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

Great Disappointment? Overdue 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

School Employees Credit Unionof Washington

April 16, 2011

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

The Zurich Axioms

Key takeawaysThe financial crisis changed everything.

A new, vastly different, era has begun.

High oil prices and inflation elevate risk

of another recession. Stagflation, anyone?

Washington, helped by technology, weak $

and Boeing’s backlog, should outperform.

Key takeaways (cont.)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.

-6

-4

-2

0

2

4

6

8

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008 2009 2010 2011

Emerging economies lead the way Per cent change in inflation-adjusted output from same quarter a year earlier

Emerging economies

Advanced economies

World

Forecast

Data: International Monetary Fund

Courtesy McKinsey Global Institute

Courtesy McKinsey Global Institute

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

P e r c e n t sh a re o f g lo b a l o u tp u t

Forecast

U nited S ta tes

C h ina

International Monetary Fund; purchasing power parity (PPP) basis

Copyright © 2011 Random Lengths Publications Inc; used with permission

80

100

120

140

160

180

200

2005 2006 2007 2008 2009 2010 2011 2012

China 204

U.S. 110

Brazil 135

India 174

Japan 104Euro 106

What recession?Forecast

Data: International Monetary Fund

GDP 2005-20122005 = 100

2.8

-4.9

-6.8

3.1

-8

-6

-4

-2

0

2

4

6

Real U.S. gross domestic product Per cent change from previous quarter

2005 200820072006 2009 2010

Forecast

2011

Data: Bureau of Economic Analysis.Forecast: CIBC World Markets

-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

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

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

U.S. nonfarm payroll employment

Data: Bureau of Labor Statisticsmillion

70

75

80

85

90

95

100

105

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

U.S. payroll employment

Data: Bureau of Labor Statistics

Total

Index: March 2001 = 100

Goods producing

Goods-producing:manufacturing,construction,mining

4

6

8

10

12

14

16

18

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 M J J A S O N D J F M

2007 2008 2009 2010 11

U.S. unemployment rates

Headline rate: 8.8%

Broad definition: Involuntary part-time'marginally attached,' etc.: 15.7%

Data: Bureau of Labor Statistics

%

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)

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 employment

Jan 00-Mar 11

Dec 00-Dec 049/11 and 2001 recession

Thousands

Peak 02/08

Washington Employment Security Department

Mar 11:Y/Y +1.2%

from peak -5.7%from GR start -5.3%

-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

Jul 98-Jan 04:-90.4, -18%

Washington Employment Security Department

From Jan 08-114.1, -22%

Thousands

Jan 04-Nov 07 +87.2, +17%

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

Apr 08-May 04:-52.2, -46%

May 04-Jul 08:+25.1, +41%

Jul 08-Jun 10:-5.7, -7%

120

130

140

150

160

170

180

190

200

210

96 97 98 99 2000 01 02 03 04 05 06 07 08 09 2010 2011

Jan 96-Jan 01+32%

to June 07+40%

to Mar 11-37%

Washington construction employment

Washington Employment Security Department

Thousands

to Mar 02 -8%

E

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

Boeing backlog by model

737 2,186

747107

76750

777253

787847

Through Dec 2010 Data: Boeing

3.5

4.2

5.8

6.7

7.1

Busy, busy at the 'Lazy B'

787 (20 per month*)

Through Dec 2010 Data: Boeing*'Guessimate'

747 (1.25 per month*)

737 (31 per month)

777 (6 per month)

767 (1 per month*)

Years to deliver backlog at current/guesstimated production

$4,871

$5,178

$6,577

$7,261

$7,781

Exports per person

Data: WISERTrade (for 2009)

Washington

Delaware

Vermont

Texas

Louisiana

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

120

130

140

150

160

170

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Magnet Washington, again

Washington Department of Licensing

S

S

S

S=strikeThousands

Driver's licenses issued to out-of-staters(12 month moving sum)

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 $.

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