Economic Outlook: Shades of 1990?
A local recession isn’t imminent, but don’t get too cocky.
| FROM THE PRINT EDITION |
With evidence of a booming economy practically everywhere we look — help-wanted signs, local government surpluses, congested freeways — it is difficult to imagine a slowdown,” I said at a business leadership conference in Vancouver, British Columbia, in early 1990. “But a closer look at the nature of the Seattle economy and its recent growth portends change.”
This gloomy outlook on the Seattle-area economy was not well received. One critic said the outlook was hard to swallow given the bullish picture of the current state of the economy I had provided: “Five percent job growth in 1990 will reduce the unemployment rate to 4 percent. In response to full-employment conditions, people are moving into the area at the rate of 40,000 per year and fueling one of the hottest housing markets in the nation.”
But there were larger forces at play. Between 1983 and 1990, Boeing had created 45,000 new jobs and boosted its payroll by $2.3 billion. Counting the multiplier effect, the airplane maker had been responsible for more than 40 percent of the Seattle area’s seven-year jobs gain. Without the Boeing surge, the local economy would have advanced at the slower national rate. This meant that if Boeing halted hiring and the national economy applied the brakes, the Seattle economy could come to a screeching stop by the end of 1990.
Sure enough. By the fourth quarter of 1990, aerospace employment had fallen 3,100 from its cyclical high, while the nation’s real Gross Domestic Product (GDP), which had reversed course midyear, fell at a 3.4 percent annual rate. As a consequence, Seattle jobs — which had increased 4.9 percent between 1989 and 1990 — declined at a 0.7 percent annual rate in the fourth quarter. That slowdown contributed to the collapse of the housing market and four years of sluggish growth.
Accuracy alone does not make for a good forecast, since dart throwers occasionally hit the mark. Based on a theory of regional economic growth and calibrated with 30 years of data, the model we used to prepare the forecast provided a logical explanation of where the Seattle area economy was likely to head.
The accuracy of the Vancouver forecast also depended on “tells,” which, in poker, are changes in a player’s behavior. The forecast hinged on two assumptions: Boeing would reduce the size of its workforce and the nation’s economic expansion would come to an end. Two facts, or tells, supported this prognosis: Aerospace jobs peaked in November 1989, according to monthly labor data, and the Department of Commerce’s U.S. Leading Economic Index had been falling steadily since the autumn of 1988, a signal that a national recession was overdue.
Most forecasts do not work out so neatly. Since Doug Pedersen and I began publishing The Puget Sound Economic Forecaster in 1993, we have dutifully reported our prediction errors to give readers some sense of the uncertainty associated with the forecasts. Based on 22 end-of-year forecasts, the average absolute one-year-ahead prediction error for Puget Sound employment has been 0.8 percent. The average error for real GDP, as forecast by the Blue Chip panel of national economists, has been 1.0 percent. Two recessions resulted in the largest regional employment prediction errors: the Dot-Com 9/11 Recession (2.5 percent in 2001) and the Great Recession (4.0 percent in 2009).
Recently, our forecasts have been quite accurate. At the start of the economic recovery in 2009, two developments seemed likely: The U.S. economy would rebound slowly because of restrictive federal fiscal policies and the Puget Sound region would outpace the nation because of thousands of new jobs at Boeing and Amazon.com. Because the two economies stuck to the playbook, the average absolute one-year-ahead prediction error for the first six years of the expansion was only 0.3 percent for real GDP and 0.2 percent for regional employment.
Now that the Puget Sound recovery is getting long in the tooth, there are questions about a possible slowdown or even another recession. Unfortunately, when an economy approaches a turning point, uncertainty about its course mounts, as evidenced by the outsized prediction errors associated with downturns. But a review of the 1990 experience provides some clues about the regional economy’s likely path this time around.
As in 1990, the Puget Sound economy was in top form in 2016. In fact, last year was its best year since 2006. Based on preliminary data, employment increased 3.1 percent — nearly twice the national gain; the unemployment rate fell to 5.0 percent — just 0.2 percentage points higher than the United States rate despite surging regional population; and per capita income rose to $62,117 — 25.6 percent above the national average.
There was, however, one hint of a slowdown. The regional employment growth rate remained flat for the third straight year — 2.8 percent in 2014, 3.0 percent in 2015 and 3.1 percent in 2016 — due in part to the loss of 5,400 aerospace jobs.
Another similarity with 1990 has been the narrow focus of the regional expansion since the Great Recession. Although the Puget Sound economy has changed in many ways since 1990, its structure and behavior have remained fundamentally the same. Instead of one dominant player, it now has three: Boeing, Microsoft and Amazon. With a combined payroll of approximately 155,000 employees, they directly and indirectly support roughly 465,000 jobs. This figure represents 23 percent of total regional employment, which virtually matches Boeing’s impact in 1990.
Between 2010 and 2016, the regional economy added 286,000 jobs, expanding at a 2.6 percent annual rate. The contribution of Boeing, Microsoft and Amazon amounted to 105,000 jobs (35,000 directly and 70,000 indirectly). This constituted 37 percent of the total employment gain over the six-year period. If not for the lift given by these three companies, Puget Sound employment would have grown by 1.7 percent, exactly the national rate.
I have always said, “Give me a good forecast for the nation and Boeing, and I will give you a good forecast for the region.” Obviously, we must now include Microsoft and Amazon, but the implication is the same. If the dominant players in the region are no longer expanding their combined workforce, the regional economic growth rate will tend to converge with the national rate.
Last year, Amazon (+4,000), Microsoft (+2,000) and Boeing (–4,000) added 2,000 jobs on net and continued to provide a modest boost to the economy. Our short-term forecast for this year presumes that Microsoft employment will level off, while the job gains at Amazon will more or less offset losses at Boeing. Consequently, Puget Sound employment growth will slow from 3.1 percent in 2016 to 2.1 percent in 2017 and 1.8 percent in 2018.
Because of improving wages and a higher inflation rate, nominal personal income is expected to keep increasing at about 5.5 percent per year. In response to the cooling economy, population growth will decline from 1.7 percent in 2016 to 1.3 percent in 2018. With jobs increasing faster than population, the regional unemployment rate will remain at 5.0 percent.
Despite the slowdown, the region will continue to outpace the nation. In 2018, as the economic recovery from the Great Recession matures, U.S. job and income growth rates will fall to 1.1 percent and 4.9 percent, respectively.
Our regional forecast calling for slower growth is consistent with readings from the Puget Sound Index of Leading Economic Indicators. The index is designed to predict the direction of the economy, as measured by employment, three to four quarters in advance. After climbing strongly since 2009, it has shown signs recently of possibly flattening. This suggests that the regional economy is decelerating rather than turning down.
Even though we have no immediate concerns about a local recession, we are wary. A sluggish national economy, jobs cuts at Boeing, an end to hiring by Amazon and a downturn in housing and office construction could do the trick.
As for the timing of a possible recession, the experience of 1990 is informative: The Puget Sound economy can turn on a dime.
DICK CONWAY is cofounder of Conway Pedersen Economics, an economic forecasting service for the Puget Sound region.