Puget Sound Region’s Economy Looks to Rebound in 2014

Susanna Ray, December 27, 2013, Puget Sound Buisness Journal

The cranes slashing across Seattle’s skyline add to the festive colors of the holidays, with their bright lights and Christmas trees. They also boost the exuberance of local business people.

“I’ve been in the business a long time, and this is as good as it could be looking forward— and it’s not just 2014; you’re talking through 2017 or 2018 being very, very busy,” said David Allen, who’s been with the McKinstry Co. construction and design firm for 35 years. “I’m telling you, there is a lot of pent-up demand. There’s so much going on it’s unbelievable.”

There’s currently $10 billion in projects under construction in Seattle, with an additional $20 billion in the pipeline, said Lee Newgent, executive secretary of the Seattle Building & Construction Trades Council.

In the next 12 months, there will be 30 to 40 major projects around King County, Allen said.

The hiring halls are facing the prospect of work force shortages in 2014 as they compete for skilled labor. The state’s unemployment level finally fell below the national rate in 2013 and is expected to keep dropping, spurring contagious confidence that could touch every sector and relegate the Great Recession to history books.

Economists are optimistic about 2014, though it’s tinged with caution.

“The general view is that next year will be better,” said Steve Lerch, the chief economist and executive director of the Washington State Economic and Revenue Forecast Council. “Not great, but better.”

Personal income in the state probably grew at about 3.1 percent in 2013, and that’ll jump to growth of 5.2 percent in 2014, Lerch predicted. Employment, population, construction, retail sales, car sales all are growing.

“Post recession, a lot of the strong recovery we’ve seen in the state has really been in the Puget Sound region,” Lerch said.

 

This area suffered a deeper recession than the nation as a whole, said Dick Conway, the dean of local economists, who has been in regional forecasting since 1969. That’s because the region had been growing at a faster pace than elsewhere before the crash, so it had farther to fall. Employment here, for example, fell 7.5 percent in the recession, compared with 6 percent nationwide.

But once it hit bottom, the local economy started growing again, and once more at a faster rate than the country. Around 2011, the growth was twice as fast as the nation’s, and it has been significantly faster since, Conway said, producing what’s known as a V-shaped recession.

Boeing’s growth has made the main difference in the local economy’s strength compared to the country’s, Conway said. That’s at risk as the company has been steadily moving work to other states and is considering placing the new 777X assembly line elsewhere. The new model would support about 25,000 jobs locally, Conway estimates. A decision is due in early 2014, though it wouldn’t have an immediate impact on employment here.

But Boeing isn’t the only game in town anymore. Amazon’s expansion in Seattle’s South Lake Union neighborhood reflects an overall healthy economy, Conway said.

 

Technology is the biggest story in the Seattle area now, said Bill Conerly, an economist based in the Portland suburb of Lake Oswego. There’s been a technology explosion in every location that has that industry as an installed base, and Seattle is getting an extra boost as Silicon Valley companies add offices here and as Amazon expands, Conerly said.

“Microsoft was the story of the previous decade or two,” he said, “and it seems to be all Amazon right now.”

This area actually has 14 economic clusters that are at or above the average economic impact for that cluster in the nation — far above the level seen elsewhere, said McKinstry’s Allen, who is also chairman of the board of the Economic Development Council of Seattle and King County. The clusters include aerospace, information technology, life sciences, fashion, maritime, trade and logistics, clean technology, financial services, global health and philanthropy, among others.

The region’s interactive-media business, including gaming and application development, is moving to No. 1 in the world, he said. There were 10 companies in IM a decade ago, and now there are more than 200.

“Diversification has been the mantra of our work and economics development council,” Allen said. “We love Boeing and we should get that goddamn 777 line, but we have worked hard over the past 20 years to diversify our economy away from reliance on anyone.”

 

The Puget Sound area employment growth rate of 2.9 percent is almost double the national rate, Conway said, and the same is true of population growth, which generates more purchases, more income and more jobs. The jobs gains will slow and come more in line with the national rate now that Boeing is no longer a growth force, he said, “but in general we appear to be in pretty good shape.”

And that’s why housing and construction activity is so strong.

Home sales are just 10 percent to 15 percent away from normal levels, Conway said, after having fallen 70 percent in the recession. He predicts it will be a couple of years before that final gap is closed but says the biggest gains are behind us.

The big question will be affordability.

The housing recovery is “a good-news/bad-news thing,” agreed Lerch. The rising home prices are good for homeowners, especially those whose mortgages were under water, and that gives them more spending confidence, which helps the economy. But the gains in both prices and in mortgage rates could end up sidelining some first-time buyers, which in turn could translate into fewer sales and less construction.

Homes a year ago were the most affordable since 1970, taking into account house prices, mortgage rates and household income, Conway said. But that’s changing rapidly. Home prices have climbed 11 percent and the mortgage rate rose a percentage point, meaning that in 2013, he said, the first-year mortgage payment as a fraction of household income has jumped 22 percent.

Conway predicts a further rise of 7 percent in prices in 2014, along with more gains in interest rates.

Still, even in this, the housing market is better here. King, Snohomish, Pierce and Kitsap counties are home to 1.2 percent of the nation’s population and are doing 1.6 percent of the homebuilding.

While sunny skies dominate the forecast, clouds could be seen as well.

 

Indeed, Conway gave this title to his current quarterly Economic Forecaster newsletter: “A Lump of Coal.”

That refers to the still-struggling national economy, but it affects the Puget Sound region, of course.

“The U.S. economy will be better, but it sure could use some help, and it’s not going to get it,” said Conway, adding that he’s “disgusted” by federal policy that left the country in “a slow slog” with close to 10 million people still unemployed.

Another government shutdown looks less likely now, though, which should make consumers feel more comfortable about making purchases and businesses feel better about hiring.

But the planned cancellation of federal long-term unemployment benefits could strip about $474 million out of the local economy next year, or about two-tenths of a percent of the total, Conway estimated.

“That’s not going to make or break the economy,” he said, “but why are people who are struggling to get jobs having to bear the brunt of this?”

 

China is one of Lerch’s worry items for 2014. It’s the biggest single trade partner for the state, accounting for 17 percent of Washington exports in the first six months of 2013, and its economic growth has been slowing.

Conerly has his eye on a couple of concerns in a five-year horizon, including Boeing’s plans and whether the military keeps reducing its spending.

“If the cuts continue, at some point there will be another base-closing decision,” Conerly said. “Puget Sound was very fortunate the last time we closed bases, and it’s kind of luck-of-the-draw how that happens. It’s a big unknown for the community.”

Still, the region learned a painful lesson from Boeing’s infamous 1971 downturn, and the diversification strategy since then seems to be working.

“Seattle has emerged in the past 15 years as a truly global city,” Allen said, “a huge regional center where companies that have offices around the country will have an office here, and that’s an overlay of the many clusters we have here.

“If you live in Seattle,” he added, “you should kiss the freaking ground when you wake up that we’re as lucky as we are to have the vitality we have.”

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