Outlook for the Northwest Economy

Joe Cortright – October 2009

Synopsis

• The national economic outlook

• Implications for the Northwest

• From recession to recovery

• A foundation for the future

We’re in a recession again

• Brad DeLong Arrows chart

A Different Kind of Recession

• An Asset Bubble– Housing Collapse

• Speculative Finance– Deregulation, “too big to fail”– Multiplied the shock– Accommodative Fed

• Punctured by Energy Prices– Running up against real limits

Last September . . . Financial Market’s Wiley Coyote Moment Dow

Industrials

An abrupt fall

This recession

Oregon caught in the downdraftEmployment Growth12-Month Change in Non-Agricultural Payroll Employment

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Bureau of Labor Statistics

OREGON

US

Unemployment RateOregon and U.S. Seasonally Adjusted Percent of Labor Force

3

4

5

6

7

8

9

10

11

12

13

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Bureau of Labor Statistics

OREGON

US

Oregon & US unemployment spiked

Analyzing Oregon’s Performance

• Since the Peak (November 2007)– Wage and salary employment– US: -7.9 million jobs: -5.7%– Oregon -131,000 jobs: -7.5%

• Why is Oregon worse off?

Breaking it down

92,000 jobs lost, in 3 categories:

• Housing and Finance Bubble -30,000

• Durable Goods Mfg. -20,000

• Contagious Pessimism -42,000

12 month change in Oregon Wage & Salary Employment

Housing and Finance Bubble

Sector Jobs Lost % Change

• Construction (18,000) -19%

• Real Estate (5,000) -12%

• Finance (6,500) -6%

• Total (29,500)12 month change in Oregon Wage & Salary Employment March 2008 to March 2009

Oregon Building permits down 44% in 2008; US housing starts at lowest level since 1946 <600k

Late to the housing collapseOregon Lags US Housing CyclePortland and U.S. Housing Price Change (12 months)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Case-Shiller House Price Index

Portland

US

Construction decline later, but steeperOregon Construction Peaked Later, Caught Up to USConstruction Employment (Index 2000=100)

80

85

90

95

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: Bureau of Economic Analysis

OREGON

US

Durable Goods Collapsed

#1 in Durable Goods DependenceOregon Most Dependent on Durable GoodsPercent of State GDP from Durable Goods Manufacturing

0% 5% 10% 15% 20%

District of ColumbiaAlaskaHawaii

WyomingDelawareMontanaMarylandNew York

New JerseyNevadaFlorida

ColoradoLouisiana

VirginiaGeorgia

New MexicoCalifornia

West VirginiaNebraska

MaineTexas

Rhode IslandNorth Dakota

MassachusettsIdaho

ArizonaOklahoma

MissouriSouth Dakota

IllinoisWashington

PennsylvaniaNorth Carolina

MinnesotaNew Hampshire

ConnecticutVermont

UtahMississippi

ArkansasSouth Carolina

KansasTennessee

KentuckyAlabama

IowaOhio

MichiganWisconsin

IndianaOregon

Source: Bureau of Economic Analysis

Durable Goods Manufacturing

Sector Jobs Lost % Change• Transp. Equipment (5,400) -33%• Wood Products (5,200) -19%• High Tech (4,600) -12%• Metals/Machinery (4,700) -14%• Total (19,900)

12 month change in Oregon Wage & Salary Employment March 2008 to March 2009

Exports declined dramatically

Vulnerable to export shockOregon is in top ten in exports per capitaExports Per Capita, 2007

- 2,000 4,000 6,000 8,000 10,000

Oregon

Source: WISERTrade , 2007

Ranking among 50

States

Contagious Pessimism

Sector Jobs Lost % Change

Retail (14,100) -7%

Temps (10,900) -30%

Wholesale (6,200) -8%

Transportation (5,500) -9%

Restaurants (5,500) -4%

Total (42,200)12 month change in Oregon Wage & Salary Employment March 2008 to March 2009

Unemployment RateOregon and U.S. Seasonally Adjusted Percent of Labor Force

3

4

5

6

7

8

9

10

11

12

13

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Bureau of Labor Statistics

OREGON

US

Unemployment: Special Factors

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2001 2002 2003 2004 2005 2006 2007 2008

Net migration is strong

11th 6th 17th 24th 10th 8th 10th 9th Oregon Rank

Oregon net domestic migration, percent of current population

Source: Census Bureau estimates

2008: Oregon ranked 8th highest in net in-bound percent of United Van Lines Moves

What’s the outlook?

• Insights from the Economic Forecasts

--Wells Fargo

--Oregon Economic Forecast

GDP expected to recover

Wells Fargo Securities, Monthly Outlook, October 7, 2009

Unemployment persistsHigh unemployment projected to persist for yearsNational Unemployment Rate (Percent)

0

2

4

6

8

10

12

2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3

Source: Wachovia Economic Forecast

FORECAST

Wells Fargo Securities, Monthly Outlook, October 7, 2009

State forecast has bottomedOregon Total Nonfarm Employment (000s)

1,600

1,650

1,700

1,750

1,800

1,850

1,900

1,950

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10

Q1

20

10

Q3

20

11

Q1

20

11

Q3

20

12

Q1

20

12

Q3

20

13

Q1

20

13

Q3

20

14

Q1

20

14

Q3

20

15

Q1

20

15

Q3

Mar-08

Sep-08

Dec-08

Mar-09

May-09

Sep-09

Alternative Scenarios

September 2009 Revenue Forecast

Oregon Non-Farm Employment

News Flash: Recession Over

Mid-September Good News . . .

• Sept. 14th: Governor Yellen

• Sept. 15th: Chair Bernanke

“Recession may have ended in summer”

What’s the evidence?

“Over” = GDP growth not declining

Evidence:

- Retail sales up

- House prices up (slightly)

- Job losses easing

- More normal financial markets

Risks

• Retail sales: temporary spurt– “Cash for Clunkers”

• Housing– Huge backlog of foreclosures– Millions underwater on mortgages– Shadow inventory

• Financial Markets– CRE: the other shoe

Retail sales “rebound”

Retail sales are up!Retail Sales, Seasonally Adjusted, Millions (monthly)

Category July August ChangeTotal Retail Sales 342,280 351,418 2.7%Auto Sales 58,089 64,221 10.6%Gas Station Sales 29,727 31,239 5.1%Retail,

ex. Gas & auto 254,464 255,958 0.6%

But very little after adjustingRetail Sales, Seasonally Adjusted, Millions (monthly)

Category July August ChangeTotal Retail Sales 342,280 351,418 2.7%Auto Sales 58,089 64,221 10.6%Gas Station Sales 29,727 31,239 5.1%Retail,

ex. Gas & auto 254,464 255,958 0.6%

Home prices may have “bottomed”

The Other Shoe: CRE

Two Year Lag between residential and commercial peaks

First Time Buyers Giveway

• 2009: – 350,000 additional sales– Cost: $15 billion– = $43,000 per additional sale

• 2010– 500,000 additional sales– Cost: $30 billion– = $60,000 per additional sale

• These are the National Association of Realtors estimates, and may be low.

A very different recession

• Financial collapse

• Liquidity trap (monetary policy impotent)

• Massive wealth effect

• Global scope

= “Out of sample” forecasting

Here we go again

As in 2002, we are in a recession – Let’s remember the lessons from last time:

1. Recessions end2. “Recovery” is a misnomer: we don’t

recover the same jobs and businesses we lost

3. Recession is time to lay the foundation for building during the next expansion

A very different “recovery”

• Letters:– Not “V”– Maybe “U” or “W”– Possibly “L”

• Adjectives– “Tepid”– “Protracted”

Key drivers for the future

• Cluster performance

• New business formation

• Innovation

• Sustainability

• Institutions

Parallel to the 1930s

• New Institutions for a changed world

• Then: Industrial Economy

• Now: Knowledge Economy/Sustainability

Four Key Changes

• Energy

• Housing

• Transportation

• Health Care

“May you live in interesting times.”

www.ImpresaConsulting.com

Joe Cortright – June 2009

Debt: Still over leveraged

Equity: We lost $14 trillion