Economic Analyst Uses Boom-Bust
Mining Analogy at Central Oregon Talk
Central Oregon built a paradise for Baby Boomers, only to find they “couldn’t afford to play,” claimed economic analyst Bill Watkins at a packed recent business conference in Bend.
During his keynote address to the 2012 Central Oregon Forecast held at the Riverhouse Hotel and Convention Center, Watkins, an associate professor with Cal Lutheran University Center for Economic Research and Forecasting, said, “Baby Boomer wealth drove the local boom, particularly in Bend, but that generation’s wealth took a massive fall during the recession, linked to the real estate bust.”
Citing data showing Deschutes County’s median home price premium of almost $100,000 over neighboring communities in 2007 effectively evaporating to zero within four years, he added, “You thought you were ‘mining’ the resource of quality of life – and there is no doubt that this is a wonderful area in terms of amenities and natural beauty.
“But what you were actually mining was Baby Boomers’ wealth, which took a big hit and is not coming back any time soon. The community needs to accept that, and come up with new models to stimulate economic vigour that utilize the assets you have and build on new initiatives.”
Watkins said that CLU CERF’s forecast last January at the annual event – predicting a flat economy for Central Oregon in 2011, no longer in rapid decline, but almost imperceptibly improving – turned out to have been fairly accurate.
On a macro level, major concerns remained regarding how the debt crisis affecting ailing countries like Greece may affect the global economy, with Watkins anticipating, “the Euro-Zone will come apart, and it will be ugly.”
Meanwhile, domestic indicators pointed to bank charge-off volume decreasing but still significant, home ownership dropping to a more reasonable 75 percent of the U.S. population but still “too high” compared to a recognized stable equilibrium of around 64 percent, and national productive capacity utilization increasing but still too low to translate into meaningful economic benefit.
“People talk about V’s and W’s and Double Dips,” said Watkins. “We think we dodged the double dip, but we call this the “Frying Pan” Recession. We went down one side, then experienced a long flat period. Eventually, we’ll see a pick-up on the other side.”
The estimate was for slow Gross Domestic Product (GDP) growth of under three percent for 2012, and some improvement on the jobs front, but still two years out before reaching pre-recession employment levels. The national deficit was also something of a lag on the economy, with U.S. Government spending of 35 percent of GDP representing a level not seen since World War II.
In terms of how to potentially stimulate more vigorous growth, Watkins suggested the government could explore buying more distressed homes for use as housing authority inventory, or encouraging a higher influx of immigrants with home-buying power.
Another impediment to more meaningful recovery was the challenging lending environment faced by small business, particularly in light of more restrictive policies instituted post-2006, in part due to increased regulatory pressure and oversight.
In the past, business financed growth by pledging assets, such as inventory and receivables. Over time, though, attitudes about pledging homes to support business borrowing changed and it lost its social stigma. Both banks and borrowers embraced such collateralized loans as cheaper and safe, as everyone grew confident that real estate prices would continue to rise.
Pledging real estate to support the loan became the norm and asset-based borrowing came to be seen as weakness. Watkins, however, suggested the situation had now reversed, adding, “The prospects for economic and job growth would be significantly improved if lenders and borrowers were to embrace a return to more asset based borrowing.”
On the state front, the expectation was for weak economic growth in Oregon with continued job losses over the next two quarters and a growing gap relative to the national unemployment rate, continuing softness in home prices, and relatively little new construction.
Watkins also said that a preliminary look at the data suggested the state’s domestic migration rate as negative, or at least flat. But this outlook has been somewhat contradicted by a recent On Numbers analysis compiled by Oregon Business Journal, which used a computer program to project state populations as of January 15, 2012 by studying demographic trends since 2000.
According to the model data, recently circulated via the Bend Chamber Newsletter, Oregon should have 3.9 million people, up about 73,000 from the 3.83 million people who lived here in April 2010, when the last official count was taken. This would make it the country’s 27th most-populace state.
Switching focus to the local level, Watkins predicted that in the short-run GDP and non farm job growth in Central Oregon would outperform the state, but this was in large part due to the massive Facebook data center projects currently underway in Prineville.
Watkins also poured cold water on recent media-driven forecasts suggesting more bullish growth and a quicker turnaround in terms of home price appreciation for the region compared to the national average over the next several years, adding, “The criteria applied often seems to be on the basis of ‘what goes down must come up,’ but as we all know, busts don’t always leadto booms…”
During an audience question and answer session, Watkins speculated that some 85 percent of Central Oregon’s volatility was tied to California, which unfortunately was experiencing even worse conditions. He said that a band of the country stretching from North Dakota down to Texas, partially boosted by oil extraction, was experiencing relatively higher prosperity, and that efforts may be redoubled to “get people besides Californians to come here.”
He also commented that retirement-oriented communities can build solid local economic growth, and that the continued pursuit of green manufacturers was worthwhile as potentially a good fit for the region.
GRINDING OUT OF A DOWNTURN
Another among an impressive slate of national speakers gathered for the 2012 event was Dr. Martin A. Regalia, senior vice president for economic and tax policy and chief economist at the United States Chamber of Commerce and an oft-featured national media pundit, who discussed the U.S. economic forecast and Washington policies via satellite.
Regalia said that the U.S. economy had been “grinding” out of a steep downturn for over two years but had failed to gain much in the wayof momentum.
He said, “Normally, GDP can grow at a natural or potential level of 2.8 to 2.7 percent where things are relatively in balance. Below that rate jobs tend to be lost, and above employment growth stimulated.
“Typically, we fall below that rate in a recession with consequent higher unemployment and come out accelerating and creating jobs more aggressively – for example, after 1991 there were growth rates of six to eight percent, which put people back to work.
“This time round it has been much slower going after the loss of some eight million jobs. Recovery started relatively encouragingly at around 3.5 percent and we began to create more jobs, but then we hit a number of snags, including natural disasters, and the economy slumped to around 1-1.25 percent growth.
“The last quarter of 2011 we grew over three percent, which are better numbers, good enough to create a number of jobs and see a decline in the unemployment rate, which has gone from a peak of around ten percent to now just over 8.5 per cent.”
Regalia said the recent recovery had occurred in “fits and starts” but a key component of stimulating economic growth was consumer spending, primarily driven by disposable income and wealth – including investment, or financial wealth which has largely recovered to pre-recession levels, and “real” or consumer household wealth which has seen a multi-trillion dollar hit due to being embedded in housing and deeply affected by the home
He added, “One of the keys to getting that wealth and spending number up, and a major factor which has held it back is housing values.
“Recently, the numbers have stabilized and are moving in the right direction. There was a noticeable improvement by the end of last year, which has been a major factor in improvement in consumption.”
Regalia said certain Washington policy programs could be instituted to stimulate growth, such as focused time-constrained initiatives like accelerated depreciation incentives to speed up business investment. Continued low interest rates and inventory levels should also give rise to increased demand.
Inflation appeared in check, but the ongoing Euro Zone difficulties had thrown the trade equation with Western Europe as a trading partner out of the U.S.’ favor, and the sovereign debt, currency and undercapitalized banking system issues abroad still held out the possibility of “financial contagion”.
Regalia concluded, “Overall, I think we will see consistent GDP growth of 2.5 to 3 percent, a gradually improving housing sector, and the Euro Zone hanging on and going through a shallower recession over the next six to eight months.
“We are seeing a few more signs of optimism. Forecasts recently primarily looked at downside risk, but now are relatively flat or even slightly positive.
“I am guardedly optimistic that we will see gradual improvement economically across the board this year and into next.”