King County Quarterly Economic Measures, Fourth Quarter, 2001

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Quarterly Economic Measures Report
Fourth Quarter, 2001

Executive Summary

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As part of its year 2001 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 fourth quarter, 2001 report. Please contact us for more information about the QEM reports.

A Tale of the Economy

The close of the 4th quarter of 2001, and with it the end of the first year of the 21st century, appeared like a tale of the economy written by Jonathan Swift. The central character of this tale was named Investor, prisoner to the whims and fortunes of both the tiny Dot-coms and the corporate giants.

At the year's outset, Investor's island home fell from the clouds and the ground was shaken by an earthquake, so Investor tried to navigate a storm-driven sea called Capital Markets. Investor became thrown to the mercy of the waves. As its legs dropped and struggled to find Markets' bottom, Investor was then swept forward and tossed upon a rocky beach called the New Economy.

While it slept and tried to regain its strength, Investor, like Gulliver, was beset by the intrepidity of diminutive mortals, who dared to mount and walk upon its supine body. Fearful of discovering that they would not grow so tall as they believed or looking ridiculous in their folly, the tiny Dot-com people immobilized Investor with ropes made of promises and prickly arrows made of paper. Investor was their acquiescent victim. The miniaturized gizmos and gadgets and the confidence of these people fascinated it.

The Dot-coms lost their strength and influence due to an old-fashioned problem - cash. Investor realized that it, too, was drained of its resources and grown smaller. Subsequently, Investor tried to free itself and move on. However, Investor next became beset by giants. This part of the story, of course, focused on the four big giants of the news - Boeing, Microsoft, Enron, and Amazon. Within the region, Boeing's decision to lay off 30,000 workers and move its corporate headquarters raised issues of loyalty, taxes, and the new realities of the global economy. Microsoft's stock price fell and its future turned cloudy as it confronted challenges to its realm based on questions about tactics, politics, and free competition. Enron supercharged itself based on financial foolery, then sought to pillage the nation's energy markets and even its own employees for personal gain. The good news at year's end was Amazon; this youthful giant dropped the pretence of "operating pro forma results" and struggled to demonstrate an honest 4th quarter profit.

The year's story also included the terrorist attacks of September 11th and subsequent war in Afghanistan. This cast a shadow across the economic landscape and resulted in a horrible loss of life. Fortunately, terrorism and the war seems to be having little negative effect on the national economy apart from the initial losses and military costs. Coalition-building might actually benefit the world economy, in terms of breaking down barriers to commerce and pulling markets together through more stable trade and political relations. The rise in the importance of Russian oil is one example. The improvements in U.S.- China relations is another. Even the controversial issue of world steel production appears to be moving toward future resolution.

Regionally, the economic effects appear more profound and threaten to be more lasting; the uncertainty and airline industry impacts will prolong the slide in Investor confidence and were a major factor in Boeing layoffs. These layoffs have contributed to an already elevated level of unemployment, as evidenced by claims, beneficiaries, and workforce totals. We also continue to see a significant drop in the producer services sector, both in wages and employment. Residential real estate prices and the volume of transactions remain relatively stable, but only insofar as quality, affordable housing remains a scarce resource.

President Bush has promised moral accountability, and, in plain speaking fashion, sought to lead the country in its search for world security. However, there are many questions from an economic standpoint. Do government surpluses or deficits stimulate, or can any government action stimulate this economy? Confusion exists about how to answer this in the realization that most of the 1990s boom may have been an illusion. What is the proper baseline for the economy? Alan Greenspan, the Federal Reserve Chairman, says that the economy has truly changed, that it has realized a higher level of productivity that sustains growth without inflation. Yet convincing evidence for this is lacking, or no one is sure what to believe, as news reports reveal how negative charges against corporate earnings have either been kept off balance sheets or reclassified in ways to appear misleading. As a result, Congress and the nation are asking other important questions: What is the appropriate level of transparency in financial statements?; Does that level vary by company size?; and, Can the government provide adequate oversight to the financial markets? The federal government and Wall Street will struggle to sort out and answer these questions at least through the end of 2002.

In Jonathan Swift's story, the initially naïve Gulliver is overcome by his long confrontation with the less attractive elements of human nature. Gulliver learns that a world where lying has no meaning and governments are not necessary is an utopian ideal. By the end of the 4th quarter of 2001, Investor learned a similar lesson. The present-day lessons of Investor are that truth and fiction are tightly entwined, profit numbers pose as "facts" but may not be reliable or certain, and annual reports are often stories suffused with imagination. In the vernacular of Swift, Investor no longer lives on an Island in the Clouds. Investor must remain alert, lest it again awaken under the hot sun to a flurry of darts that blister its skin and ligatures that retard its freedom.

Economic indicators

A narrative summary of quarterly indicators and future prospects is presented below. This is followed by statistical tables describing the 4th quarter 2001 and prior quarters. These tables include unemployment data to the middle of February 2002.

I. The Nation

US Economic Measures
Debate over when the expansion ended and the recession began settled into a consensus among national economists that it happened at the end of March of 2001. The consensus also wants to say that the recession is over by the beginning of February of 2002. There is an appealing symmetry to that prediction - a 10 year expansion followed by a mild 10 month recession. If the consensus is correct, this could be the shortest and mildest national recession on record. This judgment is based on the good news that GDP growth is flat but not negative and inflation does not exist.

Yet the data is not conclusive. Productivity is low and declining, there is insufficient evidence that the inventory correction is over, and corporate profit reports have been the worst on record. Furthermore, the bad news may not all be out in the open. Tony Santomero, the straight-talking head of the Federal Reserve Bank of Philadelphia, champions this less sanguine outlook. He cautions that it may take a while for businesses to rebuild inventories, even if all the surplus has been worked off. He also warns that consumer confidence could be hit hard, and thus consumer spending, should the layoff and wage news continue bad. In all, Mr. Santomero advises that the national economy may not turn upward before the 3rd quarter of 2002.

Rates and Prices
The CPI has remained flat. One impact on the CPI has been the drop in world oil prices, due to the emergence of Russia as a larger producer of crude oil in the wake of September 11th. Production of crude oil and other energy prices continue to be stable. The Federal Reserve again moved aggressively by lowering interest rates from 2.50% nominal to 1.25% nominal (as of January 8th). The Prime Rate also dropped to 4.75%. More rate cuts are unlikely, and talk has switched to when rates might rise again. However, the timing of any future rate rises cannot be determined. This is due to three main factors: (1) Economic data is contradictory; (2) It is difficult to forecast how soon rate cuts might help the economy since the impact of low rates diminishes as the inflation-adjusted rate reaches zero; and (3) Banks and other creditors have reduced the availability of funds.

The capital availability issue is noticeable in mortgages. Uniformly across the nation, the percentage of loans in adjustable mortgages is down to between 10% and 15% on average with the Seattle area average at just over 17%. The other part of the story is that average loan to value ratios dropped to 74% nationally and 69.4% locally, which are the lowest ratios since 1992. The average term to maturity also declined to 26.6 years on average. This data can be compared with home sales data, which is described in a later section. The spread between short and long-term rates has also continued to increase, and this mutes the impact of rate cuts. The increased spread is most notable in 10-year bonds. In municipal borrowing, the local story is that the City of Seattle received a AA+ rating from Fitch, Inc. on its upcoming G.O. Refunding Bonds, despite the recent economic downturn. In early 2002, the City plans to sell $615.3 million of these outstanding parity limited tax debt obligations. The City also received a AAA rating, Fitch's highest mark, for its outstanding G.O. Bonds totaling $150 million.

Industrial/Manufacturing Measures
Every time that someone predicts that inventories must have hit bottom, another negative correction ensues. In the 4th quarter 2001, private inventories took a dramatic reduction in real dollars at a rate of more than three times the highest previous quarterly reduction, after a net increase in the 3rd quarter. New orders and equipment figures continued negative; this indicates that future productive growth may be limited. Utilization rates also fell slightly, despite the ongoing attempt by manufacturers to bolster these rates through labor reductions. These continue to be key measures to watch in the next quarters.

Income Measures
Per capita disposable income increased again in the 4th quarter to $25,895, but per capita GDP again decreased slightly to $33,474.

II. The Region

Economic Activity
Seattle-King County area prices continued to occupy a higher level than either the Western states or the U.S. as a whole. Now weighted toward the post-September 11th period, new business starts decreased by more than 50% and bankruptcies increased by 25% in King County (matching the national average and reversing the performance of the 3rd quarter). Air and water-borne freight shipments and the number of airport passengers are down approximately 25% compared to the same period last year. Convention Information Prior quarter convention data has been corrected. The data for 2001 now shows that convention activity decreased by an average of 30%. However, the number of room nights per event remained stable and local room taxes were higher than the year prior.

1
Taxable Retail Sales

Final 2001 2nd and 3rd quarter figures are now available for both Seattle and King County; these are presented in full detail together with the 1st quarter numbers.

1 Taxable retail sales data lag by three to six months.

Employment
The rate of unemployment continued upward. In King County at the end of the 4th quarter of 2001, the number of unemployed was 75% higher than one year prior, average weekly initial unemployment claims were up by 190%, and average total beneficiaries were up by 45.3%. The King County unemployment rate, which stands at 6.1% at year's end, is expected to surpass 6.5% and in 2002 and the metropolitan area rate could reach as high as 8%. Preliminary figures indicate that 4th quarter 2001 metropolitan area employment is down an average of 10% for all sectors.

Perhaps, the most troubling statistic is that King County lost 51,000 people from the labor force in 2001, which is in addition to the 18,000 newly unemployed reflected in the 6.1% unemployment rate. These numbers include the Boeing Company layoffs that took effect in the 4th quarter, but they do not include the announced layoffs for 2002.
Job Dislocation Activity

The layoff list (provided by the Reemployment Center) has been updated for fourth quarter and post-September 11th data. This data shows that the average size of layoffs increased from 125 employees to 500 employees during 2001 and that 75% of Seattle area layoffs occurred post-September 11th.

Boeing and Airline Industry Data
The number of Boeing workers in Washington State rose dropped to 70,000 by the end of 2001. This represents a loss of 10,000 workers in the 2nd half of 2001 and nearly 35,000 workers since 1990. The job losses in 2002 may total 20,000 or more additional workers, thereby reducing the Boeing Company's presence in Washington to 50,000 employees or less than one-half of its 1990 total.

2
Wages
Preliminary average monthly wage figures for King County have become available for the 4th quarter of 2000 and the 1st half of 2001 at the one and two-digit SIC level. Prior quarterly data have also been rechecked and revised. The most significant pattern in these statistics was in Services, where average wages dropped by 50% over six quarters. Government remained the strongest sector. The increase in Mining wages was produced by a drop in employment in that sector. All other sectors showed declining wages in 2001 due to recessionary effects. Wages data in all sectors except Government and Mining should continue lower in the 2nd half of 2001 and into 2002; while Government and Mining are expected to see lower numbers of jobs instead of lower average wages.

2 Average monthly wage data for King County lags by as much as one year; the current data (still subject to revision by the State of Washington) were acquired in February 2002.

Real Estate

Construction Permits and Home Sales
Permit statistics indicate that the dollar value of new construction has decreased by 35.7% for residential but increased by 35% for non-residential construction, while the number of permits increased only for existing housing units, compared with one year prior. Meanwhile, revised home sales figures show a 45% increase in sales activity for the 2nd half of 2001 compared to the 1st half. However, average prices declined and the days on the market remained higher than one year prior.

Office Market
Statistics changed very little from the 3rd to 4th quarters in all categories, with additional negative absorption in Seattle and its Central Business District. Negative absorption and vacancy rates increased at an even higher rate in the North, South, and Eastside markets. Lease rates for new 2002 leases are being offered below 2001 rates. Approximately 4.5 million square feet of new office space remains under construction throughout the Puget Sound region. Seattle alone has more than 2 million square feet under construction, about 80% of which has been pre-leased.

Industrial Market
In Seattle's industrial market, the fourth quarter figures remain mostly positive, except for an absorption of -174,285. The positive news included 90,000 square feet of new high-tech space that was fully leased.

In South King County, the market remained stable; higher vacancy rates resulted when newly-built industrial space was not readily absorbed. Eastside market's vacancies increased by 300,000 square feet in each of the industrial and high-tech categories. Average lease rates remained steady in all markets. However, new leases for 2002 are being signed at 40% below 2001 rates (e.g., $0.20 psf for a shell in the Kent Valley).

Retail Market
As a whole, retailers have been reporting lackluster sales in the 2nd half of 2001, and retail vacancies increased from 2.82 percent to 3.58 percent on average. The greatest increases were observed in downtown Bellevue and downtown Seattle. The largest overall vacancy rates exist in suburban Bellevue (7.75 percent) and in downtown Tacoma (23.4 percent, despite a $10 per square foot asking lease price). Absorption was negative in most markets. The average asking lease rate also fell from $22.04 to $21.57 per square foot. Construction activity has tapered off; although this is a sign of market weakness, this should also introduce some stability into the market.

Apartment Market
Vacancies in the 2nd half of 2001 began to reflect the faltering economy, after several consecutive periods of stability. The largest increase in vacancies were on the Eastside. The overall average rent also declined to $1.00 per square foot.

Future Prospects

On the national stage, stocks regained most of the pre-September 11th levels only to be hard hit by the collapse of Enron, the mighty energy giant, similar questions about the truthfulness and propriety of financial statements, new flurries of layoffs, and renewed antitrust attacks on Microsoft after the promise of a national settlement. The recovery strength of the markets was tested by mid-January. A negative correction again set in, wiping out the post-September 11th loss and rebound. Furthermore, the upsurge in consumer spending during October, due to the success of 0% financing on new cars and trucks, was a positive sign in the 4th quarter, but this might not be a sustainable trend.

The general worry remains, namely, that this current economic recession is more similar to the 1930s than to the 1980s or 1990s. The 1930s depression resulted from three types of economic collapse that occurred in the 1929 to 1931 period. First, there was an investment bubble. It was created when people thought that the rules of the old economy no longer applied, and, therefore, on the prospects of massive, hoped for growth, people rushed into a speculative frenzy that pushed prices higher than underlying values. When the bubble burst, prices plummeted, even though basic, productive capability remained strong. Second, there followed panic, defaults, and a credit crunch. Third, trade barriers prevented a larger, global economy from finding a natural level of equilibrium. In 2001, a speculative investment bubble has again burst, and banks have dramatically tightened credit lines and venture funding has been cut off. The current war posture toward a number of nations, terror threats, and the Israeli-Palestinian Conflict may also create big impediments to cross-border trade, even though the conflict in Afghanistan reached a swift resolution.

Economists continue to forecast that the Seattle-King County metropolitan area's recession will be "long and deep," even if the national recession is "short and shallow." The region is not expected to come out of this slump before the end of 2003. As a result, there continues to be a need for strategic thinking and stimulus action that will help the economy rebound and patch up the economic safety net. Unfortunately, the prospects for federal assistance have dimmed.

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Updated: January 29, 2004

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