Great Disappointment or Sustained Recovery? Economic Trends and Outlook Michael J. Parks, editor emeritus Marple's Northwest Business Letter michaeljparks.com.

Great Disappointment or Sustained Recovery?

Economic Trends and Outlook

Michael J. Parks, editor emeritus

Marple's Northwest Business Lettermichaeljparks.com marples.com

Copyright © 2011 Michael J. Parks; please don’t reproduce without permission

Washington StateSelf Storage Association

May 20, 2011

Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.

The Zurich Axioms

Key Washington plusses

Boeing backlog; up part of the cycle.

Export orientation/weak dollar.

Strong/broad portfolio in high technology

(software, biotechnology/medical, entertainment,

communications, the cloud).

Above-average population growth.

Boeing backlog by model

747109 767

53

777286

787835

Through March 2011 Data: Boeing

7372,162

Duration of backlogYears to deliver backlog at current production rates

4.0

4.4

5.8

6.8

7.0787 (20 per month*)

Through March 2011 *Parks: 'guesstimate'

747 (1.25 per month*)

737 (31 per month)

777 (6 per month)

767 (1 per month*)

50

60

70

80

90

100

110

1998 99 2000 01 02 03 04 05 06 07 08 09 2010 '11

Washington aerospace employment

Washington Employment Security Department

S

S

S

S=strike

Thousands

$4,871

$5,178

$6,577

$7,261

$7,781

Exports per person

Data: WISERTrade (for 2009)

Washington

Delaware

Vermont

Texas

Louisiana

Trade-weighted value of the dollar

90

100

110

120

1/3/06 9/19/06 6/7/07 2/22/08 11/6/08 7/27/09 4/16/10 1/5/11

Stock-market trough

Lehman bankruptcy

Euro crisis

Index: Jan '97=100

Data: Federal Reserve System

QE2

Trade-weighted value of the dollar

86

90

94

98

102

5/13 6/4 6/25 7/19 8/9 8/30 9/2110/13 11/311/2612/17 1/11 2/2 2/24 3/17 4/7 4/28

Index: Jan 2010-=100

Data: Federal Reserve System

20112010

10

20

30

40

50

1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 2010 11

Compound annual growth since 1990 10.2%

Washington Employment Security Department

ThousandsWashington software employment

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

Washington 114.1Oregon 112.4United States 109.5

Index: July 2000 = 100

Population growth to July 2010

Data: Census Bureau, February 2011

166.5

128.4

120

140

160

180

2007 08 09 10 11

Magnet Washington

Washington Department of Licensing

Washington driver's licenses issued to out-of-staters(thousands, 12 month moving sum)

Leading states:CaliforniaOregonTexas

Perspective on the times

Not so fast!

Just a little off the top.

Many happy returns.

Key takeawaysThe financial crisis changed everything.

A new, vastly different, era has begun.

High oil prices and the threat of inflation

elevate risk of recession or “stagflation.”

Washington, helped by technology, weak $

and Boeing’s backlog, should outperform.

Key takeaways (continued)

Two-speed global recovery. Developing/

emerging fast, advanced economies slow.

U.S. recovery has reached Wall Street,

banking, corporations. Not Main Street.

Policy uncertainty – health care, energy,

taxes – keeps corporations hoarding cash.

Lean on meOld-age dependency ratios (ages 15-64/65+)

6.35.2

3.0

9.8

2.8

1.3

1970 2010 2050 1970 2010 2050

United States Japan

Data: United Nations

Normal, old and new

• Globalization

• Laissez faire banking

• Debt-led consumption

• Shrinking role for govt

• Worry about deflation

• US GDP growth > 3%

• Modest tax burden

• Protectionism

• Banking reregulation

• Fear-based savings

• Larger government role

• High risk of inflation

• US GDP growth ~ 2%

• Higher tax burden

Mohamed El-Erian, Bill Gross, PIMCO, Spring 2009

Two-speed recoveryChange in real output from same quarter year ago

-6

-4

-2

0

2

4

6

8

10

2000 01 02 03 04 05 06 07 08 09 10 11 12

Emerging economies

Advanced economies

Data: International Monetary Fund

Forecast

What recession?Inflation-adjusted GDP 2005-'12 (2005=100)

China 204

Brazil 138

India 176

US 111

2005 2006 2007 2008 2009 2010 2011 2012

Data: International Monetary Fund

Forecast

Real U.S. gross domestic productPer cent change from prior quarter at annual rate

1.8

-6.8-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012

Forecast

Bureau of Economic Analysis.Forecast: Federal Reserve Bank of Philadelphia

-900

-700

-500

-300

-100

100

300

500

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A

2008 2009 2010 11

U.S. nonfarm payroll employment

Data: Bureau of Labor Statistics

Change from prior month (thousands)

128

130

132

134

136

138

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

U.S. nonfarm payroll employment

Data: Bureau of Labor Statisticsmillion

4

6

8

10

12

14

16

18

2007 2008 2009 2010 11

U.S. unemployment rates

Headline rate: 9.0%

Broad definition: Involuntary part-time'marginally attached,' etc.: 15.9%

Data: Bureau of Labor Statistics

%

70

75

80

85

90

95

100

105

01 02 03 04 05 06 07 08 09 10 11

U.S. payroll employment

Data: Bureau of Labor Statistics

Total

Index: January 2001 = 100

Goods producing

Goods-producing:manufacturing,construction,mining

Key U.S. interest rates

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11

10-year Treasury note Federal funds

Data: Federal Reserve Board of Governors

%

May 10Jun

JulyAug

SepOct

NovDec

Jan 11Feb

MarApr

May

2.22.42.62.83.03.23.43.63.8

10-year Treasury note yield

Per cent

Data: Federal Reserve System

01/05 07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11

0

500

1000

1500

2000

2500

U.S. housing startsthousands

Data: Census Bureau

00 02 04 06 08 10 110

500

1000

1500

2000

2500

U.S. housing starts

thousands

Data: Census Bureau

It can't go onGovernment spending as % of GDP

0

10

20

30

40

50

1870 1913 1920 1937 1960 1980 1990 2000 2005 2009

United States

Average*

*Advanced economies. Data: The Economist

Why PIMCO dumped Treasuries

Medicare, Medicaid and Social Security = 44% of federal spending; rising steadily.

We have relied on the assumption that we can grow our way out of the resulting debt.

Unless entitlements are reformed, the U.S. will likely default -- via inflation, currency devaluation, and/or low returns to savers.

Bill Gross, Pacific Investment Management Co. April 2011

-8

-6

-4

-2

0

2

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Recessions and the Evergreen StatePer cent employment change following U.S. economic peaks

Data: Federal Reserve Bank of MinneapolisMonths

1969-70 (11 months)

Will the last person leaving SEATTLE - Turn out the lights (1971)

-8

-6

-4

-2

0

2

4

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Recessions and the Evergreen State

Data: Federal Reserve Bank of Minneapolis

Months

1969-70 (11 months)

1981-82 (16 months)

Per cent employment change following U.S. economic peaks

-8

-6

-4

-2

0

2

4

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Recessions and the Evergreen State

Per cent employment change following U.S. economic peaks

Data: Federal Reserve Bank of Minneapolis

Months

1969-70 (11 months)

1981-82 (16 months)

Great Recession 2008-09 (18 months)

Economic and Revenue Forecast Council

Economic and Revenue Forecast Council

2,600

2,700

2,800

2,900

3,000

00 01 02 03 04 05 06 07 08 09 2010 2011

Washington nonfarm payroll employmentJan 00-Apr 11

Thousands

Washington Employment Security Department

Apr 11:Y/Y +1.5%

from peak -5.1%from GR start -4.8%

-40

-30

-20

-10

0

10

20

2007 08 09 10 11

Washington payroll employment

Data: Washington Employment Security Department

Change from prior month (thousands)

-5

-4

-3

-2

-1

0

1

2

3

4

5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Washington nonfarm payroll employmentPer cent change

Forecast

Data: Washington Economic and Revenue Forecast Council

390

410

430

450

470

490

510

1998 99 2000 01 02 03 04 05 06 07 08 09 2010 2011

Washington goods-producing employment

Washington Employment Security Department

Thousands

ManufacturingConstructionMining

-18%

+17%

+2%-21%

120

130

140

150

160

170

180

190

200

210

Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Washington construction employment

Washington Employment Security Department

Thousands

-34%

+40%

Economic and Revenue Forecast Council

Economic and Revenue Forecast Council

1500

1750

2000

2250

2500

1990 '92 '94 '96 '98 2000 '02 '04 '06 '08 '10 '11

Washington service-producing employment

Washington Employment Security Department

Thousands

Aug 08-Mar 11-68.8, -2.8%

GovernmentTrade, transportation and utilitiesEducation and health servicesProfessional and business servicesLeisure and hospitalityFinancial activitiesOther servicesInformation

0

500

1,000

1,500

2,000

2,500

1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10

Washington service-related employment

Trade, transportation & utilities

Government

Education and health services

Washington Employment Security Department

Professional and business services

Leisure and hospitality

Thousands

Financial

Other

Information

40

60

80

100

120

2006 2007 2008 2008 2010

S&P/Case Shiller home-price indices

Index: Jan 2006=100

Seattle 82

Data: Standard & Poor's

Los Angeles 64

Las Vegas 43

Monthly 2006 through Jan 11

Basic 2011 forecast:Partly cloudy, but fairer weather. Washington will outperform thanks to Boeing backlog, strong exports, in-migration, weak $, high-tech portfolio

What to monitor in ’11: U.S.-China relations Value of the dollar Sovereign risk Interest rates Global growth rate

Not your father's global economyPer cent share of global output, ppp* basis

0

10

20

30

40

50

60

70

80

1990 1994 1998 2002 2006 2010 2014

Emerging/developing economies

Advanced economies

Data: International Monetary Fund

Forecast

*Purchasing Power Parity

Share of global outputPer cent based on purchasing-power parity (PPP)

0

5

10

15

20

25

30

1990 1994 1998 2002 2006 2010 2014

United States

China

Data: International Monetary Fund

Forecast