This scarecrow and its crop of pumpkins illustrates the prevailing mood of cautious optimism. Photo: Flickr’s Great_Beyond.
Umpqua Bank and the Puget Sound Business Journal welcomed area businesses to a crowded Four Seasons ballroom this morning, as Washington’s chief economist Arun Raha, Michael Parks (editor emeritus of Marple’s Letter), and Umpqua CEO Ray Davis held forth on the economics of the year ahead.
This morning’s key pronouncement from Raha–“What we need now is just a few months of nothing going wrong,” a big laugh line as it turns out–contrasted strongly with the suppressed panic of the last big economic forecast I attended in December of 2008. The mood now is one of growing impatience, having seen the worst, with the progress of recovery–though all the panelists were careful to emphasize that patience will be exactly what’s required.
Raha led off with a short summary of where Washington state stands. We’ve seen a 6.1 percent overall decline in employment since the recession began (though, he noted, it technically ended a year ago), the result of a “castle of derivatives built on a foundation of sand.” Community banks are still under stress (an assessment Davis backed up, saying he expected a number of bank closures still to come), and interest rates are likely to remain low, with “quantitative easing” being considered.
Currently we’re somewhere at the bottom-right curve of a U-shaped recovery, which is why state unemployment has been more or less frozen at nine percent since March of 2009. (The recession, you remember, ended in June of ’09.) If nothing upsets the recovery apple cart, we’ll have “lost” five years to the downturn, which is not so bad as the 16 lean years following the Great Depression. Still, Raha doesn’t expect to see much bounce-back in real estate until mid-2011.
Other areas (Boeing, Microsoft, exports) are showing definite signs of life: Boeing has six years of back orders to fill, and while the state lost 2,400 jobs in the software sector, we’ve gained back almost half that. Meanwhile, the export engine is only fueled by a weak dollar.
Michael Parks noted that while Washington had it bad, it could have been worse; neighboring states Oregon, Idaho, and California all saw total non-farm employment declines of eight percent or more, compared to our six. One advantage not mentioned yet: the number of military bases in the state.
Parks is watching China very closely as a trade war threatens to flare up. The value of Washington state’s exports to China have quadrupled in the past ten years, and we’re currently profiting from the weak U.S. dollar (aside from expenditures on gas and other imports). Raha believes that, despite criticism worldwide, China can’t afford to let their currency appreciate without risking substantial civil unrest. He thinks it may be some years before the Chinese economy can absorb the loss without derailing the great economic uplift underway there.
Again, if nothing goes wrong, Parks said, the IMF is forecasting economic growth of nine percent for the next six quarters in China and India (compared to about two percent for the U.S.), which would be great news in the export sector. Further, firms putting off updating software for the duration of the recession have a strong new OS candidate in Windows 7, and Boeing has recently declared another planned increase to the production rate of 737s, to 38 per month from 30.
Umpqua’s Ray David pronounced himself an optimist, which stands to reason because the Roseburg, Oregon-based bank has fairly inexpensively bought their way into Washington this year, taking over Vancouver’s Bank of Clark County, Seattle’s Evergreen Bank, and Tacoma’s Rainier Pacific Bank. In each case, Umpqua was able to arrange a loss-share arrangement with the FDIC, where the FDIC typically shoulders some 80 percent of projected losses for five to ten years, and Umpqua takes over an otherwise healthy bank.
For example, in the case of Rainier Pacific, the bank was done in by the collapse of the market for CDOs, which left it under-capitalized. After its seizure, Umpqua picked up Rainier Pacific’s deposits, and purchased some $670 million of its assets. The FDIC agreed to loss-share some $564 million of Rainier Pacific’s loan portfolio, as the Seattle Times detailed the arrangements, and Umpqua then became one of Washington’s “20 biggest banks in terms of deposits.”
I suspect this banner year for Umpqua is why breakfast was free at the event this morning (fruit cup, baby quiche, baby muffin, baby hashbrowns). Also, Umpqua is hiring.
In the Q&A that followed, someone asked about new bubbles. Raha said firmly, “gold,” adding that the cost to mine gold was now just one-third of its market price. If and when the gold bubble pops, he added, be prepared for a rise in the value of the dollar. Michael Parks dubbed government bonds, which investors have fled to in recent years despite 3-percent returns on 30-year notes, a return no one can believe is actually commensurate with the risks.
The difficulty of getting credit from banks arose, which Umpqua’s Davis fielded, pointing out that Umpqua is required to have $1 billion on deposit with the FDIC, which currently is netting him something very close to no interest at all. While Umpqua is in a relatively good position, capitalization-wise, they and every other community bank out there are living under the sword of regulatory oversight. Still, Umpqua wrote $1.7 billion in new loans last year.
No one was concerned about inflation. Raha responded that the bigger fear was being sucked into a deflationary spiral, since all the inflation indicators have been more or less flat for so long. On the question of what have we learned, Raha mentioned that new regulations are bringing transparency to CDO trading, but Davis also mentioned that, due to bank consolidation, we’re placing an even bigger too-big-too-fail bet.
The panelists were relatively sanguine about the recent foreclosure documentation kerfluffle, saying that, practically speaking, the foreclosures were called for, whether they were performed properly or not. Fines may be levied and charges pressed, but the economy is pushing the process, not banks. All were much more concerned about the effects of policy uncertainty on the pace of recovery: “What are the new health care costs going to be?” asked Parks, asking the same question about withholding and energy costs. Especially with limited credit available, businesses need to know precisely what their outlays from 2011 will be, and as of this morning, too much remained unknown.