A time for economic caution

For the third time this year, the stock market has had a whiff of recession. The first time, in February, this page dismissed it. The July market break was deeper and longer, but we took a pass on comment. This one is deeper. The national economy may yet avoid a downturn; however, it's clear that its upward pace has been broken. Risk — for organizations and individuals — has increased, and it's time for caution.

The problem is biggest in housing finance, where mortgage companies made loans they shouldn't have made and sold them to investors who shouldn't have bought them. Fear has spread from the subprime market to other mortgage and business credit. Add to that the plunge in the dollar and the squeeze on oil. Washington has a more modern economy than most states, and is better off because of it. In particular, this state is the most export-oriented, benefiting from the cheap dollar, and its hydro base makes it less reliant on fossil fuels. Boeing suffers only the pains of excess. Housing prices have not been hit so hard here, nor have car sales. But both have been affected.

For most of this year, the total value of home sales in Washington has been falling. In September, it was down 25 percent from a year earlier, and in October, down 22 percent.

Tax revenues into the state general fund also tell a story. In the year ended June 30, 2006, they were up 10.5 percent; the following year, up 8.4 percent. The forecast for this year is up only 1.5 percent.

The state official who makes these forecasts is economist Chang Mook Sohn. He revises them regularly, and there has been a pattern in his revisions over the years. When the economy is speeding up, he revises upward; when it is slowing down, he revises downward. Usually, once a trend is established, it runs for a while.

And that is why we note that Sohn has just lowered the current revenue forecast by $130 million. The amount is not much — a mere four-tenths of a percent of state revenue. The significance is the direction: downward. It is the first $100-million-plus downward revision in almost four years.

So far, Sohn is forecasting an economic slowdown but no recession, meaning no shrinkage in business. But, avoiding a recession depends on many things. For one, it depends on the subprime-mortgage mess not getting a whole lot worse, and not affecting consumer spending in a big way. About those assumptions; there were more reasons for confidence nine months ago.