With this week's somewhat encouraging news about unemployment in Washington state, here are 10 things you should know about the local, state and national economies:
1. The recovery is real, but the pace of growth will remain subdued for months to come. There are too many potential shocks to the economy for a sustained, strong, job-producing recovery to take hold. Housing as a personal asset and as an industry, for example, will likely continue to suffer for years.
According to the Zillow Home Value Index, housing prices in the Greater Seattle area have declined about 27 percent from their peak in the summer of 2007. With a high level of foreclosures still in the market, those home values will be very slow to rise. Even a modest 3-percent-a-year increase would mean almost 10 years before a home’s price could return to anything near its peak.
2. Washington’s economy may have picked up a little more steam than first thought toward the end of last year. Washington Employment Security Department economists “benchmark” their unemployment figures. That means they check their estimates of job growth against actual employment records.
So last October, economists were still reporting the state was losing jobs. When economists went back to double-check their numbers, they found some 16,000 jobs more than they expected. “The recovery appeared a little earlier and a little better than we first expected,” said David Wallace, the department’s chief economist.
3. The Seattle area has an unusual mix of employment and unemployment. Boeing announced Tuesday (May 17) that it was adding 1,200 jobs on the 737 assembly line in Renton. On Wednesday (May 18), the Employment Security Department reported that Seattle-area unemployment went up to 8.7 percent in April from 8.6 percent in March, a figure that translates into 128,000 people. The difference likely lies in the kinds of jobs being added: mostly high-tech or skilled manufacturing positions.
If you’ve got the right skills, odds are you’ll land a job. If not, it will continue to be a tough road to employment, or could mean accepting positions that pay much less.
4. Inflation seems under control, but the factors that lead to rapidly rising prices at some point in the future are emerging. Most economists focus on “core” inflation, which leaves out energy and food, mostly because those two items are fairly volatile. The two together make up about 20 percent of the Consumer Price Index, reflecting the costs in most consumer budgets. Gas prices get a lot of headlines — rightly so — but gas usually makes up only a small percentage of spending. It’s really psychological: When gas prices hit $4 a gallon, we change our behavior.
Why worry about inflation? The Federal Reserve has been pumping money into the economy for two years, helping to keep the economy afloat. But all that money has to go someplace, and eventually it will result in rising prices. Money is a commodity. The price of money right now is near zero since the Fed has kept interest rates at that level since the recession began.
Too much money chasing too few goods is the classic definition of inflation. We have too much money and we may start chasing too few goods within two, three, or four years. Thomas Hoenig, president of the Kansas City Federal Reserve Bank and a now famous critic of Fed policy, points out that the inflation of the 1980s started in the “guns and butter” policies of the 1960s.
In a recent speech he said: "Central bankers must look to the long run. If current policy remains in place, we almost certainly will stimulate the growth of asset values and inflation. This may temporarily increase GDP and employment, but in the long run, we risk instability, damaging inflation, and lost jobs, which is a dear price for middle- and lower-income citizens to pay.”
5. The debt-ceiling debate will get very nasty. Lots of rhetoric. Lots of confusion. Lots of name calling. Congress should just raise the limit and be done with it. With all the jabbering in Washington, one fact will remain: U.S. Treasuries — the bonds we sell to ourselves and the world to finance our debt — really have no competition. Investors, from foreign governments to my own IRA, have few options. Japan? Its debt is approaching 200 percent of its GDP. The Euro? Sure, but what about Spain and Greece? Swiss francs? Great, but a limited market with little liquidity.
Sorry, China, Japan and ourselves have little choice. No reason to make it a political football, but don’t worry about it too much either.
6. Both parties are right about the nation's debt, so the country needs a bipartisan approach. The Republicans are correct about the debt and the need to do something about it. The Democrats are correct about the need to make spending cuts in a thoughtful way.
7. The day-to-day movement of the stock market isn't worth watching closely unless, of course, you are an active investor. There are many factors that make the stock market move, from rumors to world events to comments by stock analysts to decisions by the Federal Reserve Board.
In a broader economic sense, though, the stock market is a fairly good leading economic indicator. The general rule is that it is a view of what the economy will be like in six months. The market has increased nicely over the past year, so the general sense of the market is that the economy is getting better. For the past six weeks, however, the market has been relatively stagnant, perhaps an indication that the recovery may be slower than expected.
8. We live in strange times. Student loan debt, at about $800 billion now, is greater than credit-card debt in the country. Quite a commentary on our education system and how money is used. Some students are also saddled with high interest rates on the loans (8 percent), when almost all of us are getting practically free money from the Fed – 30-year mortgages at 5 percent, for example. Couldn’t the government offer some sort of refinancing option for students?
9. China's economy is worth watching closely. It is changing dramatically as it moves from being the “factory of the world” to its own self-sustaining domestic economy. It is like the U.S. economy at the end of World War II. A sudden surge of an educated, well-paid, willing-to-spend middle class will remake the Chinese economy.
It is also changing from a world viewpoint. News reports last week said that Coach, the luxury handbag company, would shift more of its production out of China at the same time it expected to sell more bags in the Chinese domestic market.
10. And finally an optimistic note: Manufacturing — the business of making things — seems to be coming back across the country. We in Western Washington have been spared the “rust belt” problems with such solid companies here as Boeing and Paccar. These jobs are key because of the multiplier effect.
Manufacturing jobs generate jobs in the service sector of the economy. A well-paid Boeing engineer has to buy groceries for his or her family, get a haircut, buy gas, plant flowers, educate children, and so forth. I include Microsoft as a manufacturer, by the way, because it produces a product — maybe not a big heavy truck like Paccar's but a product nonetheless.
The growing role of manufacturing gives me hope. Growing our manufacturing base provides those family-wage jobs that propelled the economy in past decades. We may be seeing the dawn of a new era for the U.S. economy, when we return to our roots, making and growing things that the world needs.
