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The puzzling state of Washington’s economy

Are the state's fortunes rising with Boeing's? Credit: ThierryB/Flickr

There was a rerun of the 1998 romantic comedy “You’ve Got Mail” on TV the other night.  In it, the Tom Hanks character talks about his mega bookstore and its impact on the small bookstore around the corner owned by the Meg Ryan character.

“It’s not personal, it’s business,” he says. Like in “The Godfather,” and “going to the mattresses.”

That all comes to mind when I look at some of the issues in the region these days including Boeing, the Export-Import Bank, the general economy and how the state Legislature might react to more money in the pot.

The state Economic and Revenue Forecast Council reported recently that revenue collections for mid-July to mid-August were more than 5 percent higher than expected, up $62.4 million. So, the Legislature may have a bit more money to play with in January when it convenes to write a budget for the next biennium.

Legislators, however will still face a daunting task of trying to match revenue and expenses with a multi-billion dollar legal case hanging over their heads. In the McCleary case, the Supreme Court ruled that the state is failing to meet its constitutional duty to fully fund education in Washington, and must do so by 2018.

David Schumacher, director of the state Office of Financial Management, said in July that the revenue growth “will not keep pace with the cost of maintaining current services and covering mandatory increases, let alone provide the additional $1 billion to $2 billion needed to meet the state’s constitutional basic education obligations.” The next revenue forecast is scheduled for release Sept. 16.

So, what is the state of the economy, and business, around here as we look ahead to the rest of the year?

Boeing

Boeing and the Puget Sound region seem like they are in crisis these days: Jobs going elsewhere. “Centers of Excellence” being created. Suggestions that the company is trying to destroy the Seattle Professional Engineers Association. The 787-10 to be built in South Carolina. Huge subsidies granted by the Legislature.

OK, let’s all take a deep breath and relax. I am not a Boeing apologist though, for full disclosure, I will note that I have family members who work, or worked, for Boeing.

But like in the movie, what is happening at Boeing these days in regard to the Puget Sound region is just business.

Boeing is obviously a global company with many functions; some people have compared it to the U.S. State Department. After all, it has operations around the world for various political and economic reasons — aircraft parts from Chengdu in China, engineers in Russia, and so forth. It made the business decision to diversify its manufacturing by opening a plant in South Carolina, though the headlines show that program still has some growing pains.

So, it is no surprise that Boeing also is tapping the aerospace engineer market in Southern California. You go where the talent is. There were few complaints in California when Google opened an office in Seattle to take advantage of the talent from software and gaming industries here. It made sense. So does Boeing’s decision to shift jobs to California and elsewhere.

Boeing jobs will come and go. The focus should be on what’s here and it’s significance. Our region remains a major manufacturing base for the company. Boeing will build the 777X here, including the high-technology wing because of the skill and experience of the work force. Boeing is here to stay and the jobs will keep coming — just not in all areas or all divisions.

Of course, there are issues remaining. Workers have accused the company of age discrimination in the recent reduction in engineering jobs.

And CEO Jim McNerney also made the situation worse recently with a mindlessly self-centered remark when he was talking to analysts about quarterly results and whether he might be near retiring. McNerney said he won’t retire because “the heart will still be beating, the employees will still be cowering,” according to Bloomberg. Workers rightly reacted strongly to that comment.

Sports announcers often get docked or taken off the air for stupid remarks. Too bad there isn’t something like that for CEOs.

The other factor at work in the region is that Boeing, while important, is no longer the dominant industry it has been in the past.  Not long ago, Boeing was the major factor in the region’s economic growth. The boom-bust nature of the industry created a boom-bust economy here.

That has changed dramatically over the past decade. Check these numbers from the state Employment Security Department and the Bureau of Labor Statistics. For 2013, the latest year available, aircraft manufacturing (read Boeing and aerospace firms) had average employment of 83,200 for the year and a total payroll of about $8.82 billion. Software publishing (read Microsoft and gaming industries) had average employment of 52,125 and a total payroll of $10.14 billion. Average annual wages in aircraft manufacturing were $106,000.  Annual average wages in software were $188,500.

Boeing also is avoiding the boom-bust trend of the past. Boeing employment in Washington has averaged about 80,000 over the past five years — 81,400 in 2014.

Export-Import Bank

The reauthorization of the Export-Import Bank of the United States, now before Congress, would seem like a no-brainer for our region. The bank helps finance exports.  The region is the most trade dependent in the country. Boeing and other industries benefit.

Eric Schinfeld, president of the Washington Council on International Trade, made the case for reauthorizing, focusing rightly on the bank’s assistance to small businesses in the state. In a recent piece, he wrote:

“The case for reauthorizing the Ex-Im Bank is very straightforward, particularly for Washington, which exports twice the national average and where 40 percent of jobs are tied to trade. In the last five years, the Ex-Im Bank has financed $91 billion of Washington exports from 165 businesses, over 70 percent of which were small and medium-sized businesses. These are businesses like L’Ecole 41 Winery in Walla Walla, Manhasset Specialty Company in Yakima and Columbia Machine in Vancouver. By the U.S. International Trade Administration’s calculation, the Bank supported 120,000 jobs in Washington state in 2013 alone.”

But there is some dissenting opinion on the reauthorization, focusing on one part of the bank’s business – helping to finance the sale of wide-bodied jets to foreign airlines. Delta Airlines and the Airline Pilots Association object to this provision, saying that it helps competitors.

On Aug. 8, Delta, which thinks the bank helps overseas airlines to favorable financing, responded to a panel discussion in Washington, D.C., on reauthorization of the bank:

“[T]oday’s panel discussion on reauthorization of the Export-Import Bank of the United States does not consider or address the harm Ex-Im financings for widebody aircraft do to U.S. airlines and their employees. Delta continues to urge members of Congress to enact reforms that will ensure that the Bank provides support to U.S. manufacturers without damaging the ability of U.S. airlines and their employees to compete in the global marketplace. Delta, along with the Air Line Pilots Association, encourages the U.S. House Financial Services Committee to enact reforms in the 2014 Export Import Bank reauthorization that will protect U.S. airlines and their employees from continued, Bank-induced, harm.”

So why should we care what Delta thinks?

Delta is one of the major carriers serving the region. It is a Boeing customer, of course. More importantly, it is increasingly making Seattle one of its hubs for Asian flights, essentially shifting its hub from Tokyo’s Narita Airport here. That means more flights here, more crews based here, more spending here.

The changes are already happening with Delta recently adding a number of international flights, such as a direct flight to Hong Kong. More are planned. And the concern about Delta moving into Alaska Airlines territory is overplayed — airline passengers will benefit from the competition and Alaska will benefit from the Asian hub being developed by Delta.

So helping Delta helps the region. To be clear, Delta does not object to reauthorizing of the bank. It just wants reforms that eliminate the financing of Boeing jets to what are state-subsidized airlines overseas.

The Economy

Trying to decipher the overall economy right now can be a bit difficult. For example here’s what could be a financial headline for last week: “Market tanks as thousands are thrown back to work.” The Federal Reserve talks about ending some of its programs to help boost the economy because the economy seems to be doing fairly well. Then it backs away from that idea with fears of something called “secular stagnation.”

Around here, things seem pretty rosy. The state unemployment rate dropped to 5.6 percent in July from 5.8 percent in June, the lowest since 2008, before the Great Recession. Unemployment in the Seattle/Bellevue/Everett area dropped from 4.8 percent in June to 4.7 percent in July. By contrast, the national unemployment rate rose slightly to 6.2 percent in July.

“Washington’s labor market continues to gain momentum,” said Paul Turek, an economist with the Employment Security Department. “Year-over-year, the state saw growth in nearly every industry.”

The report released Wednesday, covering July, is before layoffs at Microsoft (1,351 is the number the company reported to the state) and consolidation in the biotech industry. In addition, there are growing questions about funding for health research, a key to several research organizations here, such as the Fred Hutchinson Cancer Research Center.

State economists expect the slow pace of economic recovery to continue in both the U.S. and Washington state, with the state economy slightly stronger than the overall economy. And the Seattle area will have much stronger job growth than the rest of the state.

But several questions persist about the overall state of the economy, both here and across the nation. For one, the labor participation rate remains lower — 62.9 percent in July. It was 66.1 percent in 2008 before the Great Recession hit. The lower rate means there are about 7.5 million fewer jobs now than before the recession. Where those jobs are and when, if ever, they return is a nagging question.

Another is the continued high rate of discouraged workers. The government’s most comprehensive unemployment rate — it counts people out of work, underemployed workers and those who have given up — stood at 12.6 percent in July. It was 12.8 percent for Washington.

And what about “secular stagnation”? That is a condition where very low interest rates and a high savings rate combine to create a situation where there is little or no growth. It is similar to the problem that Japan has faced for decades. If the U.S. economy does face such an issue — some of the elements are present, such as zero interest rates — it could mean the recovery continues to be modest. It could mean the rising inequality gap will increasingly be a factor. It could mean efforts to stimulate the economy will be like pushing on a string.

For now, growth is consistent with more than 200,000 jobs created in each of the past six months.

There was a flurry of news reports Wednesday about a report from the Bureau of Labor Statistics on job openings. The total at the end of June was 4.7 million.  But what was not included in the media reports was a simple fact — it was little changed from the 4.6 million openings in May.

Job openings are one thing. Hiring apparently is another.

So, like in the movie, is it all just business? For Boeing and Delta’s opposition to Ex-Im Bank lending policies, it seems so. For the rest of us, nothing much really has changed — it’s all about the economy.

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