For local economy, it'll be a long slog

For Lisa Jones, of Seattle, the economic outlook is as simple and raw as finding full-time work. A former creative director for a public-relations and advertising agency, Jones worries that her age — 55 — and lack of advanced technical skills are keeping her from getting a new job.

But her difficulty is also symptomatic of the complex and creeping way the national slowdown is finally hitting the Puget Sound region, slowing job creation as well as pressuring would-be home-sellers, the construction industry and credit-strapped homeowners.

As recently as last year, employment growth here was more than twice the national average, according to Dick Conway, a Seattle economist and co-publisher of the Puget Sound Economic Forecaster. Now, he forecasts it will decelerate from a peak of 3.2 percent in the first quarter of 2007 to less than 2 percent this year. On a quarter-to-quarter basis, job creation could be essentially flat, something backed up by recent state job numbers.

"The picture did change substantially with housing," Conway said. "Ours held up pretty well for a while. We've finally succumbed." Price appreciation has stalled and inventory is swelling as potential buyers try to time the bottom of the already favorable market.

Similarly, the economic model of Pacific Northwest economies maintained by Jeremy Piger, associate professor of economics at the University of Oregon, showed a 99.4 percent chance of recession for Washington in its latest reading. The model is based on data from the Federal Reserve Bank of Philadelphia.

Conway has little patience for the national debate: Are we having a recession? "We're so close, it doesn't really matter."

The good news: Unlike 2001, Seattle's key sectors of aerospace and technology haven't taken direct hits, and the local economy's diverse, international posture has kept it healthier than most U.S. metro areas. The state is also benefiting from increased exports thanks to a weaker dollar.

But this is a slow-and-fast downturn. Slow in the way real-estate collapses take years to work out (Japan in the 1990s is the classic example). Fast in the quick pivots of events. Thus, the dollar has recently strengthened, mostly as investors concerned about the Russia-Georgia conflict moved into historically safe dollar-based assets.

The dollar's rise might not continue, but a stronger dollar makes American exports less competitive. If that combines with current economic weakness in Britain, continental Europe and Japan, it could slow demand for Washington exports, from wheat to airplanes. If China and India slow down, the outlook would darken considerably.

Uncharted territory

This is a recession the likes of which we haven't seen. In addition to the collapse of the housing bubble and a spike in oil and commodity prices, we face a banking crisis characterized by the implosion of exotic, little-understood securities.

Unhappy surprises keep erupting in the big financial institutions, including mortgage backers Freddie Mac and Fannie Mae. Federal regulators have taken unprecedented steps to prop up the credit markets, even as big spikes in inflation are making such stimulus risky.

Also, the crisis has occurred in a very different U.S. economy than existed throughout most of the post-World War II era. China is about to surpass the United States as the world's largest manufacturer.

American debt is at historic levels, especially our dependence on foreign creditors to finance our trade and federal budget deficits. The remaining economy is more dependent than ever on building, selling and financing houses, and on jobs in the financial-services industries.

Meanwhile, unlike 2001, when money ran from tech stocks to real estate, no promising new bubble exists for capital. Domestic investment is partly crippled by the credit crisis. Foreign investors are less willing to take the relatively small returns from Treasury bonds and want to directly buy U.S. companies or invest elsewhere.

America's debtor status complicates the picture further. Foreign central banks and investors hold large amounts of dollars and American debt. For example, China's central bank owns more than $500 billion in U.S. Treasury notes.

More sobering, Russia, in a tense relationship with the U.S., holds more than $65 billion in Treasury securities. The danger that foreign investors might quickly dump these holdings hangs over policymakers.

While that doomsday scenario is unlikely, the dollar is no longer the world's only widely used reserve currency. With investors diversifying into euros, yen and other currencies, Americans essentially are losing the unlimited credit card that the dollar's pre-eminence once offered. That puts tighter restraints on how the Federal Reserve can manage a financial crisis.

A slow recovery

Conway compares today's climate to 2001's and uses the term "rubber-band effect." The faster you drop into recession, the faster you bounce out. This has been a slow slide. He said the Puget Sound region may touch bottom in the next few months and begin growing again.

Even so, the outlook is dim. We're in for a long slog coming out of this; you're not going to see really high economic-growth rates. Next year will be weak, with a bit of a bounce in 2010.

How will we know when things might get better?

Alan Greenspan, the former Federal Reserve chairman and arguably the father of the housing bubble because of the central bank's easy credit policies during his tenure, has predicted that home prices won't stabilize until the first half of next year. Even then, prices would drift lower for months or years to come.

That's optimistic compared with the view of Nouriel Roubini, the New York University economist who two years ago correctly called the timing and severity of this downturn.

On his influential blog recently, he wrote of an increasing probability that the global economy, not just the U.S., will experience a serious and protracted recession. He sees the most severe financial crisis since the Great Depression, although not as bad as that calamity.

Here are a few markers. They won't time when we hit bottom — when the economy has worked out all the bad bets made during the bubble years — but they will provide some vital signs for future recovery:

• Investors become confident that the banking system, along with Freddie Mac and Fannie Mae, has cleaned all the skeletons out of its closets.

• Mortgage delinquency and default rates, as well as foreclosures, flatten out, indicating the worst of the subprime debacle is coming to an end.

• Inventories of new and existing houses on the market start to draw down, especially in hard-hit states such as California, Nevada and Arizona.

• Oil and commodity price increases moderate, as they should because of falling demand in a slow economy. That would give consumers a break and take some pressure off the Fed to raise interest rates and fight inflation.

• Business capital spending starts growing again in the U.S. and venture capital expands again.

• A pause in global shocks. This is asking a lot in a world with terrorism, instability and a reassertive Russia. But markets thrive on predictability and dive on unpleasant news.

Oh, and Lisa Jones gets a good full-time job.

President Bush famously said Wall Street "got drunk and now it's got a hangover." True enough. Unfortunately, this was a binge for the ages, and we'll all be paying for the detox for a long time.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You can reach Jon Talton at jtalton@seattletimes.com.