Economic Forecast 2011: The Light at the End of the Tunnel

Governor Gregoire sees jobs and recovery in 2011

Putting Washingtonians back to work is my top priority. Trade will lead the way and small businesses will create jobs. Were strong in agriculture (it contributes 12 percent to Washingtons economy), aerospace (650 companies) and technology (half our jobs are tech related). We are emerging in clean tech (400 companies) and life sciences (recession notwithstanding, life sciences has grown by 5 percent).

Washington is the nations most trade-dependent stateaffecting one in three jobs. Last falls trade mission to Asia was our largest ever. Ive set a goal to increase exports by 30 percent over the next five years. To help businesses develop export strategies, weve provided $3 million in grants. To boost success for small businesses, were reducing state-imposed costs and streamlining licensing.

Moving forward, we must support a vibrant education system that will create tomorrows skilled workforce.

A Weak Dollar is a Bad Sign Michael Parks, Editor Emeritus, Marple’s Pacific Northwest Letter

The indicators I will watch most closely to assay regional prospects: interest rates, the dollars value and the health of relations between the United States and China. The Great Disappointmentwhere we are economically as this is writtenwill not morph into sustainable recovery as long as short-term rates are 0 percent. We love a weak dollar in the Pacific Northwest, music to exporters ears. But a 97-pound weakling greenback signifies national economic malaise. No thanks. Trade war between China and America, the two poles of the globes most important trade relationship, would amount to an economic disaster.

Good News in Aerospace Scott Hamilton, Founder, Leeham Co. LLC, Sammamish

In the second quarter of 2011, Boeing should finally begin delivery of the 787. Delivery of the first 747-8 is expected by analysts to be in the third quarter. If deliveries begin for both aircraft, it represents the beginning of the end of a long corporate nightmare of delays and billions of dollars in cost overruns and customer penalties. In the meantime, Boeing is gearing up for increasing production of the 737 and 777 lines; and the KC-X Air Force aerial tanker contract, originally expected to be awarded in the fourth quarter of 2010, likely will be in the first quarter of 2011. Boeing, of course, hopes to win this with the KC-767. Once deliveries begin for these aircraft, Boeing will start hiring again. And with a half-billion-dollar backlog of orders, those jobs will be around for a long time.

Microsofts Comeback Year? Rob Helm, Director of Research, Directions on Microsoft, Kirkland

The Threat: The iPad and its wannabe tablets cant replace the PC, but they can compete with it for technology dollars. That situation could hurt sales of Windows and Office, Microsofts two most profitable software products. Windows and Office dont ship on most tablets. Nobody knows what the impact of tablets will be. If the tablet hit turns out to be minor, there could actually be an upside as analysts revise their estimates upward.

The Promise: Servers and the cloud. Microsoft has completely rebooted its lineup of software for e-mail, social networking and communications inside businesses. Now Microsoft is feverishly working to put the new server products into its data centers so it can offer them as cloud services to businesses. The company has already collected a lot of the money for new servers through long-term contracts. Theres potentially a lot more money to come as customers roll out the servers or start subscribing to them in the cloud. For the cloud, the number to watch is unearned revenue as a percent of revenue in the companys Office and Server & Tools Divisions. As customers move to the cloud, you should see unearned revenue go skyward as well.

In the end, the biggest factor in Microsofts success is the number of PCs sold. Anything unexpected that tweaks PC sales up or down even a few percentage points will turn tablets and the cloud into footnotes.

G Forces Brenda Cooper, Chief Information Officer, City of Kirkland, science fiction writer and futurist

At the risk of sounding a little silly, I kept coming up with Gs for next year. Yep. Gs. Microsofts Kinect will contribute to our great gaming industry, as will the rise of social, mobile and geo-aware games. Googles growing presence in the region will keep adding to the tech ecosystem, and draw great people. And the most important G word for the year is green. Well see green building and green retrofitting and green energy industries do well. While not enough to lift all boats, I expect Seattle to outperform most metro areas in 2011. Well grow.

Hoods Law and Cheap Power Dave Sabey, CEO, Sabey Corp. (Sabey Data Center Properties is the largest multitenant data center developer on the West Coast.)

Storing digital data and developing new products and services based on that data will be the next industry for Washington. Since we have the cheapest electricity in the country, we are going to emerge as the digital hub, the center of cloud computing for the world. Its going to be particularly important in health care. The amount of data from DNA sequencing alone is soaring. We call it Leroy Hoods law: Data generated by DNA sequencing doubles every nine months. And when researchers or medical professionals want to access that data, or data involving MRI or CT scans, they tap into databases with many terabytes of datathose are quantities of information you cant easily push through our fiber networks. To gain access to all that data, it helps to be physically close to it. I can imagine pathologists being based in a nice community near a data center in eastern Washington analyzing data from hospitals all across the country.

Venture Capital Will Ramp Up Matt McIlwain, Managing Director, Madrona Venture Group

Positive momentum will continue in the venture industry in 2011. On the new investment end, we are seeing an increase of compelling teams and market opportunities. One theme is helping enterprise technology teams and their data centers transition to the new cloud-enabled IT organization. Another is helping end users coordinate all the content and workflows they now have access to from an ever-increasing number of connected devices (smartphones, iPads, netbooks).

This year will also see continued innovation in entertainment shopping models including flash sales, auctions and other promotional strategies online. Similar to new investing, acquisitions are likely to continue an upward trend. Large companies are in need of innovative new products and ways to grow. In many cases, they have billions in cash and a very low cost of capital, which motivates them to be proactive in buying rapidly growing, smaller companies. We expect the number of transactions and average deal size to increase this year400 transactions and average deal size of $50 million for venture-backed companies nationally.

Nature Inspires Innovation Sesh Velamoor, Trustee and Director of Programs, Foundation for the Future, Bellevue

Opportunities are emerging in biomimicry. Theoreticians and innovators pursuing this field say that the central idea is the conscious emulation of natures genius. Their description of the opportunities relates to duplicating natural processes to contribute to sustainability practices. Important questions are: How does life around us make things? How does life make the most of things? How does life use systems? The technologies that nature reveals stretch across multiple possibilities such as self-assembly, solar transformation, quenching thirst, separation of entities, green chemistry, timed degradation, resilience and heating, and sensing and responding. Startups already exist to exploit several of these areas.

A Sound Cleanup William D. Ruckelshaus, Co-chair,
Joint Ocean Commission Initiative

The big challenge ahead in restoring the health of Puget Sound is to successfully grapple with the non-point source pollution problem. Runoff from city streets and other impervious areas in our big urban centers, as well as direct runoff from suburban and rural areas, will continue to plague the health of Puget Sound unless we can find a viable solution.

The solution includes three major undertakings:

1) providing a plan and funding for the major infrastructure changes necessary to solve urban runoff problems;

2) low impact development requirements that will ensure any new development in the region is done in a way that minimizes its impact on Puget Sound; and

3) the adoption by local watershed groups of the responsibility for protecting, restoring and maintaining the health of their watersheds.

All three of these efforts are under way and we simply must stay at it if we are going to restore Puget Sound.

A Better Job Market, But Only Gradual Improvements Josh Warborg, District President, Robert Half International

As we head into 2011, employers continue to remain cautiously optimistic about hiring. Many organizations are bringing in skilled professionals on a temporary or project basis to help maintain productivity and ensure that key initiatives are on track until the economy rebounds.

The companies that are adding staff are taking the time to look for individuals with diverse skill sets who can perform a broad range of tasks. Positions in accounting and IT such as business analysts, web designers and ERP technical developers are poised to see some growth in 2011. On the administrative side, were seeing gains in customer service and health care.

A Merger Boom Michael Butler, CEO, Cascadia Capital

There will be a substantial increase in mergers and acquisitions in Washington state in 2011. The activity will be driven by an improved valuation climate, tax incentives, a thawing of capital and debt markets, and the aggressive return of cash-rich private equity and strategic buyers who are seeking larger and more deals. Based on these trends, we predict 2011 will deliver more than 250 M&A transactions in Washington state with an aggregate value of more than $20 billion.

For the sustainability industry, we predict 12 to 15 or more transactions (of both companies and assets) that will result in an aggregate value of more than $1.5 billion. For the IT industry, we predict 75 transactions that will result in an aggregate value of $3 billion. For the middle market, we predict over 100 transactions that will result in an aggregate value of $7.5 billion.

Finally! A Real Estate Thaw Craig Kinzer, Principal and Founder, Kinzer Real Estate Services

After three very manic years, we expect 2011 to bring the beginning stages of recovery with more transactions. This optimism is in large part due to the probability that interest rates will stay relatively low. The flight to quality will largely be over by 2012, leaving a bifurcated market creating carnage at the lower end of the property spectrum. There will be little new construction but supply will effectively be added with the delivery of build-to-suit options for Amazon and the Gates Foundation and recapitalization of buildings whose valuations were underwater.