Cautious optimism marks economic forecast
Local experts examine crystal ball

by Christopher Key

Legend has it that an economist was recently asked about the effect of the French revolution on the world economy. “Too early to tell,” was the reply. The business of predicting the economy is a risky one. Just ask the author of Dow 36,000. It’s fairly amazing that we were able to find quite a few observers who were willing to stick their necks out. Some of them even did it in a very public forum sponsored by US Bank and entitled “The First Recession of the New Millennium – A Lingering Good-bye.

John Mitchell is an economist for US Bancorp in Portland, OR. He sees the national Gross Domestic Product (GDP) growing at about four percent in 2003. Inflation should hold at around two percent and unemployment will level off at about six percent.

“The problem with unemployment data collection,” Mitchell said, “is that the system was designed for a factory economy, which we no longer have. So the figures are skewed.”

Mitchell predicts that nationally, housing prices will increase at a slower rate and short- term interest rates will begin to rise by the end of the year. Will the proposed Washington state income tax happen?

“Don’t bet on it,” said Mitchell.

Michael J. Parks is editor and publisher of Marple’s Pacific Northwest Letter, which keeps an eye on the regional economy. He compares the Washington economy with an episode of Survivor: “We haven’t been voted off the island yet.” Parks sees moderate employment growth in the state and a slow end to recession.

“We will follow the recovery in the rest of the country,” Parks said, “rather than leading it.”

He points out that the state has lost 80,000 factory jobs since 1998, many of them in aerospace, which won’t begin to recover until 2004.

“There has been a fundamental change in the airline business,” said Parks on the day before United filed for bankruptcy. “AirBus has emerged as a worthy competitor to Boeing. Boeing made the decision to give up market share for profitability. That’s creating some hardship, at least in the short-term.”

Parks noted that there has been excess capacity in the technology sector, but that it will recover strongly. The technology sector, according to Parks, is just getting started.

One of the factors that figures strongly in Whatcom County’s outlook is the economy of British Columbia. Christopher Lawless is the chief economist for the British Columbia Investment Management Corporation. He sees the Canadian economy doing well, but British Columbia lagging behind.

“Of course, our economy is 85 percent dependent on trade with the US,” Lawless said. “Without you, we’re toast.”

British Columbia is not used to being the caboose on the Canadian economic train. The province used to boast Canada’s highest standard of living, but is now lagging behind.

“Lots of people are now entering the labor force,” Lawless said, “which will boost the unemployment rate. Income growth will be slow, but retail is looking up. Big ticket items will continue to sell as long as interest rates remain low.”

Even though Whatcom County is far less dependent on the Canadian dollar that it used to be, many merchants keep a close eye on the exchange rate. Lawless sees no recovery in sight for the Canadian dollar.

Hart Hodges is interim director of the College of Business and Economics at Western Washington University. He believes that there’s a tendency to be cynical about the economy, but that it doesn’t change the underlying factors or the outlook. Hodges’ prediction? If you liked 2002, you’ll like 2003.

“Whatcom County has achieved a certain stability,” Hodges said. “Barring dramatic events, things aren’t going to change much.”

He feels that border crossings are firmly tied to the exchange rate and agrees that local retailers are far less dependent on our neighbors to the north.

“Retailers had a fairly good Christmas in 2001,” said Hodges, “partly because the expectations were very low. That may happen again in 2002 and 2003.”

The softwood timber tariff, which was expected to have a big impact on the local economy, has proved to be a tempest in a teapot. It has had almost none of the effects it was supposed to have and even Weyerhaeuser, which was supposed to benefit from the tariff, has been asking for changes.

Hodges thinks the local boom in construction will continue. Many people who pulled money out of the stock market and put it into real estate are beginning to worry about that bubble bursting. As the stock market stabilizes, Hodges believes money will start to flow that way again. But, he said, there won’t be another stock bubble like the one in the 90s.

“One of the difficulties with charting the local economy,” said Hodges, “is that we don’t have a handle on how many people live here, but get their paychecks elsewhere, either through commuting or telecommuting. Employees are leading the way with telecommuting because it’s taking a while for employers to accept that they can be productive at home.”

Hodges will be presenting a detailed sector analysis of the local economy this month that he’s been working on for a long time. He hopes it will help clarify the situation.

“There will be no big change in the manufacturing sector,” Hodges said. “Real estate will remain active as long as interest rates are low. Insurance and finance are possible growth areas.”

The Port of Bellingham plays a big role in the local economy. Steve Jilk said that the key issues for the Port include the continuing effect of 9/11 on air travel and the withdrawal of United Express from the airport. Port officials continue to negotiate with other airlines to supplement the service offered by the sole commercial carrier, Horizon.

“General aviation at the airport has recovered nicely,” Jilk said. “There is a strong demand for more hangar space with more corporate aircraft locating here.”

One possible solution to that problem would be to convert the present Air National Guard (ANG) facility to general aviation. The local ANG unit is seeking to relocate since it functions in a support capacity and doesn’t actually need to be near an airport.

Federal Express will open its new facility this year and may attract other related businesses. WoodStone, which leases its facility from the Port, is looking for more room.

“We are actively recruiting new companies,” said Jilk, “for the ITB building next to Sound Beverage. It has been 90 percent empty for some time, but we’re seeing real interest by some light industrial firms that are seeking to relocate or expand.”

The Port is completing plans to develop 250 acres to the west of the airport facility for commercial and light industrial use.

“We’re taking our time on this one,” Jilk said, “because there are significant wetlands issues to be resolved. Plus we have to get approval from both the Army Corps of Engineers and the Federal Aviation Administration.”

Redevelopment of the Bellingham waterfront will proceed in conjunction with the City of Bellingham. The Port has co-funded a redevelopment plan for the entire waterfront from Fairhaven to Mt. Baker Plywood. A lot will depend on what the community wants and what key players like Georgia Pacific have in mind.

“There is almost a new economy in the maritime industry,” Jilk said. “Just look at the investment by private companies in the past year. I think we’ll see a lot more. The big question we have to answer with regard to the waterfront is ‘What do we want to be when we grow up?’”

Whatcom County is no longer just berry and dairy, according to Jilk, and agricultural diversity is beginning to pay off.

“We’re seeing a lot more value-added producers now,” Jilk said, “like cheese manufacturers, wineries, and organic farmers.”

Port officials hope to continue working with the City of Blaine to take advantage of opportunities offered by waterfront redevelopment. But the Port’s presence in Sumas will decrease since there’s little Port-owned property left. If SE2 gets the final go-ahead, the company may option eight acres of Port holdings.

“We’ll continue to play a big part in the Partnership for a Sustainable Economy,” Jilk said, “which pulls all the interested parties together to determine long-term strategies. There’s great value in agencies working together and looking at the whole system. We have to look at how public infrastructure encourages private investment.”

The Port is working on a complete inventory of industrial zoned property in the county that will be released in February.

“There needs to be a determination made as to whether or not those properties are serviced,” said Jilk, “and how we can get services to them. This will allow us to pre-permit the sites, which can be a very valuable tool for attracting businesses.”

Western Washington University’s Small Business Development Center (SBDC) has a powerful influence on the local economy. In the five year period 1996-2001, the SBDC served over 2,000 clients, created over $33 million in capital investment, saved 615 jobs and created well over 700 more. Director Tom Dorr says the center has two sides.

“It’s part of the College of Business and Economics,” Dorr said, “but it’s also a way for the university to give something back to a very supportive business community.”

The SBDC is funded in part by the City of Bellingham, the Port and the university. Dorr sees the retail sector hurting, but doing better than some other areas.

“We really have two economies in Whatcom County,” Dorr said, “urban and rural. The rural economy is hurting a lot more than the urban. Everybody has labor issues. How can businesses pay enough to attract quality employees and still compete with pricing? Can businesses continue to pass on increases in the minimum wage? What are health care costs going to do to businesses?”

Dorr described himself as “cautiously optimistic” about 2003.

“There isn’t going to be a quick turnaround,” Dorr said. “Businesses are going to have to spend more time on strategic planning. We’re seeing a lot of people who have suddenly realized that their control of cash isn’t tight enough. Businesspeople need to focus and we can help them put systems in place.”

He believes that restaurants will continue to face difficulties due in part to fewer people eating out and in part to high labor costs.

“Local manufacturing will continue to hold its own,” Dorr said, “with the possible exception of Britax, which is dependent on the struggling airline industry. Anyone supplying the construction industry will be in good shape.”

Based on tax receipts and unemployment rate, Whatcom County is doing better than the state or the nation and Dorr believes that will continue.

“Crossing the border has become easier for many of us,” Dorr said, “but not for trucks. That needs to be addressed. Canadians have the perception that the border is still as difficult to cross as it was shortly after 9/11 and we need to change that. What worries me is how much harder the crossing will get under the new Department of Homeland Security. The exchange rate remains the real kicker and I don’t see any improvement there. It will continue to impact Blaine and Sumas.”

Retail in Sumas is hurting while the industrial sector is booming, according to Dorr. He thinks the retail sector will eventually recover.

“Canadian companies will continue to locate here,” Dorr said, “to avoid the softwood tariff and get away from unions. We’re working with a dozen of them now and there’s more on the way.”

Dorr feels that our focus should be more on retention and expansion of existing companies than recruitment of new ones.

“Downtown revitalization is ready to take off,” Dorr said, “and the waterfront continues to evolve.”

Whatcom County Planning and Development Director Hal Hart is encouraged by the continued increase in building permits that started last fall.

“Our goal is to have a fair and equitable permit system,” Hart said, “while protecting health, the environment and safety. There is a consultant helping us streamline our process. We want measurable outcomes.”

Hart sees strong growth for Whatcom County in 2003.

“We’re fortunate not to have a Boeing here,” Hart said, “but we don’t have a Microsoft either. We have grown in a healthier way than the Central Sound region, which is now suffering.”

Low interest rates will continue to fuel the housing sector and Hart believes people who have done well in the stock market are now looking for tangible investments such as a second home or rental property.

“People are looking for waterfront, a view, a sense of community,” Hart said, “and we have that in abundance here. Plus we’re more affordable than Seattle. We offer security, peace and access to outdoor recreation. We don’t want to lose the essence of what Whatcom County is. We have to do that in the face of 40-100,000 more people in the next twenty years.”

In order to meet that demand, Whatcom County will have to balance job growth with quality of life issues, according to Hart.

“We need to level the playing field in Whatcom County and the state,” said Hart. “Do we give tax breaks to a few big companies for 30 years or do we create a stable and predictable business environment? We have to find a balance.”

One of the big issues for Hart is the Endangered Species Act (ESA).

“The feds say protect the salmon,” Hart said. “That means we need to look at water quality and other habitat factors. It impacts our certainty and predictability. I think we’re ahead of the game on this one.”

There is a mandated update of the county’s comprehensive plan due in 2004, but Hart doesn’t expect any major changes.

“We need to work more closely with the City of Bellingham in coordinating urban growth areas,” Hart said. “How much of those big population increases should go to the city and how much to the county? Where should the Urban Growth Area boundaries be? How can the county help the cities of Bellingham and Ferndale plan for growth? We’re doing a lot more with planning than we were just ten years ago.”

Mike Brennan, head of the Bellingham/Whatcom Chamber of Commerce, is delighted that Whatcom County has been leading the economic recovery rather than lagging behind as it did for many years.

“We have a lot of new jobs,” Brennan said, “but not all of them are at the level of the ones we’ve lost.”

He thinks the rebirth of the shipyard is a good sign.

“There are a series of actions needed,” Brennan said, “involving the creation of public facilities districts in the city and county. We need to decide what to do with the Georgia Pacific site. It’s not often you get to redevelop 150 acres on the waterfront.”

Brennan believes that private companies will come in to take advantage of public investment.

“From a political standpoint,” said Brennan, “we have to figure out where we will put businesses with family wage jobs. Will we support them? Do we have the political strength to do that?”

He believes that the trend is toward professional services like VECO, St. Joseph Hospital, physicians, architects and financial services.

“We need to become the regional and super-regional marketplace,” Brennan said. “Our business and operating taxes are higher, but our property taxes are lower.”

The technology sector can offer some solutions.

“Hardware manufacturing has gone offshore and we won’t get it back,” said Brennan. “But software research and development can be done here.”

Canadian investment in the area, Brennan feels, will more than offset the retail business lost to the weak Canadian dollar and border crossing problems.

“We need to implement the FAST program that has been pioneered in the Detroit/Windsor market,” Brennan said, “to help speed up trucks crossing the border. We’re next on the list for that program.”

The Chamber is massively supported by small business, according to Brennan, and when small business suffers, the chamber suffers.

“The Delta Port being planned in lower mainland BC could have a big impact on us,” Brennan said. “The new generation of container ships will be too big to turn around in Seattle or Portland. The only ports capable of handling them will be Long Beach and Delta. We’re the nearest border crossing to get those containers into the US. We’ll need to improve our infrastructure and our border technology. We might well need 20 lanes at the truck crossing.”

Whatcom County, Brennan believes, will become a focus of international trade. He also sees increased recreational development in Birch Bay and continued growth in the Mt. Baker/Foothills corridor.

“There’s lots of positive news,” said Brennan, “and little negative news. We need to get a structured Economic Development Council in place. We have a lot to look forward to, but we must keep people informed of the benefits of development. The quality of our environment needs to be further explored and exploited.”

The cautious optimism expressed by the economic experts we consulted seems to be remarkably unanimous. Especially when you realize that economics is the only field in which the Nobel prize was once shared by two people who were promulgating opposing views.