Economic Outlook 2014: Time to move on

Last september, the puget sound regional economy (comprising King, Kitsap, Pierce and Snohomish counties) reached a milestone of sorts, as wage-and-salary jobs climbed to 1,856,700. The last time employment hit that mark was February 2008. Hammered by the Great Recession, the regional economy went five years and seven months without creating one net new job. It is not clear how to react to this. Should we celebrate the closing chapter of the Great Recession or mourn the economic losses of the six-year ordeal?

The damage to the economy inflicted by the recession was indeed massive. As we wrote in our September 2007 newsletter, we had an inkling of the trouble ahead: Currently, with the housing and credit markets in turmoil, we find ourselves in the strange position of feeling more confident about our predictions for 2017 than 2008. Nevertheless, based on the Blue Chip national economic outlook, we predicted that the regional economy would moderate its pace but not fall into recession.

One way to gauge the damage is to compare the September 2007 projections with what actually occurred. The analysis shows that, from 2008 to 2013, the accumulated loss to the Puget Sound economy amounted to 915,700 one-year jobs, $168.1 billion in personal income and $13.7 billion in retail sales taxes. The Great Recession raised the unemployment rate by an average of 3.1 percentage points over the six-year period. In 2010, the jobless rate peaked at 9.6 percent, more than double the 4.5 percent rate predicted three years earlier.

Not to downplay the harm caused by the Great Recession, but it had some interesting features. Despite the fact that the Puget Sound economy was expanding at twice the national rate just prior to the recession, the region suffered a greater drop. The rapid growth of jobs and population combined with the speculative demand associated with the housing bubble hoisted the regional housing market to an extremely high plane. Thus, when the housing and financial markets collapsed, the regional housing market and the broader economy had relatively far to fall. Between the first quarter of 2008 and the first quarter of 2010, the region lost 139,100 jobs, including 44,000 in construction. This figure constituted 7.5 percent of its total employment, one out of every 13 jobs. By comparison, the national loss was 6.2 percent.

In hard economic times, air travel often stalls, causing aircraft production to nosedive. During the Great Recession, however, Boeing was one of the few stabilizing forces in the regional economy. Recovering from the devastating effects of the dot-com and 9/11 recession (2001-03), the airplane manufacturer managed to maintain deliveries at about 440 aircraft per year from 2008 to 2010. Aerospace employment declined during the period, but the total loss amounted to fewer than 3,000 jobs. If the industry had found it necessary to shed 25,000 workers, as it did during the dot-com 9/11 recession, the Great Recession would have been a much greater debacle. All told, the region would have lost approximately 210,000 jobs (11.3 percent of total employment), propelling the unemployment rate to around 14 percent.

A perhaps counterintuitive outcome of the Great Recession was its negligible impact on Puget Sound population growth. In September 2007, we predicted that population would increase by 254,000 over the next six years, reaching 3,823,900 in 2013. Based on our latest forecast, the current population estimate for 2013 is 3,837,000, a difference of only 0.3 percent. The Puget Sound population growth rate depends primarily on the difference between the regional and national employment growth rates and that difference did not change as a result of the downturn. Six years ago, we forecast that, between 2007 and 2013, the Puget Sound average annual employment growth rate would exceed the U.S. rate by 0.3 percentage points (1.5 percent versus 1.2 percent). The latest data indicate that, due to the recession, the actual job growth rates were much slower (0.1 percent and minus 0.2 percent, respectively) but that the difference was still 0.3 percentage points.

The Great Recession, coupled with the steady increase in population, put extraordinary strain on state and local government finances. Despite boosts from an accounting change and the temporary business and occupation tax rate hike for services, state government tax revenue hardly budged between FY 2007 and FY 2013, inching up from $14.2 billion to $15.4 billion, according to the Washington Economic and Revenue Forecast Council. Adjusting for inflation and population growth, state tax revenue measured in 2005 dollars plummeted from $2,044 per person in FY 2007 to $1,773 per person in FY 2013, a decline of 13.3 percent. This meant that the purchasing power of state government tax revenue the ability to provide public goods and services (education, safety, health care and infrastructure) for Washingtons people and businesses declined by one-eighth over the six-year period.

As bad as it was, the Great Recession was only the second-worst economic calamity since the Great Depression. When airplane orders dried up during the 1969-70 national downturn, Boeing was forced to eliminate 64,000 jobs in King and Snohomish counties. By 1971, counting the indirect impact, one out of every nine workers in the two counties had lost his or her job, driving the unemployment rate up to 12.4 percent. One year later, however, with the national economy back on its feet, regional employment was again growing at a brisk pace.

But it is time to forget the Great Recession though not its lessons and move on. While the National Bureau of Economic Research officially declared that the Great Recession ended in 2009, it marked only the beginning of the healing

process. Fortunately, by most measures, the region has mended more quickly than the nation.

Based on preliminary numbers for 2013, Puget Sound wage and salary employment increased at a 2.2 percent annual rate between 2010 and 2013, while personal income rose 5.1 percent. In terms of both jobs and income, the region outpaced the nation by an average of 0.7 percentage points per year.

During the three-year period, the regional economy created 118,700 new jobs. This in turn helped lower the unemployment rate to 5.7 percent (well below the 7.5 percent U.S. rate), boost per-capita income to $53,900 (20.4 percent above the national average) and propel residential building permits to 19,200 units (2.0 percent of U.S. housing starts with only 1.2 percent of the nations population).

Still, there is a bit of irony in the regions comeback. Just as employment is returning to its pre-recession level, the economy will most likely pass the peak growth rate for the recovery. In terms of jobs, we are predicting a 2.8 percent increase in 2013, the biggest gain of the rebound, followed by advances of 2.3 percent in 2014 and 2.2 percent in 2015.

The main reason for the slowdown is Boeing; it continually amazes us how a 97-year-old company still holds sway in the local economy. Led

by Boeing, the aerospace industry accounted for an estimated 35,000 new jobs (13,800 directly and 21,200 indirectly through the multiplier effect)

between 2010 and 2013. Without the lift from Boeing and its subcontractors, regional employment would have expanded at only 1.6 percent annually, slightly faster than the 1.5 percent national rate for the three-year period. Now that Boeing is close to a cyclical peak in production and employment, and with production of the 777X possibly headed out of state, it is no longer a growth force in the economy. Consequently, the local economy will decelerate during the next few years, causing regional and national growth rates to converge around 2017.

This forecast should not be interpreted as any sign of weakness. The housing market is still surging, creating thousands of jobs in construction, finance and real estate. Even though home sales and residential building permits are up 50 percent and 140 percent, respectively, since the trough of the recession, there is still room for improvement. Amazon.com continues to hire locally as part of its quest to find new ways of doing business. After a two-year slowdown, foreign exports, one of the regions strong suits, picked up in the second quarter of 2013, growing at a robust 7.7 percent annual rate, according to U.S. data.

Even in the long run, the prospects look good. Barring another Great Recession, the Puget Sound economy is expected to add 322,600 jobs between 2013 and 2023. Our 10-year employment outlook calls for the region to grow faster than the nation 1.6 percent annually compared to 1.3 percent. But a word of caution: If Congress shuts down the federal government or fails to raise the debt ceiling during the next round of politicking, this forecast is null and void.

Economist Dick Conway is a member of the Washington Governors Council of Economic Advisors and has co-published The Puget Sound Economic Forecaster (economicforecaster.com) since 1993.