2009 outlook: It's gloomy for WA region

By Jon Talton

Special to The Seattle Times

Economists rarely agree on anything, but this time is different: 2009 will offer little, if any, relief from a recession that is already officially a year old. This downturn will be longer and deeper than any seen since 1981, and it well may be the worst contraction since the Great Depression.

The grim tidings seemed barely better for Seattle when I talked last week with economist Mark McMullen, a director at Economy.com. "Washington and Seattle are fairly well-positioned for the current downturn," he said.

So far, so good. Then, he added: "That said, we expect it to be a severe one everywhere, including Seattle. This will be one of the more severe downturns that the region has experienced." Ouch.

Still, great fortunes and innovative breakthroughs are made during tough times. Well-run and lucky companies survive, just as Boeing and Washington Mutual came through the Depression (alas, in the latter's case, this time it was not to be). Painful as it can be, life goes on.

I'm setting down some unscientific markers to watch in 2009, which may give us a sense of the health of the Puget Sound economy, potential dangers and opportunities. You can't tell the players without a program, so get your recession program here:

• Biotech. Every state and city wants a piece of this 21st-century sector, but Seattle is consistently rated one of the top biotech/biomedical hubs in the country. This will come under pressure as the always volatile sector faces venture-capital shortages, the credit squeeze and worldwide competition. Severe cuts at the University of Washington would also hobble a key partner.

Silver lining: Seattle already has a substantial set of biotech assets, along with being a major software hub. This sector could also benefit from the new administration's friendlier attitude toward funding research and science.

• Boeing. The aircraft giant isn't as central to the region's economy as it was 30 years ago, but it still employs 77,000 in Washington state and anchors a Tiffany economic asset: the aerospace sector. Boeing has been a major jobs engine here in recent years but is warning of possible layoffs in 2009 as the recession causes airlines to cancel or delay orders.

Silver lining: Boeing appears to have achieved détente with its major unions, and the much-delayed 787 Dreamliner should be in demand (and ready to deliver?) as airlines start to recover.

• Downtown Seattle. No major metropolitan area is successful without a real downtown, and Seattle has created an enviable center city. Now it will be hammered by the loss of Washington Mutual's headquarters emptying 700,000 square feet, perhaps more, of prime office space. Lost, too, will be thousands of well-paid employees spending money at downtown retailers. The worst of this will play out next year, as many jobs are cut and offices shut, and retailers see if they made enough in the holidays to keep going.

Silver lining: Seattle is a worldwide magnet for creative talent that feeds on, and can help reinvent, a vibrant center city. It has the Vulcan-driven transformation of South Lake Union, which will include new Amazon.com headquarters. Nearby will be the new Bill & Melinda Gates Foundation building.

• Government. With the state highly dependent on sales taxes, it could face a shortfall of as much as $6 billion. If this translates into 20 percent cutbacks at universities and a $1 billion funding loss for schools, it's hemlock in a world that rewards education. The shortfall also raises questions about infrastructure that is similarly essential for competitiveness.

Silver lining: The relative affluence of parts of the state and the Puget Sound area's competitive prowess may allow for a quicker recovery once the economy hits bottom. Now, if the budget cuts can be done with a scalpel instead of a meat ax.

• Jobs. The labor market is facing its toughest patch in decades, having shed more than 1 million jobs so far this year. Washington has seen stronger performance, but many layoffs won't hit until next year. If recent history is a guide, the recovery will be tepid when it arrives.

Silver lining: The region's diverse economy should make its employment situation look good compared with the rest of the nation.

• Microsoft and the software sector. Less disposable income for individuals and a severe pullback in business spending means less demand for software, a fact reflected in Microsoft's stock price being not far from its 52-week low and word of a hiring freeze. The environment will also sharpen pressures as the Redmond giant fends off rivals on every front. Meanwhile, the region's smaller software outfits, which had been thriving in recent years, will face a dearth of venture capital and be exposed to the credit crunch.

Silver lining: Microsoft remains dominant in many areas and financially strong. Watch to see if it can succeed in nimbly making the transition to a new era of technologies. Also, thousands of talented software workers create a critical mass for revival, as was shown after the 2001 meltdown.

• The ports of Seattle and Tacoma. These are key engines in Puget Sound's global heft. Unfortunately, this is a global downturn, with the economies of the U.S., European Union and Japan facing recessions simultaneously and with China also feeling the downdraft.

Silver lining: The downturn is hitting other ports as well. It may give Seattle and Tacoma time to understand and react to new competition on the West Coast.

• Small business. The places where most people work are also most vulnerable to this downturn's terrors: frozen credit markets, a consumer pullback and deflation that stymies their pricing power. Even small things, such as municipal regulatory moves, can mean life or death for some companies.

Silver lining: Seattle is rich in entrepreneurship and local businesses, as well as a buy-local ethic.

Much of the entire outlook will depend on consumers. They've lost huge amounts of wealth in 401(k)s and, especially, house values. The ratio of debt to disposable income is 140 percent, versus 70 percent in the early 1990s. As more Americans lose their jobs as expected in 2009, they will be even less likely to spend. Yet consumer spending makes up more than 70 percent of gross domestic product.

Much is also out of Seattle and the state's control.

The result: Even if the economy hits bottom toward the end of next year, the recovery will be tepid. The great binge is over. Hard times will linger. We'll have plenty of lean time to reflect on their causes, and perhaps make sure they don't happen again.