013.

2. What about the economy and President Obama? A mixed bag but on the whole positive.  Most attention in the presidential races falls on the unemployment rate — it is something that most of us can understand and grasp as a good indicator of where things stand. The strong report Friday was good for the Obama camp, but the economy is only just beginning to grow fast enough to do much about replacing the jobs lost during the steep recession that was ending just as he came into office. There now have been two months with job growth of 200,000 or more, but the six-month average is about 150,000, enough to handle demographics, which requires about 125,000 jobs a month to accommodate new entrants to the work force, but barely enough to help the long-term unemployed.

The way unemployment is figured, the unemployment rate could actually rise in early 2012, because more people will be encouraged to re-enter the work force. With sluggish growth in jobs, more people in the work force looking for still scarce jobs would push the overall rate higher. But if the economy is on track to grow in 2012, even slowly, that growth should be fairly solid by fall, which will be a positive for the president. If the growth falters, as it did in 2011, then things could get interesting. 

3. So why hasn’t the economy responded? Several factors are at work. One, the recession that developed in 2007 was the worst since the Great Depression in the 1930s. It would take the economy a while to recovery from that recession even if the recovery were “normal.” But the recovery was not normal. For one thing, housing and commercial construction usually kick in after a recession trying to fulfill any pent-up demand caused by the recession. But this time, housing was a big part of the recession in the first place as the mortgage bubble collapsed, flooding the market with millions of homes at substantially lower values.

Many people have much of their net worth tied up in their homes. And with values still disappearing, many people are reluctant to spend.The report out last Tuesday (Jan. 31) reflects that fact — the S&P/Case-Shiller Home Price Index for the Seattle metropolitan area, which includes King, Snohomish and Pierce counties, showed home values declining in November, to a low point since the recession began. Housing here declined 31 percent from the peak in 2007.  Homes in the United States were expected to lose more than $681 billion in value during 2011, which is 35 percent less than the $1.1 trillion lost in 2010, according to recent analysis by the Zillow Real Estate Market Reports. And don’t expect things to improve soon. Zillow also forecast another slight decline in home prices this year, with some improvement beginning in 2013. Here’s the reality: A Zillow survey of experts said the consensus is that home prices will be just 9 percent higher than they are today at the end of 2016.

4. What are the positives? Generally speaking, people are more positive about the economy, though still far from confident in its future course. Consumer sentiment is improving. Manufacturing is fairly solid with the Boeing Company a good part of that. Housing starts are picking up a bit, though mostly in the multi-family segment as builders try to tap into the rental market. But that industry is famous for overbuilding and likely will slow later this year as the market becomes more saturated. The double-dip recession that was feared last fall when the economy slowed seems much less likely now.

5. What are the negatives? Unemployment. There remains a large overhang of workers who cannot find jobs, are accepting jobs at lower pay, are taking part-time jobs, or have just given up. Portions of the economy also are suffering more than others. The University of California at Berkeley Labor Center said recently that black unemployment is worse now than it was two years ago. According to the report, the black unemployment rate is higher now than at the official end of the recession in June 2009. That unemployment rate then was 14.9 percent.  It stood at 15.8 percent at the end of last month.

6. Why do experts believe growth will be slow?  The signs continue to point that way.  On Monday (Jan. 30), for example, the government released a report on personal income.  It was up 0.5 percent in December, which is generally a good thing.  But spending was up only 0.1 percent in the month, meaning that the holidays were perhaps not as robust for retailers as first thought.  People are still cautious about spending as reflected in the fact that the savings rate for December was 4 percent, compared with 3.5 percent in November.  Continued high unemployment and a housing market still in the doldrums are making consumers reluctant to spend, or only spend on real bargains. 

7. What about Washington state? Washington’s economy is benefitting from solid performances by aerospace, software, and agriculture, according to the state Revenue and Forecast Council. But overall growth is being held back by a still stagnant construction sector and declining state and local government budgets. A developing risk to Washington comes from the slowdown in growth in Asia. In the past we have noted our below-average exposure to Europe as a relative advantage to Washington as that continent flirts with recession,” the Council said in a recent report.“However, we are much more vulnerable to the slowdown in Asian growth than is the average state.”

In its latest forecast, the Council said that except for construction, and state and local governments, the Washington economy is sound. “We have raised our Washington job growth forecast for 2012 and 2013 to 1.6% and 2% from 1.2% and 1.9% in the November forecast,” the Council said. “We also raised our forecast for personal income growth to 3% and 4.8% from 2.8% and 4.7% in November.” The personal income growth is especially important – think of it as fuel for the economy.

8. What about Seattle? The Seattle area will be one of those places in the country that buck the trend. The area has a range of companies that for one reason or another are proving to be somewhat recession proof. Boeing, Microsoft, Starbucks, Amazon.com, Nordstrom, Costco, and so forth are all performing well in the recession. Seattle’s unemployment rate fell in December to 7.9 percent from 8.2 percent in November. King County’s rate is 7.2 percent. So generally the Seattle area is doing quite well – even the number of unemployed persons in the county dropped.

What is troublesome is the overall report for the state, which showed a seasonally adjusted decline of more than 10,000 jobs. Seasonal adjustments can also mask more fundamental issues with the economy. For example, the Employment Security Department report said that based on historical patterns, Washington state typically loses 13,200 jobs from November to December. This year, an estimated 23,900 jobs were lost, amounting to a seasonally adjusted decline of 10,700 jobs. Here’s the breakout as reported by the Employment Security Department:

  • The professional and business services sector historically loses about 800 jobs in December. In December 2011, the industry lost an estimated 5,100 jobs, amounting to a seasonally adjusted loss of 4,300 jobs.
  • Retail trade normally gains about 2,500 jobs in December. The sec­tor lost an estimated 1,200 jobs in December, resulting in a season­ally adjusted loss of 3,500 jobs.
  • Government typically loses more jobs than any other sector in December. This year, losses were a little worse than usual for government, down an estimated 9,900 jobs, leading to a seasonally adjusted loss of 1,200 jobs.
  • The wholesale trade sector exactly matched its historical pattern in December when it lost an estimated 1,200 jobs.

9. What to watch? On the international front, Europe is the place to keep an eye on as it deals with the sovereign debt crisis. It looks like Greece and other countries are working out deals that will hold things together, but the situation is still tenuous. Also pay attention to growth in China — and to a lesser extent India and Russia. If China’s growth slows, it could have an impact globally. India has had strong growth, but it is not nearly the global player China is at this point. Russia is slated to join the World Trade Organization this year, and that could have an impact.

10. What to watch, Part 2? The national unemployment rate and the total number of new positions, reported on the first Friday of each month. The way the calendar works, there will be an unemployment report on Friday, Nov. 2, just before the general election the following Tuesday. That could be an economic number of historic proportions because of its potential impact on the election.

Stephen H. Dunphy writes on business and economic issues for Crosscut. He was a business editor and columnist for a number of years at The Seattle Times.


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Comments:

Posted Sun, Feb 5, 8:17 a.m. Inappropriate

From the piece:

So generally the Seattle area is doing quite well

Talk about cherry-picking statistics. This piece notes BA, AMZN, SBUX, MSFT and Costco are hiring and profitable. That’s because none of them depend on local economic vigor. Moreover, none of the must “collect and remit to the WashDOR” from the bulk of their customers the 9.5% sales tax like local sellers must.

There are data showing Seattle is not doing well, especially in the private sector. This piece avoids looking at that information.

Government employment is UP around here – this piece is misleading in that it suggests otherwise. Government sector employment in the 2000-2010 period increased by 4 percent in downtown Seattle, 2 percent city-wide, 7 percent in King County and 16 percent for the Puget Sound Region. Those are significant increases.

In contrast, private sector employment in downtown Seattle saw a 15 percent loss in jobs in the 2000-2010 period. The private sector job loss figure last decade was 9 percent city-wide, 4 percent for King County and 2 percent for the Puget Sound region. What’s hurting the economy around here is that large loss of private sector jobs. There was a loss of 4% of private sector jobs downtown in the 2009 – 2010 period alone. That is the reality, and hiring at the several large multinational corporations is not enough to overcome that trend.

These data come from here:

http://downtownseattle.com/pdf_files/resources/Workforce_7.11.11.pdf

crossrip

Posted Sun, Feb 5, 9:16 p.m. Inappropriate

5. What are the negatives? Unemployment. There remains a large overhang of workers who cannot find jobs, are accepting jobs at lower pay, are taking part-time jobs, or have just given up.

A more accurate description would be to say there is an overhang of workers compared to jobs available. He makes it sound like jobs are out there and people just haven't 'found' them yet.

The truth is that our economy has been moving factories overseas and shutting them down in the United States for 20 years now. Is it any wonder the economy is struggling now? Jobs that have replaced manufacturing jobs pay about half (or less), have no health care benefits, no pensions and less job security.

Our economy is in horrible, horrible shape despite Obama's and the media's attempts to wallpaper over the facts. What makes it even more painful is to have people like Mitt go around saying that the way to fix the economy is to let people get kicked out, foreclose their homes and let some wealthy investors buy these homes as investments. Americans are broke and are being made to suffer by the Wall Street/DC Industrial complex. There is no bright spot of light anywhere in this scenario.

Posted Sun, Feb 5, 9:53 p.m. Inappropriate

Jeffrey Sachs in his book "The Price of Civilization" highlights the decline in the wages over the past 30-years for males who have no more education than a high-school degree. Prior to this time, the jobs that were available were union jobs in the manufacturing sector or jobs in construction. These jobs were the core of what we termed middle class.

With the rise of international trade and globalization, the US has lost a significant portion of its manufacturing jobs. And those jobs that remain need to be low wage to compete with overseas markets or are in industries--such as aviation--where there are structural barriers to low wage competition.

The housing bubble whose bursting precipitated the 2008 recession only served to mask these demographic and economic trends. And this is why this past recession is different than others that we've seen. Previous recessions were characterized by typical business over-expansion and thus when inventories were reduced and the economy recovered, the types of jobs that were available were more or less the same types of jobs that were there prior to the recession.

The current recession is different though since so many people were employed in the housing industry as carpenters, electricians, plumbers, etc. All these jobs generally don't need college degrees. With the bursting of the bubble, it is clear that these jobs just aren't going to come back in the numbers that existed before the recession. We have too much housing stock based upon decades of policies which subsidized overbuilding of housing--McMansions, second- and third homes, sub-prime mortgages etc.

As a consequence, much of our unemployment can be classified as structural unemployment where those with skills that they've spent years to learn are no longer of value to the market. So as the economy recovers, high-tech jobs that are needed to compete in the global economy can't be filled because workers don't have the education. What this means in reality is that the unemployment rate is going to remain stubbornly high for years to come.

If you have the time, listen to or read through President Obama's State of the Union address again. The policies that he promotes are intended to address the structural unemployment seen by those who don't have the high-education skills that are currently needed and it recognizes that there is a significant portion of the unemployed that would like to work but just do not have the skills required. It recognizes that manufacturing traditionally filled a role for providing middle-class incomes to those with a high school diploma. His proposals for retaining manufacturing jobs in the US through tax and business incentives are critically important for reducing the income inequality that currently characterizes the US economy.

Posted Sun, Feb 5, 10:14 p.m. Inappropriate

It might also be useful to look at the titanic, unprecedented levels of debt. I've read different figures, but it appears that only half or so of US Gov't expenditures are now covered by taxes. The rest is from debt issuance. Or perhaps it is better to say was from debt issuance, since now it seems to be more and more simple money printing.

There is no end of different names - quantitative easing, operation twist, permanent open market order, GDP targeting - all of which are just fancy ways of saying "money printing." Can it go on forever? Seems like it has always eventually caught up with every country that has done it in the past. Will this time be different? Will the rest of the world stay interested in dollars that are being created by the trillions? Will they keep trading oil and every other kind of stuff that we don't make here any more for them? Can something that is created out of thin air in unlimited quantities stay valuable?

I guess we'll find out. If the answer is no, what's our Plan B?

Posted Thu, Feb 9, 8:32 p.m. Inappropriate

Snoqualman

Plan B might be to
(1) Stop spending more on defense that the rest of the world put together.
(2) Really reform health care so we only spend the same per capita as the next most extravagant nation (Switzerland which spends about 60% per head and has a population in much better health by any sensible measure).
(3) Increase the retirement age.
(4) Increase taxes modestly on the well off to the levels well below those in the 50's when the US was doing pretty well.

Posted Sun, Feb 12, 10:24 a.m. Inappropriate

In the 1980's recession, the government system learned that you cannot allow the middle class and home ownership values to collapse without a resulting intense increase in unemployment.

The worse unemployment gets, the worse the housing equities fall. The worse the housing equities fall, the more damage to employment.

It is a vicious circle that no one is talking about in 2012. Why the freak not?

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