With momentum in the nation’s financial, housing and labor markets waning in recent weeks, many economists have been racing to downgrade their forecasts for 2011. For many months, good economic forecasters have understood that the key to 2010 was the production of sufficient momentum to offset a sea of headwinds that we know will become more impactful next year.
For its part, Sage has generally been pessimistic about economic prospects and has built in a high probability of a double dip recession since late-2009. There are a number of things that could happen that would upend the ongoing economic recovery next year. Here are some highlights:
• The ’01 and ’03 Bush tax cuts lapse – as a result, the estate tax becomes draconian and many investors harvest capital gains toward the end of 2010, causing the market to swoon;
• short- and long-term interest rates begin to rise;
• State and local governments begin to slash spending in a non-election year, including in the area of preK-12 education;
• European markets become unsettled fearing that the roughly $1 trillion package to stem the risk of sovereign default has only served to postpone the inevitable;
• The dollar’s value rises along with gold and certain other commodity prices, making production more expensive and limiting U.S. export growth;
• Corporate profits fall short of expectations, causing the U.S. markets to become even more volatile;
• Investors get nervous and consumers become psychologically shaky causing the savings rate to rise again;
• Correspondingly, retail sales begin to slump, inventory investment declines and the emerging momentum in industrial production and durable goods orders is thrown into reverse;
• The federal government looks on helplessly as the 2009 stimulus package monies are steadily spent down and the budget deficit remains stubbornly high as federal revenues fail to rebound;
• Commercial real estate begins to pummel bank balance sheets, leading to further tightening of credit; and
• small business hiring remains frustratingly slow due to an ongoing lack of confidence among owners.
It should be noted that only a handful of these items would need to transpire to send the economy into reverse. There is evidence to suggest that some of these forces are already conspiring to slow economic weakness. As of this writing, the latest Economic Cycle Research Institute Weekly Leading Index indicates that the recovery lost momentum as early as late-April. The Conference Board’s index of leading indicators began to show signs of emerging weakness in June by posting its largest decline since March 2009. Both indicators suggest that the U.S. economy was beginning to limp as the third quarter began.
Economic Dynamics in the Corridor are Simply Different
Though the Baltimore-Washington Corridor has more than a few issues, the region now appears to be in the midst of a self-sustaining economic recovery. The difference between the U.S. economy and the Corridor’s economy is one part economic and one part psychological. Unlike much of the U.S., the Corridor’s economy possesses a key economic driver that is presently expanding briskly; namely defense and related activities.
The presence of this source of employment growth and investment has led many economic actors in the region to conclude that the Corridor’s future is bright, risks are relatively low and that the time to invest is now. In much of the nation, there is no analogous reason for economic decision makers to be similarly confident. Therefore, hiring and investment remain more subdued. Exceptions include Silicon Valley, parts of Texas, Northern Virginia and a host of natural resource rich communities in America’s heartland.
Data characterizing regional activity reflect ongoing momentum. For instance, during the second quarter of 2010, the direct vacancy rate in Annapolis was 12.2 percent, down from a year ago. At 12.9 percent, Columbia’s direct vacancy rate was also down from a year prior. Though vacancy around BWI remains elevated, it has fallen over the past six months. Notable recent office transactions include Computer Sciences Corporation leasing 42,681 square feet, Northrop Grumman leasing 26,149 square feet and ITT leasing 22,575 square feet, all in the BWI submarket.
Housing statistics also paint a picture of steady healing. The active inventory of unsold homes in Howard County is now below 6 months and is below 5 months in Montgomery County. These are indications of housing markets in equilibrium. The attainment of equilibrium, in turn, is associated with rising home values and construction levels.
In Prince George’s County, the active inventory of unsold homes is higher in terms of months of supply. However, the county has made enormous strides toward equilibrium over the past year and was arguably the leading beneficiary of first-time homebuyer tax credits while they were available.
This is not to suggest that the Corridor will experience the pace of growth that characterized the middle part of the prior decade. Challenges remain, including elevated commercial vacancy, tight credit, higher than usual unemployment, consumer shakiness, volatile financial markets, and a potentially slowing national economy. That said, few region economies are positioned to outperform the Corridor next year.
