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Home / Washington Business - January 2006 / Economy: First Half Down, Second Half Up... Usually |
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Economy: First Half Down, Second Half Up... Usually |
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Written On: January 2006 |
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Written By: by Kriss Sjoblom - Washington Research Council |
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For the past 40 years, the Washington economy has followed a cycle of strong half-decades following weak half-decades. Over this period, the average annual growth in employment for years in the first half of a decade was 1.5 percent, while the average for years in the second half was 4.3 percent.
It certainly looks as if the pattern of a strong second half is repeating itself.
For the state outside of King and Snohomish counties, the recent recession was merely a pause, with only 10,000 jobs lost. Since then, these 37 counties have added more than 100,000 jobs, and steady growth continues.
The story is much different for the Seattle area. Seattle was a center of the 1990s tech boom, and when that bubble burst the area was hit hard. Almost simultaneously, the demand for new airliners collapsed in the wake of 9/11. From peak to trough, King and Snohomish counties lost 100,000 jobs. While employment has yet to reach pre-recession levels, strong growth in the last year augurs well for the future.
A recession often strengthens those businesses it does not kill, as financial stress forces hard-nosed examinations of strategies and operations. After painful restructurings, aerospace and technology, the twin pillars of the Seattle-area economy, have regained their strides.
Boeing is developing a revolutionary new airplane, the 787, built primarily of composites. By early December, Boeing had logged more than 800 new orders for commercial airplanes in 2005, versus 272 for all of 2004. Aerospace employment grew by 11.2 percent (6,900 jobs) from October 2004 to October 2005, and more growth is expected to follow.
Rising energy prices also seem to be a plus for Boeing as its products are more fuel-efficient than offerings from rival Airbus.
Microsoft cruised through the recession. It continues to be highly profitable and to expand research and development for new and improved products and services. Software employment grew by 4.5 percent October 2004 to October 2005 (1,800 jobs).
So things are looking up for the key industries that now drive the Seattle area’s economy. But how good things get here will depend on the national economy. For the past few years consumer and construction spending have driven growth. This cannot continue. If the national economy is to remain strong, business investment must move into the driver’s seat.
Since late 2001, low interest rates have pushed housing values higher. As a result, household wealth as a share of GDP is well above historical levels, and consumers have been willing to spend nearly all of it.
The low interest rates also spurred residential construction. Homebuilding usually falls during recessions, but this was not the case in the last recession. In mid-2000, on the eve of the recession, residential construction was 4.5 percent of GDP. In the third quarter of 2005 it stood at 6.1 percent, a level last seen in the mid-1950s.
In Washington, construction has been a large factor in the recent strength of the economy. Construction employment grew by 9.1 percent (15,800 jobs) from October 2004 to October 2005.
Mortgage rates have moved up in the last two months and are expected to move higher still in the months ahead.
The Federal Reserve has been increasing short-term interest rates for some time. Until recently, long-term rates remained steady. As result the yield curve has flattened. If short-term rates continue up without further increases in long-term rates, we will soon have an inverted yield curve (the condition where short-term rates are higher than long-term rates). Inverted yield curves are typically followed by a recession within a year.
Long-term rates, though, are expected to climb. Higher long-term rates will put a break on home price increases, restraining the growth in consumption, and dampening residential construction.
This will restrain the economy unless business investment picks up the slack. That should happen. Investment usually grows as economic expansion continues. In the case of the 1990s expansion, nonresidential investment began at 9.5 percent of GDP and ended at 12.6 percent. In the third quarter of 2005, investment stood at a modest 10.6 percent of GDP. Corporate balance sheets are healthier than they have been in years.
If business investment does come through, some very good years lie ahead. And there is one further reason for optimism. As business leaders respond to recessions with hard looks at operations and strategies, so too do state policy makers. During the recession we saw a new willingness in Olympia to confront long-standing issues with respect to the state’s business climate. Transportation received a major boost in funding. The unemployment insurance system got needed, albeit modest reform. The Legislature avoided increasing business taxes to close the budget gap and provided targeted incentives for business expansion. The playing field is better here than it was five years ago.
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