April 29, 2010

Northwest recovery? Call it subdued

Basu

The nation has strung together two consecutive quarters of growth, with fourth quarter 2009 annualized growth registering 5.6 percent. Employment is now expanding and the unemployment rate has been declining in recent months.

A close inspection of fourth quarter gross domestic product data reveals a promising shift away from pure dependence upon government spending to a broadening economic expansion.

Of central importance is the ongoing rebound in retail sales and consumer confidence. Year-over-year sales growth is now positive, although the comparison months were in the immediate aftermath of the financial crisis that began in September of 2008.

Subdued local outlook

The Seattle-Tacoma-Bellevue’s regional unemployment rate stood at 9.6 percent as of February. Job losses in construction have been proportionately more rapid in Western Washington than nationally. Statewide, 19 percent of total construction employment disappeared between February of 2009 and February of 2010. In Seattle-Bellevue, the loss exceeded 21 percent. Nationally, the corresponding rate of job loss was 13 percent.

The greater Seattle region now supports 62,300 construction workers. At its apex in August of 2007, the region supported 104,100 construction jobs. That is a roughly 40 percent contraction in that segment.

Significant job losses in financial and professional services along with tight credit have hammered other elements of the Western Washington economy. Partially as a result, the region’s office vacancy rate has climbed to over 20 percent, up from 13 percent this time last year.

The implication is that commercial construction’s rebound remains far into the future.

According to local commercial real estate brokerages, asking rents for downtown Seattle office space of all classes have declined 10 percent to 12 percent since the beginning of the year. Part of the reason is that roughly 2.5 million square feet of office space in Central Seattle is just a few months from completion with only a small fraction of the space pre-leased.

Looking ahead

Associated Builders and Contractors does not anticipate a particularly brisk recovery due to tight credit. The reasons include:

• An unsettled and unsettling federal policy-making environment.

• Subdued expansion in various parts of the world, including much of Europe.

• Double-digit or near double-digit unemployment rates for months to come.

• Weak state and local government finances.

• Ongoing bank failures.

• The end of a significant fraction of stimulus spending by 2011.

• The expectation that monetary policy support for the economy will begin to wane within the next 12 months.

In fact, policy support will begin to wane well before the next 12 months. The Federal Reserve’s purchases of mortgage-backed securities stopped on March 31, which implies that the era of ultra-low mortgages may be coming to an end. Moreover, with the federal guarantee of Freddie Mac and Fannie Mae’s balance sheets now explicit as opposed to implicit, there will likely be calls for them to slow down their purchases of mortgages.

That said, one of the reasons to believe in the sustainability of the nation’s nascent but weak recovery is the recent performance of financial markets. On March 9, 2009, the Dow Jones Industrial Average reached a cyclical low of 6,547.05 after dipping to an intra-day low of 6,469.95. Since that time, stock prices have enjoyed a roughly 75 percent retracement, replenishing wealth and signaling confidence in corporate earnings. At this writing, the Dow Jones Industrial Average has raced above 11,000, buoyed by good news regarding the Greek fiscal crisis.

During the third quarter, roughly five in six large U.S. companies reported earnings that exceeded expectations. Moreover, if U.S. stocks were valued at 15 times their expected 2011 earnings by the end of 2010, the Standard and Poor’s Index would be approaching 1,365, about 14 percent higher than the level at the time of this writing.

This implies even more wealth generation, which could be enough to allow for sustained economic momentum into and through 2011 despite expectations of rising interest rates and taxes at that time. The fourth quarter GDP report was also consistent with the notion of rising profits and that may be just enough to keep the recovery going into and through 2011.

In many ways the recovery that began during the summer of 2009 is quite ordinary. As with typical recoveries, financial markets began to recover first, followed by GDP growth. Now comes the final big piece in the puzzle: job growth.

In January, the nation gained 14,000 jobs (revised estimate) and then lost almost precisely that number of jobs one month later. In March, the nation added 162,000 jobs, the first six-digit increase for the economy since November of 2007. Through March, unemployment has remained steady at 9.7 percent for several months and may fall during the months ahead due to Census Bureau hiring. However, Associated Builders and Contractors continues to expect that once Census jobs dissipate, unemployment will begin to expand again as more Americans begin their job search in earnest, and therefore, join the ranks of the unemployed.

Despite the recent employment momentum, underemployment issues remain elevated and there has been little sign of progress along that dimension.

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