Why to brace for a wild ride in the NW economy

Dismalists, err economists, paint a rosy picture, but events elsewhere and the possible end to a construction boom here could shake things up.
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Construction cranes on a cold January day: Could a slowdown be ahead?

Dismalists, err economists, paint a rosy picture, but events elsewhere and the possible end to a construction boom here could shake things up.

Consumers save millions because of lower gas prices — the stock market craters. Then maybe things are not so bad and the market rebounds with a plus-300 point surge. Thousands are thrown back to work but economists fret about a sluggish labor market. Bond prices soar but it’s considered an indication the economy is shaky.

What is going on here? Economics has been described as “the dismal science” but this is really taking things to a new level of bleakness and confusion. I've often thought that economists should actually be called dismalists, more accurately describing their role in the economy.

Meanwhile people like Steve Lerch, the state’s top economist, have a problem with his state Economic and Revenue Forecast Council presentations. When he makes his quarterly presentations to the state agency tasked with reviewing the economy and making revenue projections for state coffers, he has made basically the same forecast for the past year.

“I keep apologizing,” he said. “I keep saying the same thing.” That’s because when Lerch looks at those economic indicators he sees the national economy continuing to grow modestly with Washington state slightly better than the national outlook. So where does angst about the economy come from? Most of it is events overseas and the wider impact of falling oil prices.

There was confirmation of that rosy economic view Friday. The government said business added 252,000 jobs in December and the unemployment rate dropped to 5.6 percent.  That capped the best yearly job growth in 15 years and put the unemployment rate at its lowest level since 2008.  But — there’s that "but" again — wages dropped five cents an hour and fewer workers are actively looking for employment.

So let’s look at some of the issues in the economy these days that create this “yes, but” environment.

Oil prices? Lower oil prices have dropped the price of gasoline to five-year lows. According to one estimate, a driver could save $500 to $700 a year because of lower prices. But the falling price of crude oil — around $50 a barrel — has a downside. It is already below the cost of production here, so U.S. oil producers are beginning to cut back. That could mean the end of the energy bonanza of the past few years, forcing layoffs and cutbacks.  A sharp one-day drop in oil prices was the main reason for a 300-point-plus drop in the stock market in early January.

Bond prices? Investors are worried about putting any money in foreign investments, so they are buying U.S. treasuries in droves. In Europe, growth has slowed to near recession and prices are falling. There is concern that Europe might fall into a liquidity trap much like Japan. That could mean little or no growth for years – in Japan it was called the “lost decade.” 

So with investors flocking to U.S. Treasury bills and notes, the price of bonds is going up, which means the yield is going down. The yield curve — a key economic measure — has flattened in recent weeks, often a sign that the economy is weakening. One of the ways to reverse course is for the Federal Reserve to raise basic interest rates. But that could slow business borrowing, helping to accelerate a recession.

The dismal science for sure.

And while all this is swirling around, Lerch said that the Seattle area is much stronger than the rest of the state. “The state recovered (from the recession) at two speeds,” he said. The unemployment rate in the Seattle-Bellevue-Everett area is 4.7 percent vs. 6.2 percent statewide. Of all the new jobs created in 2014, more than 65 percent were in the Seattle area.

He forecasts an increase in jobs in aerospace, though no boom in employment since much of expected production gains will come from automation. Software will add jobs after the layoffs at Microsoft have worked through the industry. Construction is strong with the continuing boom in apartment and office building in the city. Amazon is hiring, “another big plus for Seattle.”

Real personal income — think of it as fuel for the economy — is rising. The federal Bureau of Economic Analysis said in its quarterly report that Washington personal income was up 1.2 percent, seventh best in the country. Texas was first with a 1.4 percent increase.

Where are the risks? Back to the situation overseas, or what economists call exogenous variables. Here’s the way Lerch and the council put it in their latest forecast: “Factors outside the state account for the high level of risk to the forecast. Slowing Chinese, Japanese and European economies, the potential for a slowdown in the U.S. housing recovery, and geopolitical instability in the Middle East and Eastern Europe all remain major threats to the U.S. and Washington economies. Continued strength in employment and initial unemployment claims data and lower oil prices suggest potential upside risks to the forecast.”

Wage stagnation and the growing inequities in wages are another concern. The trend is apparent in Washington state. The state Employment Security Department found that the median wage in the state grew only 62 cents an hour between 2007 and 2013. Even the top 90 percent only saw an increase of $3.72 an hour. At the very top of the labor market, though, the wage increase for the top 1 percenters was $10.89.

Another way to look at the impact on lower-wage workers is jobs lost during the recession. Those making $24 or less an hour (essentially the bottom third) lost more than 130,000 positions in the recession. Those making more than $54 an hour (essentially the top 1 percent) actually gained 20,000 jobs during the recession. That is a striking difference and reflects where the pain of the recession was felt most.

The council also provides the Legislature with an estimate of state revenues. A growing economy has increased the outlook for state revenues in the next biennium from $34.4 billion in 2013-2015 to $36.3 billion in the 2015-2017 biennium, according to the most recent forecast by Lerch.

Lerch steers away from forecasting for what the Legislature will do in the session that began this week, but admits there is a shortfall between the actual totals and what might be needed. “It will be a difficult session,” he admits.

So, what's ahead for 2015? Here are a few things for people in the Pacific Northwest to watch:

Foreign threats: This is the wild card for the economy in 2015. The economy of the state is linked to foreign trade, especially for Boeing and agriculture. The top five trading partners in 2013 were China, Canada, Japan, United Arab Emirates and Mexico. China’s growth is slowing and Japan is in a recession. Weakness in Europe can have an impact — taken as a whole, Europe was the fourth largest trading partner of the state. The concern is that some event — elections in Greece, Russia defaulting on its debt, much slower growth in China — could start a cascade of events that shakes the global economy. There is an election in Greece later this month — keep an eye on the results for a sense of where the global economy may be headed. Many experts believe the U.S. economy is strong enough to weather foreign troubles.

Construction boom/bust: Construction in the Seattle area continues to be robust with dozens and dozens of projects under way and more big projects on the drawing boards. Downtown Seattle has an interactive map that shows all the projects under way. Ditto Bellevue. The question is when will the bust come. One real-estate observer said, “Of course we’ll overbuild. It all depends on when and who’s holding the bag.” That day may be near, especially in apartment construction.

Ports: The seaport alliance between the Port of Seattle and the Port of Tacoma continues to move along with an expected final vote and approval in late March.  But there are many hurdles still to be crossed – there reportedly are more than 150 items on a “punch list” to be resolved before the agreement can be reached.  The region has been at this for quite a while – the first mention of a regional port was around 1960, more than 55 years ago.  In 1969, a bill to create a regional port authority was introduced in the Legislature, but died in committee.  Now this alliance seems real – finally.

The port matters.  It is one of the few sources of good, well-paying middle-class jobs in a region with the separation between the top and the bottom growing.  And don’t forget Sea-Tac, which is taking off in terms of traffic and investments.

Stock market:  Most of the attention is usually focused on the Dow Jones Industrial Average.  But pay attention to the Nasdaq, the tech-heavy, over-the-counter stock market index.  It is nearing its all-time high of 5,132.52 on March 10, 2000. That was the end of the “dot-com boom.” The Index is trading now around 4,600, within striking distance of topping the previous record high.  There are some indications that technology stocks in the index may be overvalued and ready for some realistic valuations. 

Amazon may be among those companies since it continues to disappoint investors on profits.  So far investors seem to go with the flow and believe that investments that cut into profitability are good for the company in the long run.  Starbucks and Microsoft are two other large local companies on Nasdaq – both seem solid for the year.

The Legislature: Who knows.  Gov. Jay Inslee has game-changing ideas such as a carbon and capital gains taxes.  Education funding and other budget issues make for a tough session though it could all fall into what Jon Talton of the Seattle Times called “the giant Wormhole of No called Olympia.”

Growth: People are moving here in increasing numbers. The Economic Development Council of Seattle and King County tracks drivers’ license transfers as a proxy for in-migration. In October 2014, for example, driver’s license transfers to King County grew 11.5 percent year-over-year (based on a three-month moving average). The top three states for license transfers into King County during this period were California, Texas and Oregon.  Rapidly rising rents are also boosting Seattle-area inflation.

Conclusions? The stock market is often not a very good indicator of the economy, but in only the first week of the year the Dow Jones average went down 300-plus points and up 300-plus points. Dismalists are looking for a volatile year for the economy. Hang on.


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About the Authors & Contributors

Stephen H. Dunphy

Stephen H. Dunphy

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.