Saturday, March 28, 2009

NYT: The Downturn Through the Eyes of Portland, Oregon

The nice thing about hopeful rally periods, and upward moving stock markets is I can post relatively sour economic pieces and not feel guilty. Three weeks ago I was reduced to posting happy videos since the mood was so dour [Mar 7: Random Interesting/Happy Videos] - ah the switch from fear to greed.

Below is an interesting piece in the New York Times regarding how the downturn is hitting Portland, Oregon. Portland is (was) a thriving city not reliant on any one industry, so unlike a Detroit, Miami, Las Vegas it's a little better barometer of the situation in the country. A lot of bright minds and interesting companies have moved to Portland so you'd expect this sort of city to lead us out - when the time comes.

I do like the term, which Paul Kedrosky has been using "The New Normal" which is cited in the piece, and part of what I see for our future as well. I've described it as a secular generational shift but "the New Normal" is more catchy, eh? After we do get through this, if we do indeed act sensibly - return to a 8%+ national savings rate [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] and resist turning back into flipping homes like NASDAQ stocks it's going to be a quite different economy. [Dec 15, 2008: The Economic "Recovery"] I'm still trying to figure out what outside of housing or government (which is just recycled tax money) is going to be creating the jobs in the "new normal" era. Remember the first part of the George W. Bush recovery in the early part of the decade was the "the jobless recovery". Not until the housing bubble was created by "easy money" (sound familiar?) did we find a way to create millions of jobs making things we don't need. Thankfully China began to really take off so our exports did as well. I'd expect job creation to again be very difficult as for all the reading I do, I cannot find a sector that will create 5+ million jobs. I think the government is just going to try to make it housing again. But either way, for the next 12-18 months it appears we'll be in a sugar high (money thrown in every direction) economy so until stimulus stops coming from every pore of government (borrow from future to create illusionary high now) we won't truly see what the "new normal" is.

Again my thesis is the "lack of credit" while true, is an overblown proportion of our problems - especially as more of the shadow banking system is taken over by the Federal Reserve. The real issue once credit markets return to "new normal" will be lack of demand by people who realize what they've done the past few decades. We have 6x more retail space per capita than any other country on the globe; we still have too many homes; we have cars sitting on ports throughout the world. Until jobs are created in large swathes, and confidence is restored... over indebted Americans (at least those of the rational sort) won't be rushing to buy, buy, buy anything that moves. Or blings. And yes, of course things cannot continue downward at the current rate because eventually people need to buy replacement product (cars, things that break down) and new families who seek shelter are formed every year. But despite all the government/Fed's intention to get you to shop til you drop with nearly free money, I think that tired game is going to be a much tougher nut this time around. Too much savings has been wiped out, and so many now see how fragile of a state their prolifigate spending has left them. [Feb 26, 2008: NYT - When Consumers Cut Back: An Object Lesson from Japan] Last, I assume (I could be wrong - maybe the bill never comes due as the Fed simply prints all our debts away) tax rates of the future will have to rise by multiple degrees to even begin to pay off this current era of "kick the can down the road" spending.
  • Over the last four decades, Powell’s Books has swelled into the largest bookstore in North America — a capacious monument to reading that occupies a full square block of this often-drizzly city. But this year, growth has given way to anxiety. Michael Powell, the store’s owner, recently dropped plans for a $5 million expansion. An architect had already prepared the drawings. His bankers had signaled that financing was available.
  • But the project no longer looked prudent, Mr. Powell concluded — not with sales down nearly 5 percent, stock markets extinguishing savings, home prices plunging and jobs disappearing. “It’s going to take a period of time to recover,” Mr. Powell said. “Whether it’s 2 years or 10 years I don’t know, but I don’t think it’s going to be quick. People are nervous.”
  • Throughout the American economy, retrenchment is begetting retrenchment. Falling home prices, weak consumer spending, diminishing investment and a fresh reappraisal of risk are combining to bring more of each. Grim expectations about the future are becoming self-fulfilling prophesies, as nervous companies cancel investments and households defer purchases. This vengeful dynamic was the main problem that policy makers failed to tame nearly 80 years ago, when a banking crisis swelled into the Great Depression.
  • Even as stock markets have rallied in recent days on hopes that the latest government plan to rescue the banks can finally restore order to the financial system, this fundamental problem continues to constrict the economy. Credit remains tight for troubled households and businesses, while even those able to borrow often demur because they are afraid to invest and spend in the face of so much uncertainty.
  • The needed ingredients to change this psychology are unclear, and history underscores the difficulties. Economists suggest the same forces now pushing the economy into a downward spiral must be reversed; housing prices must level off, stock markets stabilize and consumers — now deferring purchases of items like cars and appliances — must start to replace older models.
  • Banks now confront accusations of clinging to their money, depriving the economy of growth, while the picture, as Mr. Powell attests, is more complicated. Even banks that are eager to lend find some of their best customers reluctant to extend themselves. (very important point) “The problem is trying to get qualified people to borrow,” said Raymond P. Davis, president and chief executive of Umpqua Bank, a regional lender based in Portland.
  • As goods pile up unsold, demand weakens and expectations of lean months ahead cause businesses to cut production, the downward spiral is prompting nervous comparisons with Japan’s so-called lost decade of the 1990s. Then, as now, a collapse in real estate prices left banks in tatters. Even as Japan’s central bank dropped interest rates to zero in a bid to spur growth, it had little effect because companies and households were too fearful to borrow.
  • “You could fix all the problems in the financial system and we’d still spiral down because of the problem of expectations,” said Joe Cortright, an economist at a Portland-based consulting group, Impresa Inc.
  • Portland, a metropolitan area of 2.2 million people, affords an ideal window onto the spiral of fear and diminished expectations assailing the economy. The area has long attracted investment and talented minds with its curbs on urban sprawl, thriving culinary scene and life in proximity to the Pacific Coast and the snow-capped peaks of the Cascades. In good times, Portland tends to grow vigorously, elevated by companies like the computer chip maker Intel — which employs 15,000 people in the area — and the athletic clothing giant Nike.
  • But in recent months, Portland has devolved into a symbol of much that is wrong. Housing prices have fallen more than 14 percent since May 2007, according to the S.& P./Case-Shiller index. Foreclosures more than tripled last year, according to RealtyTrac. The unemployment rate for the metro area surged from 4.8 percent at the end of 2007 to 9.8 percent in January 2009, according to the Labor Department.
  • With a major deepwater port on the Columbia River, Portland has benefited from the growth of global trade, gaining jobs for stevedores, truckers and warehouse workers. But as the global recession tightens, Portland’s docks are a snapshot of diminishing fortunes. On a recent day, parking lots at the port were full of 30,000 automobiles that had been shipped in from Japan and South Korea, yet sat unclaimed by dealerships as sales plummeted. Volumes of so-called bulk minerals — including potash, a fertilizer that arrives by rail from Canada and is then shipped to China — have fallen off by more than 12 percent over the past year. Docks once jammed with shipping containers showed gaps between the stacks, reflecting diminishing demand for Asian-made furniture and clothing.
  • We’re going to have to recalibrate to a new normal, and it will be lower,” said Sam Ruda, the port’s director of marine and industrial development.
  • As trade slows, so does business for Greenbrier Companies, an Oregon-based manufacturer of rail cars. General Electric is seeking to renegotiate a huge order, an eight-year deal worth more than $1 billion. Columbia Sportswear, a family-run business based in Portland that employs about 1,100 local people, seems immune to the credit crisis: It has zero long-term debt and $253 million in cash. But the company is losing sales as its customers sink into trouble. “We’ve got customers we won’t sell to because their credit is now no good,” said the company’s president and chief executive, Timothy P. Boyle. “We’ve become more conservative.”
  • I’m not really spending anything because I don’t know what’s going to happen,” said Alrenzo Ferguson, who lost his job at the local Greenbrier plant last month.
  • Columbia laid off more than 50 people in the area last year, contributing to a rollback of local spending power. Daria Colner took a voluntary layoff from a high-level marketing position at Columbia last May, gaining a severance package through the end of the year. She figured she would quickly find another job, but she remains without work.
  • Ms. Colner’s husband works at Oracle, the software giant. Together, they once enjoyed an annual household income exceeding $250,000, making it easy to pay the $3,000 monthly mortgage on their Arts and Crafts house with mahogany beams and stone fireplaces. They grew accustomed to far-flung vacations — to New York, Alaska, Hawaii and Europe.
  • They plan no vacation this year. When Ms. Colner’s BMW recently came due for its 90,000-mile service check, she deferred the work. When their front awning rotted away, they decided not to replace it, merely painting over the gap. (these are all the small discretionary spending cuts that when multiplied over millions of households is why the economy, while potentially flattening - won't enjoy the V shaped bounce people are wishing for; excluding the federal government spending money it does not have like a drunk fire hose of course) “It’s not like people have any confidence that we’re on the cusp of turning around,” Ms. Colner said. (they do on Wall Street Ms. Colner - they've had that same confidence for over a year... just wait "6 months")
  • People are wondering, ‘Well, should I spend money on my house right now?’ ” said Debbie Kitchin, co-owner of InterWorks, a Portland-based general contractor. Her business has fallen by nearly half over the last year, prompting her to trim her work force to 7 from 11. She has put off the purchase of a new, $15,000 computer system.
  • With jobs, credit and confidence all tenuous, the problem is reverberating back to the initial source of trouble: real estate. Even in older, historic neighborhoods, sales are stalled. “We’re off in terms of number of sales about 40 percent,” said Shannon Spence, principal broker at Remax Equity Group in Portland. “Job fears are keeping people from buying.” (again, as I repeat almost every week - the housing bust we've enjoyed thus far has been mostly due to bad mortgages. The housing market bust from here will be based much more on the normal recessionary forces - job losses, lack of affordability, the latter of which the government is doing everything in its power to fight of course with historic low rates. The irony will be the areas that have seen the greatest degradation in price will actually stabilize, while those that have held up due to lack of egregious mortgages/housing bubble - will reverse roles in the next 6-24 months)
  • Community Financial Corporation, a Portland-area mortgage lender owned by Banner Bank of Walla Walla, Wash., recently began offering 30-year, fixed-rate mortgages for less than 4 percent on new houses for which it extended a construction loan, in a bid to overcome anxiety with easy money. (love it! sub 4%, easy money fixes gosh this is going to be fun when in 2012 we go back to 'normal rates' and people will find home prices are again elevated from 'normal' - but let's keep juggling fires with nearly free money; worked like a charm thus far. The government is now the mortgage firm that used to shill for easy low rate mortgages in those 3 AM infomercials. It's come to this... lovely)
  • The people that want the money don’t deserve it, and the people that deserve it don’t want it,” said John B. Satterberg, president of Community Financial Corporation. “Everybody’s sitting on the fence.” (great quote - but I have been told by the punditry there is no credit available to those who do deserve it and that's why we are not seeing a big rebound? hmmm.... punditry back to its old tricks I see)

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