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Quarterly Economic Measures Report
First Quarter, 2000
Executive Summary
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As part of its year 2000 special programs contract with the Office of Regional Policy and Planning, the Central Puget Sound Economic Development District (EDD) produces quarterly reports on national and county economic measures. This document is an executive summary of the first quarter, 2000 report. Please contact us for more information about the QEM reports.
I. THE NATION
Economic Measures
The U.S. economy officially marked its 108th month of continuous expansion during the first quarter of 2000, a record for the postwar period. GDP grew at a 5.4% rate during the first three months of the new year, slightly below analysts' expectations but quite robust nonetheless. The result could be considered disappointing only in comparison to the revised 7.3% growth rate from the previous quarter. Consumer spending, which accounts for roughly two-thirds of U.S. output, continues to be the driving force behind the ongoing expansion. Recovering from a pre-Y2K lull, spending by businesses was up sharply, led by a $20 billion jump in spending on computer equipment.
The remarkable thing about the current expansion has been the absence of any hint of inflation, although there are a few signs that the honeymoon may be coming to an end. In the fourth quarter of 1999, the GDP price deflator, a key inflation gauge, rose at a 1.9% annual rate, compared to 1.1% in the third quarter. Advance reports for first quarter 2000 show the implicit price deflator up by 2.6%. In March the consumer price index suggested the possibility of renewed inflation, up 0.7% from one month earlier and 3.7% over March of 1999 (compared with a 2.7% increase for all of 1999). While higher energy prices contributed substantially to the March gains, even the core rate of inflation (exclusive of food and energy prices) rose 0.4% in March, twice the rate observed in January and February.
Fears of increasing inflationary pressures have led the Fed to act preemptively. In the past ten months, the Federal Reserve has raised interest rates five times for a total of 1.25 percentage points. A further increase at the May 16th meeting of the Federal Open Market Committee would be the sixth in less than a year. As of the end of first quarter 2000, the federal funds target rate stands at 6%, its highest level in almost five years.
Interest rate hikes by the Fed coupled with the repurchase of government debt by the Treasury Department have resulted in an inverted yield curve, with shorter term 10-yr and even 3-yr bonds trading at higher rates than the standard 30-yr Treasuries. Inflation fears have tended to keep bond yields higher, although the recent volatility in the stock market has led some to seek the relative safety of government securities.
With interest rates rising, mortgage rates have continued their upward trend. The interest rate on conventional 30-year, fixed rate loans hovered around 8.25% throughout the first quarter of 2000. The impact of higher capital costs is beginning to be felt within the housing sector. The National Association of Realtors recently noted that sales of existing homes nationwide were down 10.7% in January of 2000, the largest monthly decline in more than three years.
Industrial/Manufacturing Measures
Producers' durable equipment grew by $55 billion in the first quarter of 2000, for an annualized rate of 23.7%, nearly twice the rate in the first quarter of 1999. The increase was largely due to a resurgence in computer purchases postponed due to Y2K concerns. Nonfarm inventories rose by $38.1 billion, following an unusually high $71.4 billion dollar increase in the final quarter of 1999. Signs of continued strong demand were evident in the orders placed with U.S. manufacturers during the first three months of 2000. Led by sales of electronic components, factory orders were up 2.5% from the fourth quarter of 1999 and 8.7% from the same quarter one year earlier. Industrial production increased on average by 0.5% in the first three months of 2000, slightly ahead of fourth quarter 1999 gains. At 81.5%, capacity utilization rates remain low.
Income Measures
Disposable personal income, or income after taxes, was up 0.9% in January, 0.3% in February, and 0.7% in March. Income growth in the first quarter of 2000 was largely attributable to stronger job growth and higher hourly earnings.
II. THE REGION
Economic Activity
Price levels in the region were up slightly in the first quarter of 2000. The consumer price index (CPI) for the western U.S. was up 1.0% from the previous quarter, for an annual rate of 4.1%. The estimated CPI for the Seattle metro area rose 0.8% in the first quarter of 2000, for an annual rate of 3.4%.
Bankruptcy filings in King County were at their lowest levels in more than five years. Bankruptcies declined 3.6% from the previous quarter and 9.7% from the same quarter twelve months earlier.
New business starts within Seattle returned to normal levels in the first quarter of 2000 following an unusually low number of new business licenses recorded in the final months of 1999. Licenses issued in the first three months of the new year were up more than 40% over the same period last year.
Air traffic at SeaTac continues to follow a long run trend of steady growth. The total number of passengers passing through the airport in the first quarter of 2000 increased 6.2% from the same period one year earlier, while air cargo volumes rose 2.8%. Container traffic at the Port of Seattle declined by 10.7% from first quarter 1999 levels.
Convention Information
The number of conventions and events held in King County during the first quarter of 2000 was essentially unchanged from first quarter 1999. Total room nights, a measure of the volume of tourist and business traffic, declined by 14% from the same period last year. Local room taxes collected during the fourth quarter of 1999 were up 16% from the same period last year. Local room tax per event, a proxy measure for delegate expenses, rose a healthy 44% from the same period twelve months earlier.
Taxable Retail Sales
Taxable retail sales in King County rose 12% overall in the twelve months leading up to the fourth quarter of 1999. Among the major sectors, transportation, communications, and utilities demonstrated the highest growth with an increase over fourth quarter 1998 of 56.9%. Construction activity, exhibiting continued strong growth, was up 19.1%. The services sector had its best quarter in years, up 12.2%. Much of the increase was due to growth in business services, including computer services, up by 24.2%. Retail trade, which accounts for 45 percent of all retail sales, rose 8.8%. Countywide, manufacturing finally showed some signs of a recovery-after four straight quarters in decline, it rose by 9.8%.
Taxable retail sales in the City of Seattle rose slightly higher than the county overall, up 13% in the fourth quarter of 1999. As in the county as a whole, sales in transportation, communications and utilities grew most quickly of all the major sectors, up by 44.9%, followed by construction (23.8%). Manufacturing activity was up 18.0% over the same period one year earlier. Finance, insurance and real estate, uncharacteristically, saw a 12-month drop in sales of 5.8%.
Employment
With its booming economy and tight labor market, King County continues to enjoy record low unemployment. The number of unemployed in King County was down by 4.4% from the same period last year. By the end of March, the unemployment rate stood at a mere 3.0%. The statewide unemployment rate reached record monthly lows in both January and March, finishing the quarter at 4.7%. Nationally, moderate job growth kept the rate of unemployment steady at an average 4.4% for the quarter.
Average monthly initial unemployment claims in the fourth quarter of 1999 declined by 1.8% over the same period last year; the number of unemployment beneficiaries declined by 0.6%. (Statistics on the number of beneficiaries by industry remain temporarily unavailable as of August 1999.)
In the Seattle metro area, the number of nonagricultural wage and salary workers grew by 2.0% in the first quarter of 2000. Compared to the first quarter of 1999, goods-producing industries were down by 6.6%; services-producing industries up by 4.3%. In line with the ongoing shift in the economic base of the Puget Sound region, manufacturing employment declined by 11.2%, led by job losses in transportation equipment, aircraft and parts (down 20.8%), while services employment increased by 5.4%, led by growth in business services, computer & data processing (up 22.1%).
Job Dislocation Activity
Job losses due to firm closures or workforce consolidation in the past 18 months were dominated by workforce reductions at Boeing. The King County Reemployment Center recorded an additional 2,980 workers laid off in the fourth quarter of 1999, bringing to 14,322 the number of dislocated workers attributed to the aerospace giant in all of 1999. Apart from Boeing, reductions in the manufacturing workforce during the final quarter of 1999 included 150 jobs at K2 of Vashon Island and 96 jobs at Interpoint Corp. of Redmond. In the services sector, there were a number of jobs lost in warehouse and distribution: 85 at CSK Auto in Auburn, and an additional 80 jobs at the Seattle Times in Seattle. A total of 130 customer service positions were eliminated at QualMed in Bellevue. KeyCorp of Auburn cut its credit and collections staff by 175. Adobe Systems, Inc. of Seattle and Keane, Inc. of Kirkland reduced their computer support staff by 63 and 51, respectively. There were a number of layoffs of backoffice staff among some of the area's retail giants: Eagle Hardware of Renton eliminated 300 jobs in accounting, marketing, human resources, purchasing and MIS; Nordstrom cut 190 information technology positions. Among health care providers, Monarch Care Center of Des Moines reduced its staff by 84, and the Yesler Terrace Clinic by 12. King County Public Health eliminated 15 positions.
Boeing and Airline Industry Data
The largest job losses in the central Puget Sound region continue to come from layoffs at Boeing. Workforce reductions have averaged about 1,300 per month since mid-1998. In early March, Boeing announced it might cut 5,000 more jobs than planned this year company-wide. Currently, approximately 40 percent of the company's U.S.-based workforce is located in Washington state. Locally, in the twelve-month period ending in March 2000, Boeing employment declined by 13.8%. While reducing the size of its workforce, Boeing appears to be doing more with less-contractual backlogs continued to decline during the first three months of the new year, down by 10.3% from the same period one year earlier. Backlogs in the commercial airplane division were down by 10%.
Wages
With employment and payroll data now available for the first half of 1999, overall monthly wages can be seen to have risen slightly in the first quarter (3.3%) only to fall again in the following quarter (-4.4%). However, total wage levels in the second quarter of 1999 were higher than in the same quarter one year earlier, by 6.2%. The major sectors with the highest average monthly wage were services and manufacturing.
Real Estate
Construction
Although it may be too soon to tell, the first quarter 2000 figures indicate a possible slackening in the local housing market. Compared to one year ago, King County sales volumes were down slightly and average time on market increased by a few days. However, it remains a seller's market, as prices on both new and existing homes continue to edge upwards.
The number of commercial and industrial permits issued in the first quarter of 2000 was up 3.1% from one year earlier, while the total dollar value of non-residential construction was less than half of that recorded in the first quarter of 1999. The number of residential permits issued for existing units was up 13.8% while those for new construction were down 3.7%. The dollar value of residential construction declined by 10%, although the number of new units built nearly doubled.
Office Market
The proliferation of high-tech firms and their seemingly insatiable demand for new office space continues to drive one of the hottest office markets in the nation. In the first quarter of 2000, the office vacancy rate in the Puget Sound region fell to an astonishing 3.5%, surpassing even the record low of 4.1% set last quarter. In downtown Seattle, the office vacancy rate was a scant 1.6%. Regionwide, the pace of absorption slackened somewhat. Compared with the record 2.2 million square feet of new office space absorbed last quarter, only 800,000 square feet was added in the first quarter of the new year, about half of which was in Seattle. With vacancy rates at historic lows, developers continue to bring new projects to market. More than 8 million square feet is currently under construction, with more than 70% of it preleased. The tightening market for Class A office space is finally being felt in the form of rising rents, with lease rates across the region up more than two dollars per square foot according to CB Richard Ellis' quarterly market report. In downtown Seattle, in the first quarter of 2000 alone, average lease rates rose 8.9%, compared with an increase of 12.8% for all of last year.
Industrial Market
In the first quarter of 2000, the vacancy rate for industrial space in the Puget Sound region remained essentially unchanged at 4.7%, only slightly higher than last quarter's 4.5%. In Seattle, the vacancy rate was up slightly from last quarter, but still a mere 2.1%. On the Eastside, the vacancy rate dropped a full point to 3.7%. Regionwide, net absorption was up sharply, with over a million square feet of new space added. The pace of new construction slowed to its lowest level in two years with only 1.6 million square feet planned for the first quarter, down from 2.8 million in the final quarter of 1999. Continued strong demand, coupled with a limited supply of available land, has pushed development southward into Pierce County and led to the redevelopment of older buildings in the traditional industrial core. In Seattle, high-tech companies continue to convert existing industrial space to suit their needs, often incorporating office space with a variety of other uses, including research & development, manufacturing, or warehouse & distribution. While lease rates remained relatively flat last year, the tight real estate market is forcing rents upward in some areas. While rents in Seattle were unchanged in the first quarter, lease rates were up 9.1% on the Eastside and 9.4% in the Kent Valley.
Retail Market
Spurred on by a healthy regional economy and robust consumer spending, the market for retail space in the Puget Sound region remained strong throughout the second half of 1999. The retail vacancy rate region-wide declined slightly to 5.5% from 5.6% in the first half of the year. While more than one million square feet of new retail space was added, absorption slowed somewhat from preceding periods. Gains in the Downtown and Northend submarkets were offset by a negative absorption rate on the Eastside of 141,470 square feet, due mostly to recently completed construction. Continued demand for new space has driven up average asking lease rates by 8% overall. In downtown Seattle, lease rates for the most desirable sites have risen by as much as 50 percent in the latter half of 1999.
Apartment Market
Following three years of rapid growth characterized by rising rents and diminishing vacancy rates, the apartment market at last appears to be softening. A combination of overdevelopment and declining demand has led to a general increase in vacancy rates across the region. In one or two submarkets in the downtown Seattle area, rents actually declined slightly in the latter half of 1999. According to the City of Seattle's Department of Design, Construction and Land Use, 1999 saw something of a building boom in multifamily units-plans for new Seattle apartments and condominiums hit their highest levels in 16 years, with more than half of the new units located downtown. In spite of the construction of a record number of large, multi-unit apartment buildings, however, demand for single-family rentals remains strong. According to a just-released report by Dupre & Scott Apartment Advisors Inc., low vacancy rates and strong demand for rental houses has driven up rents an average of 6% per year. The report also found that in King County, the vacancy rate for apartments in smaller buildings (fewer than 19 units) has fallen from 2.8% to 1.8% in the past year. During that same period, rents have risen an average of 6.5%.
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Updated: January 29, 2004
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