PCEI Report 2010 Final Email-Web Version

1 Pierce County Economic Index ¦

DISCOVERY LEADS TO RECOVERY

2009-2010 REPoRt

2 ¦ Pierce County Economic Index

PCEI Forecasters

Bruce D. Mann, Ph.D., has been a professor of economics at the University of Puget Soundsince 1975. Dr. Mann came to the Tacoma area from Indiana University where he received both his master’s and doctorate degrees in economics. He completed his undergraduate work at Antioch College in Yellow Springs, Ohio.

One of Dr. Mann’s particular areas of teaching interest and research deals with the operations of local economies. He has published research related to the impacts of local government subsidies to businesses, financing for housing and rent control issues. Dr. Mann has been active in local community affairs as a consultant for the City of Tacoma, Pierce County government and numerous civic groups and associations. He has been a member of the Puget Sound Regional Council advisory group on long range forecasting and a board member of the Upper Tacoma Renaissance Association.

Douglas E. Goodman, Ph.D., has been a professor of economics at the University of Puget Sound since 1977. He came from the University of Illinois where he received his master’s and doctorate degrees.

Dr. Goodman’s teaching responsibilites focus on monetary economics and econometrics.

His research interests are in the areas of financial markets and institutions, personal finance, macroeconomics and applied econometrics and forecasting. In addition to these activities, Dr. Goodman has been active in consulting for both public and private groups.

In 2007 he was awarded a Burlington Northern Curriculum Development Grant to devise a new course called “Economic Data and Analysis”. This applied course is designed to promote understanding of economic statistics.

CreditsPublisher: David Graybill Project Manager: Gary Brackett Graphic Designer: Christina KitchensPhotography: Chip Van Gilder, Philip Palermo, Port of Tacoma and Chamber Staff Printer: J & D Printing©Copyright 2009 Tacoma-Pierce County Chamber. All rights reserved.

Douglas E. Goodman, Ph.D.Professor of Economics University of Puget Sound

Bruce D. Mann, Ph.D.Professor of Economics University of Puget Sound

Printed on environmentally responsible managed forest resources


Executive Summary 4-5Pierce County Economic Index 6-7Retail Sales Activity 8-9 Labor Activity & Unemployment 10-12Personal Income 12-13Housing and Real Estate 14-15Port of Tacoma 16-17Data Tables 18-19Special Thanks 20PCEI Sponsors 21 Industry Publications 22 Save the Date 23

table of Contents

labor sectors of the economy, as well as local income.

This procedure has proved to be very reliable and has generated forecasts that have been statistically accurate. The data sets were chosen for their tested relevance, timely availability and consistency of reporting. Authors of the PCEI, Drs. Bruce Mann and Douglas Goodman, professors of economics at the University of Puget Sound (UPS), present the forecast in a general conference session.

In addition to the PCEI, Drs. Mann and Goodman also estimate a local Housing Index. This Index measures the amount of sales activity for single-family homes (detached and condominium) in Pierce County.

Data on sales and listings are the primary data sources, but the model itself is based on the particular historical structure of the single-family sales activity in the local area.

Because of the lag in publication of resource economic data, each PCEI Report forecasts for a period covering the last two quarters of the current year (2009) and the full calendar year ahead (2010).

Methodology The Pierce County Economic Index (PCEI) is unique to Pierce County and an exceptional business tool rarely duplicated in other communities. The forecast is constructed from more than 25 local, regional and national data sets.

The model developed for the Pierce County Economic Index is reconfigured and recalibrated each year to take advantage of new information, data and conditions. In addition to the statistical method, the forecast includes judgmental factors.

These factors include extensive analysis of the year’s local economic events, a review of the prior forecasts and consideration of national and international activity. The combination of the statistical and the judgmental approaches allows each year’s forecast to capture past performances as well as a forward-looking method to present an understanding of current conditions and likely short-term future outcomes.

The PCEI itself is used to forecast the overall economic condition for the county. The statistical model is also used to forecast activity in the retail and


Executive Summary

The Pierce County economy did withstood some of the negative effects from the national recession for much of 2008. But growth did slow. Pierce County’s slower growth was significantly better than the national experience principally due to Pierce County’s military and health care sectors.

The slowing Pierce County economy in late 2008 indicated more problems on the horizon. The Pierce County slowdown became a recession in 2009.

Economic activity in Pierce County will continue downward, but more moderately as this year comes to a close. The recession in Pierce County will continue through the first half of 2010. It will come to an end during the third quarter of the year. The current recession then, will be the deepest, longest and most severe in the past forty years.

A recovering U.S. economy combined with expansionary fiscal and monetary programs will help the local economy. Most of Pierce County’s trading partners will be growing again, helping the trade sector. But a stronger dollar will offset some of those gains. Single-family housing activity will improve during the year, as mortgage markets recover and credit becomes available. However, commercial and industrial real estate activity will be depressed for most of 2010. The local health care and military sectors will continue to fuel economic activity, but at a slower rate.

The benefits of the national recovery, increased trade flows, some new military construction spending and a recovering housing market will be enough to offset the negative effects of Russell Investments moving out of the area. The recovery will strengthen in the

fourth quarter of 2010, with the PCEI increasing at an annualized rate of 2.6% providing a solid foundation for the Pierce County economy as 2010 comes to a close. A feature unique to this recession has been the drop in non-labor market income for Pierce County residents. This significant source of county residents’ personal income will be stagnant in 2010.

The annual average 2009 unemployment rate in Pierce County will be 9.3%. This year-over-year increase will be the largest on record. A difference in this recession is that usually the county rate exceeds the state and national rates and moves up more rapidly.

In the 2009-10 recession the Pierce County unemployment rate started below the national and state rates, and then moved up more slowly than they did. Employment conditions in Pierce County remained stronger for longer than they have been in the past.

After nearly two years of declining jobs in Pierce County, the economy will begin to generate new employment opportunities in the second half of 2010. Job growth will begin in the third quarter; this growth rate will almost double to 1% in the fourth quarter.

The turnaround in the second half of the year, though, will not offset the job losses in the first half. The net job loss in 2010 will mark the third consecutive annual decline in Pierce County.

All three retail sales drivers (income, confidence and credit) became worse during the current recession. It is no surprise that retail spending growth in Pierce County turned negative, and that spending fell below last year’s forecast. For 2009, retail spending in Pierce County will drop by 7.5%, a loss of $415 million

Executive Summary


dollars from 2008. When adjusted for inflation, real retail sales in 2009 will be down by about 7.5%. For 2010, dollar retail volume will exceed 2009 by 2%. A total of $5.2 billion will be spent in the county during 2010 – up by $100 million from 2009.

As the Pierce County recovery takes hold, total personal income will begin increasing in 2010. Total personal income in Pierce County will increase by 5.7% in 2010, a gain of $1.5 billion. However, much of the added purchasing power will be eroded by inflation. In 2010 income growth will exceed the population increase, so per capita income will rise. The average resident’s income will move up to $34,700, a gain of 3.7% from 2009.

The First Time Home Buyer tax credit, a recovering local economy, attractive financing options and bargain-priced units will continue to push up single-family housing activity in 2010. For this forecast horizon, the multi-family housing market will remain fairly flat.

The commercial real estate outlook for this forecast horizon is mixed. The most significant challenge will be competition from the north. Local owners will have to be willing to make concessions.

Both in absolute terms and relative to the region, the industrial real estate market in Pierce County was strong through 2009. However, new demand is likely to be soft at best, during this forecast horizon.

2010 will see a further decline in volume for the Port’s international container business, as the major carrier and service string adjustments made in 2009 will now be felt over an entire year.

For 2010, container volume will decline an additional 15.4% from 2009 levels, due solely to international trade declines. Domestic volume will be flat. The Port’s breakbulk and auto lines of business are projected to have little or a very low 1% growth in 2010.


Pierce County Economic Index

Continued

From 2004 through 2008 the Pierce County economy grew at an average rate of 2.7% per year. Employment increases provided jobs and income for the expanding labor force. The local economy operated near full employment with an unemployment rate near 5% each year. Change came to the Pacific Northwest and Pierce County late in 2008 with the national recession of collapsing financial and housing markets and a world-wide economic slowdown.

United States economic activity sputtered early in 2007, worsened during the year, and was officially in a recession by the fourth quarter. U.S. economic conditions worsened throughout 2008 as housing and financial markets virtually collapsed. Credit markets froze, building almost came to a complete stand-still and significant amounts of household wealth evaporated. Increasing oil and gas prices, worsening consumer fears and declining business investments weakened the national economy more.

The U.S. recession crossed international borders. Global supply chains link production processes and labor markets. Internationally diversified portfolios meant U.S. stock and bond losses became global with the impacts quickly moving to Europe and Asia. Normal trade flows fell, further weakening economies. By late 2008, almost 70% of the world’s economies were experiencing economic slowdowns.

By late 2008 as forecast last year, the effects of the national and international economic weakness hit the local economy. On an annualized basis, the Pierce County economy sputtered and then moved into a downturn during the second half of 2008. The Pierce County Economic Index (PCEI), a measure of overall economic activity in the Pierce County economy, moved up at an annualized rate of only 0.25% in the third quarter, and then declined at an annualized rate of 2.3% in the fourth quarter.

Pierce County’s industrial structure moderated some of the effects of the national downturn. The health care and military sectors, two of the largest local economic engines, remained fairly strong throughout all of 2008. Local health care employment continued to increase, research facilities maintained their workloads and providers expanded capacity with major new investments in Puyallup and Gig Harbor. Military transformation and activity in Iraq and Afghanistan kept military payrolls, infrastructure spending and personnel levels high at Fort Lewis, McChord Air Base and Madigan Army Medical Center. Finally, Pierce County’s financial sector avoided serious problems for most of 2008.

The slowing Pierce County economy in late 2008 indicated more problems on the horizon. One sign of weakness was that in the fourth quarter of 2008 Pierce County activity declined by 0.5% from the third quarter when activity normally increases due to the holidays’ seasonal effects. Another sign was the drop in retail spending– a third-to-fourth quarter drop in dollar retail sales had not happened in the past thirty years. By the fourth quarter of 2008, the unemployment rate crossed the six percent level, a rate not experienced since late 2004. All of these indicators suggested a Pierce County recession.

The Pierce County economy withstood some of the negative effects from the national recession for much of 2008. But growth did slow. In 2008 the PCEI moved up by only 1.9% – short of last year’s forecast rate of 2.8%. Pierce County’s slower growth though, was significantly better than the national experience, as real gross domestic product moved up by only 0.4% in 2008. Pierce County outperformed the nation principally due to its military and health care sectors.

The Pierce County slowdown became a recession in 2009, as forecast last year. The PCEI declined at an annualized

Pierce County Economic Index


rate of nearly 4.5% in both the first and the second quarters, a steeper decline than forecast last year. The recession deepened in the third quarter, with the PCEI moving down at an annualized 5.5%. Economic activity in Pierce County will continue downward, but more moderately, as the year comes to a close. In the fourth quarter 2009, the PCEI will drop by 2.5%. For the year as a whole, the PCEI will be down 3.1% over 2008. This will be the largest year-over-year drop recorded by the PCEI, a clear indication of the depth and severity of the current economic recession.

The Pierce County economy moved into the recession later and more slowly than the national economy did. An expanding health care sector with increased spending at local military installations cushioned the downturn. Few significant problems at most Pierce County financial institutions kept the national financial collapse from having major impacts locally. Finally, commercial and industrial real estate activity remained healthy, generating income and employment, even as residential housing market activity came to a virtual standstill.

The recession in Pierce County will continue through the first half of 2010. It will come to an end during the third quarter of the year. A recovering U.S. economy combined with expansionary fiscal and monetary programs will help the local economy. Most of Pierce County’s trading partners will be growing again, helping the trade sector. But, a stronger dollar will offset some of those gains. The net effect for trade activity will be slower declines than in 2009. Single-family housing activity will improve during the year, as mortgage markets recover and credit becomes available. However, commercial and industrial real estate activity will be depressed for most of 2010. The local health care and military sectors will continue to fuel economic activity, but at a slower rate.

On an annualized basis the PCEI will fall by about 3.25% percent in first quarter of 2010 primarily due to the slow national recovery and reduced international trade flows. This will hurt local manufacturing and port-related economic activity, two significant sectors of the Pierce County economy. Health care spending will continue to provide some support, but even this sector will slow – due in part to uncertainty from concerns over health care reform. In addition, much of the current local investment in facilities will be completed by mid-2010. Not much new health care investment is on the horizon. The winding

down of activity in Iraq will keep expenditures at local military installations in check. The recovery will start in the third quarter of 2010. The PCEI will move up at an annualized rate of 1.3%. The benefits of the national recovery, increased trade flows, some new military construction spending and a recovering housing market will be enough to offset the negative effects of Russell Investments moving out of the area.

The recovery will strengthen in the fourth quarter of 2010. The PCEI will increase at an annualized rate of 2.6%. Access to mortgage financing, the impacts of federal stimulus programs, increasingly optimistic consumers and new employment opportunities will provide a solid foundation for the Pierce County economy as 2010 comes to a close.

For the year as a whole though, the drag of the first half of the year will more than outweigh the second-half recovery. The PCEI will show a very small year-over-year decline of 0.2%. For the first time since at least the mid-1970s the PCEI will register back-to-back annual declines. The current recession then, will be the deepest, longest and most severe in the past forty years.

A feature unique to this recession has been the drop in non-labor market income for Pierce County residents. Almost 30% of the area’s personal income comes from non-labor sources. These include social security payments, retirement fund pay-outs, veterans’ benefits, welfare payments, dividends and interest income. With no inflation adjustments (cost of living increases), low interest rates and reduced asset values, income from these sources will either decline slightly or at best, remain constant during this forecast horizon. This means a significant source of county residents’ personal income will be stagnant in 2010.

Finally, employment opportunities in the county will shrink in many industries. Labor income growth in 2009 was weak and will remain slow in 2010. Some government assistance (especially extended unemployment insurance) will help, but not enough to offset the sluggish growth of labor earnings. Stagnant non-labor and labor incomes will keep consumer spending, an important contributor to Pierce County’s economy, in check through most of this forecast horizon.


Retail Sales ActivityThe three most important drivers of retail spending are income, confidence and credit. All three of these drivers deteriorated during the current recession. It is no surprise then, that retail spending growth in Pierce County turned negative; and that spending fell below last year’s forecast.

Retail market conditions eroded sharply in 2008. Home equity borrowing came to a halt. Households lost homes to foreclosure. New home sales declined. Increased mortgage payments drained income from retail activity. The local recession cost people jobs and income. Higher gasoline prices redirected consumer spending to the gas pump and away from other local area retailers.

The national recession and falling consumer confidence kept tourists and visitors away from the Pacific Northwest and Pierce County.

As forecast last year, the second half of 2008 retail spending fell by an annualized rate of 9% in the third quarter and then by 15% in the fourth. Holiday season spending in 2008 was the weakest since 2003. For 2008 as a whole, retail spending declined by 8.6%, the largest annual dollar decline on record. This drop meant $525 million fewer dollars forcounty merchants.

Although inflation was not a serious problem in 2008, some of the dollar retail volume was due to higher prices. When the effects of price increases are removed, real retail activity (the volume of merchandise moving out of stores) dropped by 12% in 2008.

Retail spending activity in 2009 continued declining although at a more moderate pace. In the first half of

2009, dollar spending at Pierce County’s retail stores fell in each quarter by 11% from 2008 levels. A smaller drop in spending occurred in the third quarter, with dollar volume down 7% from the 2008 level. (To keep data comparable, third and fourth quarters 2009 data were adjusted for the “cash for clunkers” program.)

By the fourth quarter of 2009, retail spending will start increasing – but by only 0.5% compared to the holiday season in 2008. The 2009 fourth quarter turnaround, while not spectacular, will be good news for local merchants.

However, the 2009 holiday shopping season will still be weak. While dollar volume will be up in the fourth quarter, real (inflation adjusted) sales will be off by about 1.6% from the 2008 holiday season.

For 2009, retail spending in Pierce County will drop by 7.5%, a loss of $415 million dollars from 2008. When adjusted for inflation, real retail sales in 2009 will be down by about 7.5%.

An improved economy, a stronger housing market and low interest rates will increase retail spending in Pierce County throughout 2010. On an annualized basis, retail spending will rise by 0.1% in the first quarter of the year, by 3% in the second, by 2.5% in the third, and by 2% in thefourth quarter. For 2010, dollar retail volume will exceed 2009 by 2%. A total of $5.2 billion that will be spent in the county during 2010 – up by $100 million from 2009 – putting local merchants back up to where they were in 2004.Inflation will more than wipe out the dollar gains in 2010. Real retail activity, the amount of merchandise

Retail Sales Activity


leaving stores, will decline by 1.8% in 2010 compared to 2009.

The real (inflation adjusted sales) volume of activity in each quarter of 2010 will be below the corresponding quarter of 2009 with real sales in the 2010 holiday season down 1.5% from 2009.


Labor Activity and Unemp y

Unemployment

From 2004 through 2007 the Pierce County labor market operated at full employment as job growth kept pace with the number of new workers entering the labor market. The measured amount of unemployment (in the 4% to 5% range) was due to a normal amount of turnover in a fully employed economy. But labor market conditions took a decided turn for the worse during 2008.

A recession means rising unemployment. No surprise then, that Pierce County’s unemployment rate has been moving steadily upward since 2008. Early in 2008, Pierce County’s unemployment rate started increasing. This was in line with last year’s forecast, although the increases were smaller than expected. During the first half of 2008 the unemployment rate in Pierce County moved from 4.5% to 5.3%.

While the national unemployment rate moved up sharply (to 6.1%) during the third quarter of 2008, in Pierce County the unemployment rate moved up more modestly to 5.7%. As 2008 ended the national, state and local unemployment rates started moving up rapidly. In the U.S. the rate reached 6.9% in the fourth quarter. At the state level unemployment measured 6.2%. And in Pierce County the fourth quarter rate reached 6.4%.

Unemployment continued to increase in the first half of 2009. During the first quarter the national rate hit 8.1%, and in Washington State unemployment reached 9.1%. In Pierce County the unemployment rate increased to 9.4% in the first quarter of 2009. A nearly one-half point increase moved the local unemployment rate to 9.8% in the second quarter, above the state rate of 9.1% and the national level of 8.1%. Pierce County’s unemployment rate eased to 9.0% in the third quarter of 2009. It will remain at this rate as 2009 ends. The annual average 2009 unemployment rate in Pierce County will be 9.3%,

up three-and-one-half points from the 2008 annual rate. This year-over-year increase will be the largest on record. Some of the increase will be due to job losses. Equally important will be the increase in local labor supply as the number of workers increase.

The recession will keep unemployment high in 2010. In the first quarter the local unemployment rate will reach 9.75% and then will begin to decline. The county’s rate will drop by about one-half point in the second quarter to 9.3% and then move to 9.0% in the third quarter. The Pierce County rate will drop to 8.8% in the fourth quarter. The annual average unemployment rate in 2010 of 9.2% will be just about unchanged from 2009 – but, in 2010 the unemployment rate trend will improve. A difference in this recession is that usually the county rate exceeds the state and national rates and moves up more rapidly. In the 2009-10 recession the Pierce County unemployment rate started below the national and state rates, and then moved up more slowly than they did. Employment conditions in Pierce County remained stronger for longer than they have in the past. In part this was due to the locally strong health care and business service sectors, and in part by the stability of military and government employment.

Employment and Jobs

From 2004 through 2007 the Pierce County economy created new jobs at an average rate of 3% per year. Early signs of the recession’s impacts became evident late in 2007 as the rate of job growth slowed to 2.7% in the fourth quarter. Job growth, already slowing, slowed more in the first quarter of 2008, when new employment opportunities increased by only 1.3%. On an annualized basis, job growth came to a virtual halt during the second quarter of the year. In the third and fourth quarters of 2008 the number of jobs in Pierce County declined at an annual rate of 0.4%

Labor Activity and Unemployment


in the third quarter and then by 1.9% in the fourth quarter. Businesses became cautious in hiring, expansion plans were put on hold and housing construction jobs disappeared. For the year as a whole employment growth was stagnant, with the number of local jobs declining by 0.2% over 2007.

The rate of job loss accelerated in the first three quarters of 2009, with employment falling on an annualized basis by 3% in the first quarter, 4.2% in the second and then by 4.5% in the third quarter of the year. Jobs will continue disappearing during the fourth quarter, but at a slower rate. In the fourth quarter 2009 employment will drop at an annualized rate of 3.7%. These four consecutive quarterly declines will match the length of the mid-1980s recession experience, but the number of jobs lost in 2009 will exceed the mid-1980s jobs loss.

On an annual basis, the number of jobs in Pierce County will decline by 3.9% in 2009, about 11,000 fewer jobs than in 2008. This will be the largest one-year drop in employment on record both in percentage and absolute amounts. Employment losses will continue into the first half of 2010. In the first quarter 2010, the annualized rate of decline will be 2.2% -- 6,000 fewer jobs than in the first quarter 2009. A more moderate decline of 0.3% (on an annualized basis) will occur in the second quarter of the year, eliminating almost 1,000 employment opportunities compared to the year-earlier level. After nearly two years of declining jobs in Pierce County, the economy will begin to generate new employment opportunities in the second half of 2010. Job growth will begin in the third quarter, with an annualized rate of increase of just about 0.5%. This growth rate will almost double to 1% in the fourth quarter 2010.

The turnaround in the second half 2010 though, will not offset the job losses in the first half. For the entire year employment will be down by 0.25% (about 650 fewer jobs). The job loss in 2010 will mark the third consecutive annual decline in Pierce County.

Labor Force

In addition to losing jobs, a larger county labor force also pushed up the unemployment rate. As forecast last year, Pierce County’s labor force continued growing at fairly substantial rates in 2007 and 2008. In part, this resulted from a normal increase in the size of the

working age population. However, two additional factors led to continued labor force growth. The national financial market collapse eroded the savings of many people. To rebuilt savings, some individuals stayed in the labor force longer and others re-entered the labor force from retirement. And, as workers lost jobs, other persons in those households entered the labor force to replace lost income.

In 2007, Pierce County’s labor force grew at the fairly steady rate of 3.45% during the year. Since the effects of the recession had not yet taken hold, enough jobs were created to keep the unemployment rate in check. The low unemployment rate and job opportunities attracted new workers here. When the Pierce County economy began weakening in 2008, the rate of in-migration slowed. As forecast last year, civilian labor force growth eased from about 3% in the first quarter to just 2% by the fourth quarter of 2008. For the year as a whole, the local labor force increase was 2.75%, adding 10,500 more job seekers in Pierce County. Even with the recession taking hold in the local economy, the rate of labor force growth did not slow in 2009. As new entrants moved into the labor force, either as migrants or replacement earners, the labor force grew by nearly 3% in the first quarter.


Labor Activity and Unemployment (Cond’t)

The rate of increase of new job seekers continued at an annualized rate of 2.6% during the second, third and fourth quarters. For 2009, 10,700 new workers, a gain of 2.7%, entered Pierce County’s labor markets looking for work.

The number of workers in local labor markets will continue increasing in 2010, but at a slower pace. Each quarter of 2010 will see about 2% more people searching for work in Pierce County.

The recession will discourage some in-migration, and the higher unemployment rate will keep some local residents out of the labor force. Younger potential workers in particular, will opt to stay in school rather than look for work. Other unemployed workers will become discouraged and withdraw from the labor force.

In 2010, the net increase in new job seekers in Pierce County will be 8,300.

One result of a recession then, is more people in labor markets and fewer jobs, increasing the unemployment rate. The combined jobs loss in Pierce County for 2009 and 2010 will be 11,500.

The number of people looking for work will increase by 19,000, some of whom will find employment outside the county.

If one-third of the new job seekers are able to find employment outside the county, that will leave about 5,000 more people unemployed by the end of 2010.

On average in 2010 there will be about 40,000 to 45,000 unemployed workers in Pierce County – almost twice as many as in 2007.

Personal Income

From 1977 through 2007 Pierce County households’ total personal income increased at an average annual rate of 8.2%. When inflationary effects are removed, the gains were 4.1% annually from 1987 to 2007 and 3.6% in the 2000 to 2007 period.

When measured on a per person basis, the personal income gains have also been solid. Per capita personal income for Pierce County residents increased at an average 6.2% rate per year between 1977 and 2007.

When the effects of inflation are stripped away, real per capita personal income gained 2% annually between 1977 and 2007.

In 2008, personal income growth also slowed to just over 4.1% from 2007. Adjusted for inflation, the growth in real total personal income was only 0.3% in 2008.

Much of the slower income growth in 2008 was due to a reduction in non-labor incomes, the effects of the financial market collapses and low interest rates.

The Pierce County recession in 2009 means fewer jobs, lower wages and reduced work-hours, pushing down total personal income. In 2009, total personal income in Pierce County will fall by 2.8% -- a loss of $800 million dollars. Most of the decline will be the result of reduced labor market earnings. Non-labor incomes will rebound somewhat due to extended unemployment benefits, improved financial conditions and improved pension pay-outs.

Labor and Personal Income


Inflationary effects will be minimal in 2009, so the drop in real total personal income will also be about 2.7%.

Population growth from more military families (with substantial non-monetary compensation) and other in-migrants in 2009 will lower Pierce County’s per capita income. The average income of a county resident will drop to $33,700 in 2009 from the 2008 level of $35,000, a decline of 3.9% for the year. When the effect of inflation is removed, the drop in 2009 real per capita income will also be 3.9%.

As the Pierce County recovery takes hold, total personal income will begin increasing in 2010. Total personal income in Pierce County will increase by 5.7% in 2010, a gain of $1.5 billion. However, much of the added purchasing power will be eroded by inflation, as real total personal income will increase by only 1.7%, about half of the county’s long-term average experience. In 2010, income growth will exceed the population increase, so per capita income will rise. The average resident’s income will move up to $34,700, a gain of 3.7% from 2009. However, inflation will wipe out the gain, as real per capita income will drop by 0.8% from 2009. The typical Pierce County resident’s purchasing power - real income, in 2010 will be back to its2005 level.


Housing and Real EstateHousing and Real EstateSingle-Family

The decline in activity in the Pierce County single-family housing market that began in late 2006 became worse in 2007 and continued in 2008. Foreclosures depressed activity and pushed prices down. The number of sellers with distressed loans further weakened market conditions. Lenders were reluctant to offer mortgages to any but the most credit-worthy borrowers. In each quarter of 2008 single-family sales activity fell below the corresponding level in 2007. Activity (as measured by the Housing Index; determined by sales activity, not value) for 2008 dropped by 18%, the most severe annual decline on record.

A slower single-family sales market continued for most of 2009, although the declines in activity moderated as the year progressed. The Housing Index for Pierce County dropped by 14% in the first quarter. It then fell by 7% in the second quarter, steeper than anticipated due to the soft local economy and continuing problems in mortgage markets.

By summer 2009, financing for home buyers was more accessible. Foreclosure rates were moderating. Some buyers were taking advantage of attractively priced units. And, some sellers were desperate to make a deal. Of course, federal programs – the takeover of Freddie Mac and Fannie Mae and the anticipated housing tax credits – provided strength. Improvement in the sense of a less steep drop in activity, continued in the third quarter as the Housing Index moved down by just 3%.

Single-family sales activity will start increasing in the fourth quarter of 2009. The Housing Index will move up by 4% over fourth quarter 2008. Improved credit conditions will bring buyers back to the market. Vacant units will be priced to attract buyers. The First Time Home Buyer tax credit will stimulate demand.

This fourth quarter turnaround however, will not be enough to offset the prior nine months of decline, and the Housing Index will be down by 5.5% for the year, but still better than 2008. The tax credit, a recovering local economy, attractive financing options and bargain priced units will continue to push up single-family housing activity in 2010. The first half of the year will be the strongest with the Housing Index advancing by 11% in the first quarter and then 13% in the second. As the tax credit disappears and with fewer bargains on the market, sales will moderate in the second half of the year. The Housing Index will increase by 10% in the third quarter and then by 6% in the fourth quarter of 2010. For the year, the Housing Index will move up by 9.8%.

Multi-Family Thanks to Tom Cain, Apartment Insights for assistance.

With troop levels increasing, the economy faltering, and the single-family housing market collapsing, the demand for apartments and multi-family housing in Pierce County remained strong through 2008. By summer, the multi-family market was in its strongest position ever. Rental income provided good returns for owners, vacancy rates were below 5% and rent concession offers were minimal.

A year later, by the summer 2009, market conditions started to deteriorate. Troop deployments meant fewer families remained in the area. Vacancy rates in markets near Pierce County’s major installations increased to the 8% range, concessions became more common and rents stopped increasing. Hardest hit were areas in Spanaway, Lakewood, University Place and South Tacoma. Pierce County’s improving job and employment outlook and the stricter requirements for financing home purchases will provide some help to the apartment market in


2010. But an improved single-family housing market, high troop deployment rates, and no projected increase in the size of the military will soften demand for multi-family units. Financing for new construction will be very difficult to put together, as lenders will remain cautious about financing new commercial real estate projects. So on the supply side, not much new product will come to the market in 2009 or 2010.

For this forecast horizon then, the multi-family housing market will remain fairly flat. Demand for units will increase modestly, perhaps enough to keep the vacancy rate below 10%. Owners will have difficulty raising rents, so investment returns will continue at current levels at best.

Commercial

The Pierce County commercial real estate market remained fairly strong through much of 2009. Vacancy rates remained basically unchanged through the third quarter of the year. From 2008 through mid-2009, counter to the regional pattern, net absorption of rentable space remained positive in Pierce County and rental rates held firm.

The economic downturn will be the major factor weakening the regional office and commercial space market. By the third quarter of 2009, the regional vacancy rate will reach 12%, with most sub-markets experiencing negative absorption rates. As 2009 closes, the biggest drag will be the significant amount of space available in Seattle and south King County. The competition to fill this space will be intense through 2010.

The commercial real estate outlook for this forecast horizon is mixed. The most significant challenge will be competition from the north. The choice of Russell Investments to move from downtown Tacoma to Seattle is just the most visible result. With Seattle vacancy rates possibly reaching 20%, landlords there will be willing to deal for tenants. Options for quality class-A space will be alluring. Some available space in Tacoma’s central business district will provide competition to King County. The space vacated by Russell Investments will be attractive, as will the new Pacific Plaza development. However, local owners will have to be willing to make concessions.

The most difficult part of the commercial market will be retail. This sector has been hard hit by the recession. With cautious lenders and weak demand, rents and vacancy will suffer throughout 2010.

Industrial

Both in absolute terms and relative to the region, the industrial real estate market in Pierce County was strong through 2009. Warehouse and distribution facilities continued to drive the market. IKEA, Whirlpool, Green Mountain Coffee and others increased demand for space. Developers responded and provided facilities quickly. However, new demand is likely to be soft at best, during this forecast horizon.

Industrial space speculative building in Pierce County came to halt in late 2009; and there are no signs that this will change during 2010. Currently there is enough vacant space to meet the needs for most medium and smaller users. In addition, significant amounts of space remain available in the Kent Valley, a close competitor for the Pierce County market. Finally, financing will be available only to developers who have strong pre-construction leases in place.

For the first time in five years, the outlook for the industrial real estate market in Pierce County is not bright. Over this forecast horizon vacancy rates will move up, rent soften and regional competition will intensify. Since much of the space in Pierce County is fairly new and flexibly designed, the county should be able to compete favorably and retain current tenants.


Thanks to Josh Adams, Business & Economic Analyst, Port of Tacoma

Shipping Industry

Much like the U.S. and global economy in general, the shipping industry also took a major hit in 2009. Over the first half of the year cargo volumes dropped off the cliff, with everyone in the supply chain feeling the pain. After reducing rates to unsustainably low levels in an effort to maintain market share and volumes, 17 of the major public shipping companies lost a combined $6 billion U.S. dollars in the first six months of 2009.

Subsequently, over the last several months carriers have begun instituting rate hikes in an effort to cover operating costs and stay afloat until the economy turns around and growth in cargo resumes.

Further complicating problems in the shipping industry is the issue of overcapacity. The excess supply of space on vessels has drastically exceeded the supply of goods to fill that space. Making this situation even worse is a glut of new ship orders placed in the bountiful years but scheduled to come online over the next several years. It is estimated that it may take up to five years for the supply and demand of vessel space to return to equilibrium.

Similar to the general economy, consumer confidence is the key to a real return to growth for the shipping industry. Until consumer confidence and personal consumption returns, the shipping industry is going to continue to experience weak volumes and growth rates. Total container import volumes from Asia to the U.S. are

projected to decline 16.4% to 12.7 million TEU’s (20-foot Equivalent Units, a standard for container size) in 2009, their lowest number in five years. 2010 and 2011 will be years of very moderate growth, ranging from 1 to 2 percent.

Cargo Activity

Over the course of 2009, the Port of Tacoma directly felt the effects of a shipping industry scrambling to cut costs and capacity by whatever means necessary.

In June, one of Tacoma’s major container lines left the Port, to be followed two months later by another major carrier cutting one of its three service strings calling in Tacoma.

The overall impact of these cuts, along with the impact of the general economic recession, will contribute to a projected decline in container volumes of 19.7% for the year.

While the Port’s domestic business, which serves the Alaska and Hawaii markets and accounts for about 30% of the Port’s total container volume, has proven more resilient than its international services, it too felt the effects of the recession in 2009. By year-end, the Port’s two premium domestic carriers will see a decline in their domestic trade volume of 9.0%, as the effects of the recession have caught up with the Port’s Alaska and Hawaii trades.

The Port’s breakbulk business was down significantly in 2009. Breakbulk, which consists of items too large or awkward for efficient shipment in containers, is composed largely by military and project cargo. The military moved less cargo than expected, and

Port of tacoma


project cargo declined as the global recession caused credit to tighten and project money to dry up. Overall, breakbulk will reach approximately 96,000 short tons, a drop of 19.2%.

Auto imports for 2009 are projected at 110,000 autos, down 31% from 2008, as weak consumer demand has stymied the movement of autos through dealerships for much of the year.

2010 will see further decline in volume for the Port’s international containers business, as the major carrier and service string adjustments made in 2009 will now be felt over an entire year. For 2010, container volume will decline an additional 15.4% from 2009 levels, due solely to international trade declines. Domestic volume will be flat. The Port’s breakbulk and auto lines of business are projected to have little or a very low 1% growth in 2010.


Data tables

Forecast

2005-2010 PCEI Summary and ForecastNote: Data used to construct the charts, graphs and tables ∙ Pierce County, Washington

Year QuarterPCEI Index

1985=100

Non-Agricultural Employment

(x1000)

Percent Unemployment

Rate

Taxable Retail Sales

(millions of $)

*Housing Activity Index

1990=100

2005200520052005

Qtr 1Qtr 2Qtr 3Qtr 4

179.135181.105182.291183.618

257.27263.47265.23269.40

6.676.035.675.13

1228.7941363.4281464.9111511.460

213.52220.88230.83237.71

2006200620062006


184.927186.851187.892188.755

266.57272.63273.77278.07

5.475.205.104.57

1332.2981481.4131544.7801596.354

236.50237.22231.89227.54

2007200720072007


190.035191.116192.269193.894

275.67281.73282.13285.50

5.034.604.674.50

1411.8821518.6711553.8931601.366

226.25220.37207.81197.51

2008200820082008


194.763195.876196.006194.881

279.33282.40281.10280.00

5.335.305.676.43

1340.9161434.0811411.2581373.646

188.29174.21170.44164.83

20092009

2009 Forecast2009 Forecast


192.680190.438187.750186.572

270.73270.47268.40269.66

9.409.839.008.94

1182.0461266.3111316.5231380.310

160.54161.55165.54171.38

2010 Forecast2010 Forecast2010 Forecast2010 Forecast


186.394188.327190.195191.413

264.84269.59269.92272.31

9.749.279.008.83

1183.5561303.3051349.7341410.032

178.37182.59181.44181.44


The Pierce County Economic Index (PCEI) is sponsored by First Citizens Bank, Puget Sound Energy, Regence BlueShield and Tacoma Public Utilities. The Tacoma-Pierce County Chamber presents the PCEI Report annually at the Horizons Economic Forecast Event. Key and Legend

Key local economic variables for Pierce County, Washington as of November, 2009.

PCEI Quarterly Data figures from First Quarter 2005 through Second Quarter 2009 are actual data. PCEI forecast of quarterly figures are from Third Quarter 2009 through Fourth Quarter 2010.

*Housing Activity Index: A volume of new or used homes for sale or sold. A value of 166.68 means the number of homes for sale or sold is 66.38% above the 1990 average of the number of homes for sale or sold.

TEU’s = Twenty-Foot Equivalent Units. This is a standard measure of containers, which come in a variety of lengths that are converted to this standard for data compatibility.

ST= The short ton is a unit of weight equal to 2,000 lb. (around 907.18474 kg).

Annual Data are actual data from 2001 to 2007 for Total Personal Income. The forecast of annual figures for Total Personal Income are from 2008 through 2010.

Annual Data are actual data from 2005 through 2008 for the Port of Tacoma Containerized Cargo. The forecast of annual figures for the Port of Tacoma Containerized Cargo is from 2009-2014.

Pierce County Annual DataTotal Personal Income

2005$ (x1000)Percent Change

Year YearPort of Tacoma Containerized

Cargo (TEU’s)Percent Change

20,277,460 4.43% 2001 2005 2,067 14.96%20,767,268 2.42% 2002 2006 2,067 0.00%21,055,729 1.39% 2003 2007 1,959 -5.22%21,612,519 2.64% 2004 2008 1,861 -5.00%22,430,317 3.78% 2005 2009 1,496 -19.61%23,675,428 5.55% 2006 2010 1,266 -15.37%24,604,952 3.93% 2007 2011 1,279 1.03%24,684,849 0.32% 2008 2012 1,304 1.95%24,018,358 -2.70% 2009 2013 1,331 2.07%24,431,474 1.72% 2010 2014 1371 3.01%

Forecast Estimate


Special thanksThe 2009 Pierce County Economic Index (PCEI) Report was presented to the community at the Horizons 2010 economic forecast event.

Complementing the conference were presentations by several individuals and a sharing of expertise and information by others.

Dr. John MitchellM & H Consultants

A special thanks to the event’s keynote speaker, Dr. John Mitchell, M & H Economic Consultants. John has been making economic presentations on the nation and the region for 40 years.

John is a member of the Western Blue Chip Forecast Panel. He received his B.A. degree from Williams College and his M.S. and Ph.D. degrees from the University of Oregon.

He is a fellow of the College of Arts and Sciences at the University of Oregon and a member of Phi Beta Kappa. He was a professor of economics at Boise State University for 13 years, before joining U.S. Bancorp in July of 1983.

He was Chief Economist of U.S. Bancorp until July of 1998 and served as Economist Western Region forUS Bank until July of 2007.

He wrote U.S. Bancorp’s regional publications including the Update, The Business Barometer, Northwest Portrait, US Territory, Oregon Tidbits and was a columnist for Oregon Business Magazine.

He currently writes Sterling Bank’s Economic Newsletter. He currently speaks to conventions and business

groups around the nation and contributes to several newsletters. He was a business analyst for KPTVin Portland.

Dr. Bruce MannDr. Douglas Goodman University of Puget Sound A very special thanks is extended to University of Puget Sound, for their active support of Dr. Bruce Mann and Dr. Douglas Goodman, authors ofthe PCEI.

The University of Puget Sound is an independent predominantly residential undergraduate liberal arts college with selected graduate programs building effectively on a liberal arts foundation. The University, as a community of learning, maintains a strong commitment to teaching excellence, scholarly engagement, and fruitful student-faculty interaction.

Jonathan HensleyRegence BlueShield

Jonathan Hensley, President, Regence BlueShield served as this year’s emcee, a rotational duty among the sponsors.

At Regence BlueShield, Jonathan is responsible for performance of increasing memberships, provider contracting, government and community relations.

Jonathan served as vice president of Regence BlueShield from 2004-2007. Prior to being named in his current position, he was CEO of UnitedHealthcare’s Pacific Region.

Special thanks


Jonathan is recognized as an established leader in the health care field, with 25 years of sales and industry leadership experience.

He holds a bachelor’s degree in political science from the University of North Carolina at Greensboro.

An active member of the community, Jonathan serves on the board of the Seattle-King County chapter of the American Red Cross. He chairs the American Red Cross’ development committee.

PCEI Sponsors


Industry PublicationsIndustry PublicationsManufacturers Directory

What’s your market? Is it Washington State? Puget Sound? Pierce County? The Chamber can provide you with a directory of manufacturers scoped to your needs.

The Chamber offers a CD that includes data in a searchable format by company, product codes and location. Information includes address, phone and fax numbers, as well as email and website if available. Plus, an online demonstration can be arranged before you purchase. You can choose to use this service for just one year for a low price, or opt for a renewable subscription.

Contact Gary Brackett, [email protected] or for a phone consultation at 253.627.2175 about a customized Manufacturers Directory for your market area.

Consumer Demographics

Did you ever wonder about the potential customers surrounding your place of business? Would the customer base in another location match your product line? Is your competitor’s geographical customer base different than yours? What are customers’ buying habits?

The Chamber can develop consumer demographic information by various radii, drive times or geographical areas, track trends and chart projections for several comparable areas. As a service to our members, the Chamber offers this information in a downloadable format in various templates. The results can be emailed to you.

Call Gary Brackett, [email protected] or for a phone consultation at 253.627.2175 about site location analysis and market research.


Save the Date

Plan to join us!Thursday, December 16, 2010

Greater Tacoma Convention & Trade Center

1 2 . 1 6 . 2 0 1 0

24 ¦ Pierce County Economic Indextacomachamber.org

950 Pacific Avenue, Suite 300 PO Box 1933 Tacoma, WA 98401

p | 253.627.2175 f | 253.597.7305

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