The housing market is likely to cool, but not collapse. Exports should keep on sizzling. And though continued high energy prices may depress...
The housing market is likely to cool, but not collapse. Exports should keep on sizzling. And though continued high energy prices may depress consumer spending, sustained business investment should counterbalance that.
That’s the broad view of national and regional economists as they look ahead to 2006: The Northwest and national economies both should keep growing, though probably not as much as this year.
If you don’t care to pore over government reports and crunch mathematical models, there are economic indicators you can see around the Puget Sound region to develop your own sense of how the local economy is faring.
Here’s a guide to what the experts are saying, and what to watch for yourself.
From hot to warm?
Nationally and locally, the sizzling housing market has been one of the major props of the economic recovery. Homebuilding has turbocharged the Northwest construction industry: As of November, 19.5 percent of all new jobs created over the previous 12 months in Washington and Oregon were in construction, even though that sector accounts for just 6.2 percent of all jobs.
Housing activity has also aided the region’s lumber industry and boosted retail and professional-service jobs (all those new homes have to be furnished and paid for, after all). Soaring values have allowed consumers to tap the equity in their homes to support their spending: Last year, funds from home equity hit $599.5 billion and accounted for nearly 7 percent of all disposable income, according to the Federal Reserve.
But as mortgage rates creep higher and the Fed continues to tighten interest rates, nearly all observers expect the housing market to cool off next year. The big question is how fast it will do so.
“A year ago, I was saying ‘No, we’re not in a bubble — fundamentals are driving it,’ ” said William Conerly, a Portland-based economist. “Now, I think we are.
“So many people are buying houses for investment purposes, or they’re buying a vacation house because their stocks haven’t been doing very much and they see everyone else getting rich in real estate.”
While Conerly and other observers expect house prices to soften next year, they don’t see a precipitous drop.
That, they say, is more likely in markets that have experienced the most speculative home buying, such as Florida, Nevada and Arizona.
John Mitchell, Western regional economist for U.S. Bancorp, said softness in the housing sector likely “will take some of the steam out” of consumer spending.
And construction added far fewer Washington jobs in November than in November 2004, though it’s too soon to say if that’s a blip or the start of a trend.
Keep an eye on:
Exports: Continuing the surge
Few regions of the country rely more on overseas trade than the Northwest. Led by airplanes, microchips and farm products, the Northwest shipped out nearly $44 billion worth of stuff in the first 10 months of the year — up 10.7 percent from the same period in 2004.
Forecasters disagree on the precise numbers while agreeing on the trend
Jobs will expand Nonfarm employment will grow 2.6 percent in fiscal year 2006, up a little from 2.4 percent growth in 2005, predicts the state’s Economic and Revenue Forecast Council.
Economists participating in the Western Blue Chip Economic Forecast offer slightly different figures — employment growth of 2.3 percent in calendar year 2006, down a smidge from 2.5 percent growth in 2005.
Personal income will rise The state forecast council pegs personal income to rise 6.5 percent in fiscal 2006, stronger than the 5.1 percent of 2005.
The Blue Chip forecast estimates Washington personal income will rise 5.9 percent in calendar 2006, after 4.1 percent growth in 2005.
Neither forecast adjusts incomes for inflation.
Source: Washington Economic and Revenue Forecast Council, Western Blue Chip Economic Forecast
With more than 56 percent of the region’s exports going to East Asian and Pacific Rim countries, it’s good news that demand from those countries is expected to rise in 2006.
“Asian economies are looking stronger, and for the first time in years Japan looks like it’s ready to join the party,” said Scott Anderson, senior economist for Wells Fargo in Minneapolis.
Export growth also should be helped by the weak dollar, which isn’t expected to get much stronger next year. Lynn Reaser, chief economist at Bank of America’s Investment Strategy Group, said she expects the euro will rise to $1.29 (from about $1.20 today) by the end of 2006, and the dollar to fall to 105 yen (from about 115 today).
Keep an eye on:Cargo ships steaming to and from the ports of Seattle and Tacoma. The Northwest’s two busiest ports both have reported record traffic this year. Can they keep it up?
Gasoline prices are down markedly from the heights they reached after hurricanes Katrina and Rita, but they’re not likely to go much lower.
Wells Fargo’s Scott Anderson expects crude oil, now at $57.34 a barrel, will be above $60 for most or all of next year. That means a big chunk of consumers’ disposable income that could have been spent on iPods or Xbox 360s will go to energy.
“Gasoline prices have gone down, but home-heating prices — oil, natural gas — are still up, and there are a lot of people who are going to be squeezed by that,” U.S. Bancorp’s John Mitchell said.
That will particularly be the case if high energy costs seep into the rest of the economy, accelerating “core” inflation and spurring incoming Fed Chairman Ben Bernanke to raise short-term interest rates even beyond the 4.5-4.75 percent level that most Fed watchers expect by early next year.
“If your gas bill’s up, you’ve got an adjustable-rate mortgage and the minimum payment on your credit card’s gone up, you’ll be feeling the pinch,” Mitchell said.
Others are more optimistic. Bank of America’s Lynn Reaser noted that near-record oil prices this fall didn’t stop the gross domestic product from rising at a 4.3 percent annual rate in the third quarter, surprising even optimists.
“The economy has proven to be very resilient in the face of higher energy costs,” she said, “but a major supply shock could put the economy on a much more negative track.”
Keep an eye on:Winter heating bills and prices at the gas pump. Are you cutting back on other purchases to feed your car and furnace?
The Northwest is home to plenty of big companies focused on the consumer: Nordstrom, Starbucks, Amazon, Nike, Costco. But many other big names rely on other businesses, not individuals, for their sales.
“In our corner of the world, you’ve got to watch business investment,” John Mitchell said. “Look at what we’re loaded with: Boeing, Microsoft, Intel, Paccar, Micron.”
Business spending, which plunged during the recession, has been growing since mid-2003; Scott Anderson expects it to be up 8.7 percent for 2005. That’s solid but hardly spectacular, especially this far into a recovery.
Anderson predicts growth in business spending will slow to 7.5 percent next year.
Even if businesses are flush with profits, he said, “just because they have the cash doesn’t mean they’re going to use it, especially if they see consumer spending slowing.”
And even if they do, that may not translate into jobs — as Oregon has found with its big stock of semiconductor plants.
“While the trends are pretty strong for chip demand, we’re not seeing a lot of additional production in Portland,” Anderson said. “Most of [the chip manufacturers] are concentrating their job expansion overseas.”
One component of business spending, nonresidential construction, could be in for a good year. Schnitzer Northwest says it will start building its Bravern office tower next year in downtown Bellevue, three blocks away from where Kemper Freeman is completing the long-delayed Lincoln Square mixed-use development. Four more big-ticket projects are in planning stages.
Though vacancy rates are higher in downtown Portland and Seattle than on the Eastside, Mitchell says, “We’re now at the point where people are starting to talk about new projects.”
Keep an eye on:The number of construction sites around town. Also, the readiness of your company’s IT department to upgrade software or install new desktop computers.
Boeing remains the area’s single biggest private-sector employer, and the billions of payroll dollars it sends coursing through the local economy indirectly support thousands more jobs.
And after several years of job cuts and dwindling orders, Boeing is on a roll. So far this year, it has orders for 185 of its new 787 wide-body jets, along with 114 Everett-made 777s and 465 of the workhorse 737s.
The fuel-efficient 787 has proved especially popular with airlines shell-shocked by jet-fuel prices.
Boeing likely will also benefit from the expected strength in Asian economies; 23 percent of this year’s 827 new orders are from Pacific Rim airlines.
As the company has ramped up production, it’s added nearly 7,000 Washington jobs since January, most of them in Everett. So:
Keep an eye on:Traffic on Highway 526, the main road from Interstate 5 to the Everett plant. Traffic jams there mean more people heading to or from their shifts.
Elsewhere, meanwhile …
It’s worth keeping in mind that Washington, D.C., New York and Beijing can have more impact locally than Seattle, Bellevue or Olympia.
“We like to think we’re in control of our own destiny, and to a certain extent we are,” said Rick Kaglic, chief economist at the Washington State Employment Security Department. “But there are complex economic interactions going on worldwide that set the environment for what we do here.”
Drew DeSilver: 206-464-3145 or email@example.com