"We Buy Rugs" (Photo: Great_Beyond, in The SunBreak's Flickr pool)
“Seattle is as good as it gets!” Umpqua Bank CEO Ray Davis said this morning, at Umpqua’s Navigating 2012 economic forecast panel–referring to Seattle’s prospects of recovery compared to anywhere else in the region.
“Why does that frighten me?” responded an audience member, sotto voce. The Grand Hyatt conference room was packed with Puget Sound Business Journal readers who, if they sympathized with Ray Davis’s optimism, also have had their expectations tempered by the experiences of the past several years. Yet the takeaway was that while double-dip recession risks have risen, at the same time, so have recovery “risks,” due to the length of time people have cut back on spending. At some indefinable point, the dam is going to break.
Arun Raha
Nothing that Arun Raha, chief economist for the state of Washington, said, though leavened as always with his wry humor, was particularly comforting. Noting that he had been predicting a U-shaped recovery, Raha said he’d learned a new letter: “L,” where the economy “muddled along” along the bottom for the foreseeable future.
“I’m very pessimistic,” he stated, with regard to signs that the economy might break out of the rut it is in over the next twelve months. Single-family housing remains “down in the dumps,” though rental demand has boosted multi-family housing investment. High unemployment is chronic, with Washington State in a 141,000-job hole. (There is slight good news in that 90-day notices of mortgage distress are higher than 30-day notices, indicating that the foreclosure pipeline is drying up.)
As the national economic indicators from the summer become firmer, they’ve been telling a more sobering story that doesn’t point to a hoped-for Q3 bounce-back. (Become an economist, Raha advised, because then you can go back and revise your numbers without going to jail.) Partly that’s because political shenanigans (including the “debt limit debacle–not the debate, the debacle”) have precluded the adoption of any sound fiscal policy.
Partly that’s because things are tough all over: World GDP is projected to be weak through 2012, and the Eurozone is facing its own crisis. Given the entangled state of the global economy, shocks elsewhere are likely to be felt here, and so Raha estimates a 30-percent risk of a double-dip recession.
That said, it’s also true that the longer the downturn persists, the stronger and more sudden the upturn should be when it comes. That’s the upside risk.
“We’re driving around in some of the oldest cars on record,” Raha mentioned, which is positively “Un-American.” (Since the recession, the U.S. has, I think, clearly entered the liquidity trap predicted by Paul Krugman in his book The Return of Depression-Era Economics; when everyone is cutting back on budgets, you enter a powerful negative-feedback cycle that’s hard to disrupt–the “rut” Raha spoke of.)
Still, things wear out. And whether it’s prudent or not, when your car wears out, you’re likely to need to replace it. When your socks develop air-conditioning, you buy a new pair. Surveying the scene, Raha sees a great deal of pent-up demand that is capable of flipping the economy into growth with surprising speed.
It may seem the least of anyone’s worries but economic consultant Bill Conerly underscored that there are upside–not just recessionary–risks, too: Can stripped-down businesses scale up fast enough to meet positive-feedback enhanced demand? In just six to eight months of recovery, Conerly predicted, many businesses could find themselves at capacity, and hard-pressed to keep up.
In this context, Davis’s call to “prepare for recovery” by investing now is not as self-serving as it sounds from a bank that would like to lend money through its six new commercial banking teams. (Since its expansion into Washington through a buyout of Vancouver’s Bank of Clark County, Seattle’s Evergreen Bank, and Tacoma’s Rainier Pacific Bank, Umpqua has become the largest independent community bank in the West, with 190 branches, and is now growing its international and business banking efforts.)
Davis is still exercised about FDIC regulations increasing the amount of cash reserves banks must hold; for a bank not stung by writing loans wholesale, it must seem onerous to have prudence rewarded with extra oversight. He also seconded, strongly, Howard Schultz’s call for political reform. We need politicians who are willing to put the country ahead of partisanship, he said, to general applause. “What’s going on in D.C. right now is a trainwreck. It’s absolutely holding us back.”
The Q&A period brought a few refinements to already discussed points. Regarding high unemployment, Ray Davis and Arun Raha both noted that the problem was being exacerbated by productivity increases. Raha went on to say that since about 70 percent of Washington’s unemployment is made up of idled construction workers, there won’t be much change there until the housing sector improves.
On that score, we’ve been under-building in comparison to future demand–Davis claimed that within five years, an actual housing shortage could develop. It remains a bit of a chicken-and-egg situation: Banks of course would be happy to loan against an appreciating asset. So the housing recovery, as has been said many times, rests upon the bulk of the market resetting, with foreclosures and short sales cleared out.
