State economy slowing, but recession a way off

Washington's economy is slowing, but a recession is still considered unlikely until at least 2008, according to the latest state forecast.

The outlook released Wednesday by the state Economic and Revenue Forecast Council says the state's economy is running hotter than the nation as a whole, and is likely to keep on doing so.

Based on the forecast, the state expects revenue for the 2005-07 budget cycle to be $350 million more than predicted in June, due to strong growth so far.

Washington's growth is being fueled by strong aerospace, software and construction employment, and people moving to the state, which helps underpin demand for houses.

However, the latest quarterly forecast cut growth rates from the June forecast, mainly because the national economy is slowing down.

According to the forecast, Washington's nonfarm payroll employment — a proxy for economic growth — is expected to rise 3.0 percent this year, faster than the 2.8 percent gain logged in 2005.

However, the rate was throttled back from the 3.4 percent envisioned in the June forecast.

For next year, employment growth is expected to slow to 2.2 percent, down from 2.4 percent in the June forecast. However, that is twice the 1.1 percent growth forecast for the U.S. economy next year by Global Insight, which provides the state forecast council's national outlook.

The state's predicted slowdown, though modest, could be setting the stage for a recession in 2008 or 2009, five or six years after the Washington economy bottomed out in the last recession, in 2003.

"A period of slower growth, given the right trigger, could turn into a recession," said Eric Swenson, an economic forecaster at the state-forecast council.

The Governor's Council of Economic Advisors, which advise the state forecasters, recently predicted there is a 40 percent chance of a recession by the second quarter of 2009, Swenson said.

"When you are in a slowdown, that can create reactions in the economy that further slows the economy and occasionally cause it to go into recession," said Dick Conway, a Governor's Council member who also publishes the Puget Sound Economic Forecaster.

"That doesn't mean it's a foregone conclusion," cautioned Bill Longbrake, vice chair of Washington Mutual, who also is on the council.

Indeed, the state may steer clear of recession and make a soft landing in this business cycle, because the state's main industries are still doing well, economists said.

Boeing is ramping up production and will bring the new 787 jet into production in the next two years. Microsoft continues to hire and is preparing to release its Vista operating system. Oil prices, while high, have declined. And the global economy remains strong. That, coupled with a weak dollar, should tend to bolster exports, which are a large part of Washington's economy.

"Overall international trade is still going strong," said Douglas Ljungren, business planning manager at the Port of Tacoma, and a Governor's Council member.

He said the number of cargo containers handled by West Coast ports is up 9.4 percent this year, after rising 9.1 percent in 2005.

The biggest risk to the economy is the possibility that house prices will stop climbing, economists said. Washington is the nation's sixth-hottest housing market, with prices rising 17.4 percent in the year through June. However, high prices and rising mortgage rates are making homes tougher to afford, Conway said.

Washington's home sales already are slowing. Now, with prices slowing down nationally, the question is, "Will Washington state be far behind?" in seeing price gains slow down or decline, Longbrake said.