2016 Economic Outlook: Were Slowing Down

Whenever the economy is doing great as it is now in the Puget Sound region (King, Snohomish, Pierce and Kitsap counties) economists start fretting about the next downturn. No wonder economics is called the dismal science.

But local economists have reason for concern. The Puget Sound economy has had a tendency to take the region on thrilling, and sometimes scary, roller-coaster rides. The Roaring Twenties brought about a housing boom and record timber harvests that took the economy to grand heights only to have it plummet with the onset of the Great Depression. After airplane orders began to dry up in 1968, Boeing laid off 64,000 employees in the next three years.

During the Boeing Recession, the region lost one-tenth of its employment, elevating the unemployment rate to 12 percent. The economy recovered in the early 1970s and grew strongly until 1981s Fed Slam Recession, which was triggered by a tightening of monetary policy to control inflation. During the Reagan administration, sharp cuts in taxes and big hikes in spending launched the Great Expansion, one of the nations strongest periods of job growth. Between 1982 and 1990, Puget Sound employment soared at a 4.6 percent annual rate as the region added a total of 400,000 jobs.

With the new millennium came The Dismal Decade (2000-10), caused by the collapse of two huge bubbles the dot-com bubble in 2001 and the housing bubble in 2008. The nation lost almost 2 million jobs, while the Puget Sound region managed to eke out a paltry 11,000 new jobs. By 2010, 26 million people in the United States were unemployed or otherwise underutilized.

In each of the last four major downturns, including the Dot.com 9/11 Recession and the Great Recession, our region has fallen harder than the nation. Nevertheless, reflecting its resilience, the Puget Sound economy has substantially outpaced the U.S. economy over the long run. Between 1970 and 2015, regional employment advanced at a 2.5 percent annual rate, more than 50 percent faster than the nation.

Because people follow jobs, the region has also experienced rapid population growth. During the past 45 years, the Puget Sound population expanded at a 1.6 percent rate, 0.5 percentage points faster than the nation. This high rate of in-migration has made it difficult to maintain a low unemployment rate. Since 1970, the regional and national unemployment rates have averaged 6.7 percent and 6.4 percent, respectively. But the high rate of population growth has not cut into per capita income. In 2015, per capita personal income in the four-county region was $59,330, 24.5 percent above the national average.

The Puget Sound Region has clearly outperformed the nation during the recovery from the Great Recession. Between 2010 and 2015, it added 234,000 jobs. The employment growth rate significantly exceeded the national rate: 2.5 percent per year to 1.7 percent. The regional unemployment rate dropped from 9.6 percent to 4.5 percent, while per capita income rose 22.6 percent. Finally, the region returned to its prerecession employment peak in the third quarter of 2013, three full quarters ahead of the nation.

While the Puget Sound recovery has caught the attention of national media, it is not without its shortcomings. Considering the depth of the Great Recession, the rebound should have been even more robust. The strong growth of the region relative to the nation is due solely to the success of Boeing and Amazon.com, and the current expansion has been highly concentrated in King County.

Since the United States represents the largest markets for Washington products, a sluggish national economy has had the effect of dragging down our regional economy. Some analysts contend that the nations aging population has caused a long-term drift toward slower employment growth and that this explains the countrys anemic economic expansions. This argument fails to recognize that with 26 million workers sitting on the sidelines nationwide as a consequence of the Great Recession, there was no shortage of labor inhibiting the recovery. The main task of policymakers was not finding people to fill jobs, but finding jobs to put people back to work.

Evidence indicates that the federal government, by raising taxes and reducing spending to hold the line on debt, has been largely responsible for the weak national recovery. In the wake of the Fed Slam Recession, the Reagan administration lowered the federal personal tax rate from 11.2 percent of income to 9.2 percent and increased real federal spending 24.6 percent. In response, the nations real Gross Domestic Product (GDP) expanded at a 4.6 percent rate and employment grew at a 2.6 percent rate between 1982 and 1987. After the recent Great Recession, federal fiscal policy took a much different tack. Between 2010 and 2015, the personal tax rate was raised from 7.6 percent in 2010 to 10.0 percent in 2015, while spending was cut 12.5 percent. The result: GDP growth during that period was held to 2.0 percent a year, while annual employment grew by only 1.7 percent.

The Puget Sound economy has two strong companies that offer their workers average salaries of more than $100,000 and have helped our regional economys growth surpass the nations. Boeing and Amazon together added approximately 31,000 employees between 2010 and 2015. Including the indirect impact, they accounted for an estimated 87,000 of the 234,000 jobs created during the period. Without the lift from Boeing and Amazon, Puget Sound employment would have grown at the same rate as the nation.

The lions share of the recent expansion has gone to King County, where Boeing and Amazon jobs are concentrated. King County garnered 174,200 new jobs, or
72.8 percent of the total regional gain, between 2010 and 2015. And even that gain understates the countys role in the recovery, since a substantial number of King County jobs are held by people living in Snohomish, Pierce, and Kitsap counties. When those commuters return home and spend their income, they indirectly create jobs in the neighboring counties. Of course, while Amazon continues to grow, Boeing no longer appears to be expanding its local workforce.

The overall economic numbers still look good, but are the winds beginning to change for the Puget Sound region? There is evidence that this may be the case. The Puget Sound Index of Leading Indicators, which has been rising strongly since the Great Recession, foresees no immediate roadblock to the expansion. On the other hand, due to rising initial claims for unemployment compensation and a flattening out of help-wanted ads two key measures of the labor market the leading index turned down in the third quarter of 2015.

The latest job estimates also suggest that the economy may be slowing down. Regional employment, which on a year-over-year basis had been increasing at a 3.2 percent rate for much of 2015, decelerated to a 1.6 percent annual rate between June and September.

What concerns us is the fact that three of the five key industries that we follow appear to be applying the brakes. Aerospace and information (including software) contributed 2,000 jobs during the three-month period, but construction, wholesale and retail trade, as well as professional and business services, which have a combined workforce of 689,800, added nothing.

After recouping 30,000 jobs since the Great Recession, the construction industry shed 3,000 jobs in the June-September period, as homebuilding slumped during the summer. With home sales leveling off just short of 70,000 and the average home price getting stuck around $425,000, annual single-family building permits held constant around 9,500. At the same time, annual multifamily permits declined from 20,200 in the first half of the year to 14,200 in the latest period, perhaps in response to warnings of overbuilding.

Trade, which is where we believe Amazon.com is hiding out the company does not divulge its local payroll added 1,900 jobs. This is a small number for such a large industry, but it is not inconsistent with the presumption that Amazon.com is still expanding its payroll. Trade, which normally is not considered a basic industry, bears watching while the internet giant remains on the move.

Professional and business services are one of the fastest-growing industries of the economy. Since the end of the recession, jobs have climbed at a 4.0 percent annual rate, approximately 10,000 per year. Between June and September, however, the industry added just 1,100 in total.

Notwithstanding these sobering developments, it will take something more to trigger the next downturn. The most likely scenario would involve a stalled national economy, which grew at a disappointing 1.5 percent rate in the third quarter of 2015; a halt to local hiring by Amazon, which is unlikely given the companys ambitious plans for growth; and a cyclical decline in construction activity and jobs, resulting from the eventual end to the apartment and office building boom.
Should we be alarmed?

No, but we should be alert. Although our current forecast does not call for a recession, it does anticipate a significant slowdown. Assuming that employment of the Big Three (Boeing, Microsoft and Amazon) stabilizes within two years this is the critical presumption the pace of the Puget Sound economy will decelerate, eventually converging with the national rate. More specifically, we predict that employment growth will slow from 3.2 percent in 2015 to 2.2 percent in 2016 and 1.5 percent in 2017.

Dick Conway is principal of Dick Conway & Associates, a Seattle economic research and consulting firm. He is also co-publisher of The Puget Sound Economic Forecaster, a quarterly newsletter on the regional economy. He has an engineering degree from Stanford University and an MBA from the University of Washington. He received a doctorate in regional science from the University of Pennsylvania. Conway has served on the Washington Governors Council of Economic Advisors since 1985 and was a member of the Washington State Tax Structure Study Committee. He has taught University of Washington courses in the Foster School of Business, the Geography Department and the Economics Department.