With the continued strength of the dollar, high interest rates for at-risk borrowers, and generally choppy markets, Janet Yellen has signalled that the Fed is, at least temporarily backing down from further interest rate hikes. At the same time, Seattle mayor, Ed Murray, is down in Portland, discussing ways to solve the affordable housing problem in the Pacific Northwest. To be sure, these two items are addressing different timeframes — using public policy to guide the housing market is a much longer term proposition than adjusting short-term bank interest rates. Nevertheless, the two events happening in such synchronicity serve well to highlight the precarious economic state of cities like Portland, Seattle, and even San Francisco. The short-term issues that are causing the Fed to backtrack from their December position really take nothing away from the current strength of the U.S. economy; however, that national strength does not preclude a regional recession in the Pacific Northwest.
Here are some reasons why our part of the country could well go a different direction than the nation as a whole:
- China — already last year, Chinese investment is U.S. property was starting to slow. Since then, the economic outlook for China has worsened, and there are concerns about the strength of the RMB. These concerns have prompted a few months of increased outflows of cash from China, but in the long term, they bode ill for foreign investment. And foreign investment has been one of the two key drivers of property values, particularly at the high end of the market.
- Regional “old economy” challenges — Boeing has already announced production cuts; the strength of the U.S. dollar is hurting exports, which in turn is hurting the ports and shipping in Washington, Oregon, and California; while that same strength should be helping those ports with imports, the Baltic Dry Index continues to hit new lows.
- The “new economy” isn’t what it used to be — 2015 was a banner year for venture capital investments. But not for us. Investment in the Northwest was down more than 50% from Q3 to Q4 last year.
Now, I write the above not because I believe that 2016 will be a year of doom and gloom. In fact, there are many reasons to believe that this will be a great economic year for the region; and, even if it isn’t, there are reasons to believe that the region can recover quickly. However, when we start making long-term plans either in business or government, it’s wise to understand that things will not always go up.