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Pierce County Economic Index ¦

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ECONOMY

2010-2011 REPORT



2 ¦ Pierce County Economic Index

PCEI Forecasters

Bruce D. Mann, Ph.D., has been a professor of economics at the University of Puget Sound

since 1975. Dr. Mann came to the Tacoma area fromIndiana University where he received both his master’sand doctorate degrees in economics. He completedhis undergraduate work at Antioch College in YellowSprings, Ohio.

One of Dr. Mann’s particular areas of teachinginterest and research deals with the operations of localeconomies. He has published research related to theimpacts of local government subsidies to businesses,nancing for housing and rent control issues.

Dr. Mann has been active in local community affairs as a consultant for the City of Tacoma, PierceCounty government and numerous civic groups andassociations. He has been a member of the PugetSound Regional Council advisory group on long rangeforecasting and a board member of the Upper TacomaRenaissance Association.

Douglas E. Goodman, Ph.D., has been a professorof economics at the University of Puget Sound sinc

1977. He came from the University of Illinois wherhe received his master’s and doctorate degrees.

Dr. Goodman’s teaching responsibilites focus onmonetary economics and econometrics.

His research interests are in the areas of nancialmarkets and institutions, personal nance,macroeconomics and applied econometrics andforecasting. 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 NorthernCurriculum Development Grant to devise a newcourse called “Economic Data and Analysis”. Thisapplied course is designed to promote understandiof economic statistics.

Credits

Publisher: Mike HanschProject Manager/Editor: Gary BrackettGraphic Designer: Christina KitchensPhotography: Chip Van Gilder, Philip Palermo, Port of Tacoma and Chamber Staff ©2010 Tacoma-Pierce County Chamber. All rights reserved.

Douglas E. Goodman, Ph.D.

Professor of EconomicsUniversity of Puget Sound

Bruce D. Mann, Ph.D.

Professor of EconomicsUniversity of Puget Sound




Executive Summary 4-7

Pierce County Economic Index 8-19

Retail Sales Activity 10-11

Labor Activity & Unemployment 11-12Personal Income 12-13

Housing and Real Estate 14-15

Port of Tacoma 16-17

Data Tables 18-19

Special anks 20-21

Table of Contents

model is also used to forecast activity in the retail anlabor sectors of the economy, as well as local incom

This procedure has proved to be very reliableand has generated forecasts that have been statisticaaccurate. The data sets were chosen for their testedrelevance, timely availability and consistency of reporting. Authors of the PCEI, Drs. Bruce Mann a

Douglas Goodman, professors of economics at theUniversity of Puget Sound (UPS), present the forecin a general conference session.

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

Data on sales and listings are the primary data sourbut the model itself is based on the particular histor

structure of the single-family sales activity in the local a

Because of the lag in publication of resource econodata, each PCEI Report forecasts for a period coverthe last two quarters of the current year (2010) andfull calendar year ahead (2011).

Methodology The Pierce County Economic Index (PCEI) is uniqueto Pierce County and an exceptional business toolrarely duplicated in other communities. The forecastis constructed from more than 25 local, regional andnational data sets.

The model developed for the Pierce County EconomicIndex is recongured and recalibrated each year to takeadvantage of new information, data and conditions. Inaddition to the statistical method, the forecast includes judgmental factors.

These factors include extensive analysis of the year’slocal economic events, a review of the prior forecastsand consideration of national and internationalactivity. The combination of the statistical and the judgmental approaches allows each year’s forecast to

capture past performances as well as a forward-lookingmethod to present an understanding of currentconditions and likely short-term future outcomes.

The PCEI itself is used to forecast the overalleconomic condition for the county. The statistical




Unlike a typical recession when the labor forcedeclines, the civilian labor force in Pierce County increased, although at a moderate rate, throughout thisdownturn. For 2011 as a whole, the county’s civilianlabor force will be up by 3.2%, which means 12,500more Pierce County residents searching for jobs.

The expansion in the labor force will combine withweak job growth and seasonal lay-offs (following theend of the holiday season hiring) to push the county’sunemployment rate up. For the whole 2011 year, thePierce County unemployment rate will average 8.9%,a bit better than the 2010 rate.

Retail sales turned upward in the rst quarter of 2010,about six months before the end of the recession.Holiday sales in 2010 will move up by 2% over theholiday spending level of 2009. This increase in holiday

shopping will add about $30 million more dollars tolocal cash registers over last year’s holiday spending.Total retail spending in Pierce County will increase by about $80 million for the 2010 year.

Retail spending in 2011 will continue growing, but theincreases will be very modest. The holiday shoppingseason will be better in 2011 than in 2010 withspending up 1%.

In 2011 the dollar volume of retail spending in Pierce

County will move up by almost 1.1%, putting $55million more dollars in local cash registers than in2010. The increases in dollar spending in 2011 will justabout match the ination rate.

Total personal income for Pierce County residentswill increase in 2010. During the year total county household income will move up 2.25% adding back

$683 million dollars to household budgets. Totalpersonal income growth will accelerate in 2011,moving up by 4.1% during the year.

This will add almost $1.3 billion to the county’shouseholds’ accounts. Most of this increased incomwill come from labor earnings as jobs and employm

increase in the county.

The economic recovery and rising total personalincome will produce per capita income gains for PiCounty residents in 2010 and 2011.

In 2010 the per capita income will move up by 1.1%population growth will take away half of the growthtotal income.

Then, per capita income will increase by 2.5% durin

2011. However, the $415 gain in 2010 plus the $973added in 2011 will not completely offset the losssuffered during the recession. Per capita income inPierce in 2011 will be $39,507.

This modest rebound in real per capita income willbe equivalent to the purchasing power of an averagincome in 2006. When 2011 comes to a close thesingle-family Housing Index (a measure of the voluof activity, not price or value) will have fallen by 31%from its 2006 peak. The Housing Index for 2011 wi

at the same level it was in 2000.

Troop deployments from the area’s military basescontributed a signicant negative impact to theapartment market, as did the general economicslowdown. As troops returned to the county anddeployment rates leveled off, the apartment marketbegan to improve in the rst quarter of 2010.




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1602006 2007 2008 2009 2010 2011

PCEI Index

Forecast

P C E I I n d e x ( 1 9 8 5 = 1 0 0 )




The Pierce County economy is emerging from what hasbeen the longest and deepest recession on record. The localand national recessions are over. The recovery in PierceCounty will be slow and still fraught with uncertainty. But,the current Pierce County Economic Index (PCEI) forecastoutlook is for a slow and steady growth through 2011.

Pierce County’s recession, as reported last year, started in thefourth quarter of 2008 when the PCEI (a measure of overall

economic well-being in Pierce County) fell by one-third of one percent. The recession continued through 2009 and intothe summer of 2010. In 2009 the PCEI declined by 3.9%.The index will fall by another 1.35% during 2010. The localrecession lasted for seven quarters – from year-end in 2008through the summer of 2010. Over this seven quarters thePCEI dropped by 5.35%, the steepest and deepest declinein activity since the inception of the Pierce County Economic Index.

The economic recovery started in the third quarter of 2010

when the PCEI registered a small, but positive, annualizedgain of 0.3%. The economic recovery will build strengthas 2010 comes to a close. The PCEI will rise by 2.9% inthe fourth quarter of 2010. More moderate growth willcharacterize the Pierce County economy during 2011. ThePCEI will move up by 3.9% during the rst quarter of 2011.The local economy will grow at an annualized rate of 3.6%in the second quarter, and then move up by 3.1% duringthe third quarter, ending 2011 up by 2.35% in the fourthquarter. For the year, in 2011 the PCEI will increase by threeand one-quarter percent, a solid beginning to the recovery.

From its pre-recession peak in the third quarter of 2008when the PCEI reached 201.4 to the recession’s bottom inthe rst quarter of 2010 (the index dropped to 187.2), thePCEI fell by just over seven percent, a loss of just over two

years of economic activity. The slow pace of the recovery will require more than three years to return to pre-recessionlevels. At the current rate of recovery, it will take about

thirteen quarters for the PCEI to return to its pre-receslevel of economic activity. This will be the longest andslowest recovery on record. Historically, most PierceCounty downturns started from weak local and regionconditions, not from national and international eventsHowever, this recession was different. The collapsing glnancial markets, falling housing values, evaporatinghousehold wealth, and slowing world trade ows, pushthe U.S. economy into a recession in late 2007 about

six months before the Pierce County recession started.Initially, Pierce County’s strong local economy was abledelay the impacts of these national forces. Pierce Counteconomic strength came from the growing medicalservices industries, activity at Joint Base Lewis- McChoand a well-balanced business services sector. In additioncommercial real estate activity and industrial facility construction remained strong in thelocal area.

Six months after the U.S. economy turned down

the impacts were felt in the Pierce County economy.Some local nancial institutions were forced to closeor merge. The aerospace market softened and otherregional manufacturing activity declined. State andlocal governments reduced spending. Householdwealth declined, unemployment started to increase, andconsumer pessimism increased. Trade through the Portof Tacoma turned down as the economies of our tradinpartners stagnated. Even the economic uplift from troomovements through local facilities moderated.

The fuel for most of Pierce County’s economic enginesran low, and the local economy stalled and started itsdownward slide. Just as national and international forcepulled the Pierce County economy into recession, they slowly pull the local economy out of it. The U.S. economstarted its recovery during the second quarter of 2009.Moderate national growth will continue through thisforecast horizon. Continuing problems in nancial and

PIERCE COUNTY ECONOMIC INDEX




housing markets combined with reduced internationaltrade and exchange rates problems will keep the rateof national recovery in check. Stimulus from nationalscal policy will weaken due to concerns over decitsand the national debt. While monetary policy will beaccommodative, near zero interest rates will keep the Fed’soptions limited. And, economic weakness in Europe andparts of Asia will prevent trade ows through the port from

increasing at any signicant pace. Locally, the return fromdeployment of 18,000 new military personnel at Joint BaseLewis-McChord, with many family members, will providesome new stimulus.

The Pierce County economy will start to realize the benetsof the national recovery during the fourth quarter of 2010.As the year ends the PCEI will move up by 2.9% -- thestrongest annualized quarterly growth since late in 2006and a bit better than anticipated last year. This late-in-the-

year upturn will not offset the economic weakness during

the rst half of the year, when the PCEI dropped by 5.5% inthe rst quarter and then fell by 2.9% in the second quarter.For 2010 the annual PCEI will be down by 1.35% in 2010 –bettering the 3.9% decline of 2009.

A fairly strong recovery will continue into the rst half of 2011. The PCEI will move up at an annualized rate of 3.9% in the rst quarter and increase by 3.6% in the secondquarter. Much of the stimulus will come from the returnof troops and some 25% of their families. In addition,housing nance will be improving as credit conditions in

the mortgage markets improve. Consumer optimism willstrengthen as job prospects improve, incomes increase andportfolios are rebuilt resulting in some gains in retail activity.

The recovery will slow during the second half of 2011.The PCEI will move up at a 3.1% annualized rate duringthe third quarter and then by 2.35% in the fourth. SomeRussell Investments employees will relocate, the ofce realestate market will not be able to absorb the amount of vacant space quickly, and construction spending will soften.The bulk of the new military returnees will have settled in

and established households, reducing the increases in retailspending. Low interest rates and earnings will keep non-wage income growth in check. Savings rates will continuehigh as people spend less and rebuild their portfolios.Businesses will remain cautious and keep expansion planson the shelf. Government spending will not increase.Trade activity will remain depressed, curbing activity inthe warehousing and distribution industries. Finally, the

construction sector will not see much new activity as botnew housing and commercial building demand will beweak. For the year, the PCEI will move up by 3.25% in 2– a good, but not great, recovery year.

This recovery, both nationally and locally, will be slowerthan normal. Consumers will be reluctant to increasespending. People will continue to worry about employm

prospects given what will be still a high unemployment rWage and income growth will be sluggish as labor markconditions will be still soft. Until job gains and incomegrowth turn consumer sentiment positive, the consumesector and retail spending will remain sluggish. Consumwill also be rebuilding their wealth and portfolio positioFrom 2007 through 2009 real wealth (ination adjusteddeclined by 30%. Certainly much of the loss can beattributed to falling housing and real estate values. But italso due to the decline in stock and bond prices. Rebuildwealth will mean higher savings rates and this implies

consumers will spend less.

Two major concerns add more than the usual amount ouncertainty to this forecast. One concern is for the recovof the housing sector. The housing rebound could falterdue to the historically high number of households holdimortgages that are “under water.” If a signicant numberof these homeowners decide to abandon their propertiesor move into foreclosure this will depress housing markeagain. In the past this has not occurred, homeownersdid whatever they could to keep the “American Dream.”

However, this time could be different. If so, wealth lossesneighborhood decay, and urban distress could changeoptimism to pessimism. Should this happen, a nationaldouble dip recession becomes possible and with it anothlocal downturn.

The second concern is the possibility that countries willengage in competitive devaluations. One way for a countto protect its export position is to let its currency’s valuedecline in foreign exchange markets – making its exportscheaper. The fear is that if one country pursues a devalua

policy to promote its exports, others will respond in likemanner. If so, no country’s currency value really falls, butprices of internationally-traded goods decline – creating deationary effect throughout the world. This would hava depressing effect on businesses and reduce trade ows.Should this happen, the ramications for Pierce County are not good, given the importance of trade to the PierceCounty and regional economies.




Retail Sales Activit y

Even before the onset of the recession in the thirdquarter of 2008, retail activity in Pierce County wasdeclining. The drop in sales activity started in therst quarter of 2008, before the recession did, andcontinued its downward path through 2009. Retailsales turned upward in the rst quarter of 2010, aboutsix months before the end of the recession.

On a year-over-year basis dollar retail sales fell in2009 by 7.8%, about in line with last year’s forecast.The 2009 holiday shopping season was weaker thananticipated, though, with sales off by 1.1% rather thanthe small upturn that was anticipated.

The weak housing market, wealth losses, and apessimistic consumer outlook kept shoppers cautiousand frugal when it came to buying gifts and spending.For the year as a whole, retailers took in $432 millionfewer dollars in 2009 than they did in 2008 – and 2008

was already a slow year for retail sales.

The volume of merchandise (real retail sales, measuredby dollar spending adjusted for price changes) leavingPierce County stores in 2009 declined, but not asprecipitously as dollar volume did. Real sales droppedby about 2.8% in the rst half of the year, and thenby 1% during the second half. This was better thananticipated last year, primarily because prices declinedduring the year mitigating the dollar volume drop.

Spending in Pierce County retail outlets started toimprove in 2010. On an annualized basis dollar salesrose by 1.3% in the rst quarter, and then moved up by 1.8% in the second quarter. Sales growth slowed a bitin the third quarter with a gain of 1.1%. Holiday salesin 2010 will be better than they were in 2009. Fourthquarter spending in Pierce County will move up by 2%over the holiday spending level of 2009.

This increase in holiday shopping will add about $3million more dollars to local cash registers over last year’s holiday spending.

Total retail spending in Pierce County will be up in2010 compared to 2009, reversing the downwardmoves in 2008 and 2009. Sales in 2010 will increaseabout $80 million for the year, a gain of almost 1.6%over 2009. The rate of sales growth is moderate incomparison with activity in the pre-recession perioConsumers will remain cautious and careful aboutpurchases as the recovery begins. Thus, even with again in total annual retail spending, the annual levesales in 2010 will be almost $850 million below totaretail sales for 2007.

Since dollar retail spending in each of the rst threequarters of 2010 was in line with the rate of inatioreal retail activity held fairly constant. The dollar sa

increase in the fourth quarter will exceed the rate oprice increases, so real retail activity will move up ba modest three-tenths of one percent. This will be trst increase in the amount of merchandise movingout of area stores since late in 2007.

Retail spending in 2011 will continue growing, but increases will be very modest. The improving econopent-up demand by consumers, and higher incomewill help consumer spending. But weak consumeroptimism, concerns over wealth positions, and

recollections of the immediate past will keep peoplecautious and looking for bargains when they shop.

First quarter sales will barely increase over the level 2010, up just four-tenths of one percent. Sales gainswill accelerate in the second and third quarters of th year, up at an annualized rate of 1.4% in the secondquarter and then by 1.3% in the third quarter.

Retail Sales Activity




Labor Activit y and Unemp y

Employment and Jobs

Job losses are a consequence of a recession. A deep andlong recession means large job losses that last for a longperiod of time. Not surprisingly, this is what happenedduring the current downturn. While the Pierce County economy is starting to expand, it still will take some timefor employment to fully recover.

From the start of the local recession in 2008 until theupturn began in the rst quarter of 2010, employmentin Pierce County fell by 20,700, a 7.5% rate of job loss.From the peak to the trough of this recession, just over21,000 Pierce County residents lost jobs. During thesecond half of 2008, as the current recession began, about2,500 jobs were lost in Pierce County. An additional11,500 jobs disappeared during 2009, with the biggestlosses occurring during the rst half of the year. Te4.2% reduction in nonagricultural employment in PierceCounty during 2009 was the largest one year decline onrecord. Te rate at which jobs evaporated in 2009 was abit faster than the overall economic downturn (in 2009the PCEI dropped by just under 4%).

Employment levels in Pierce County continued fallingduring the rst half of 2010. Since the economicdownturn was steeper than anticipated last year, the job loss rate was also greater than expected. In the rstquarter of the year, employment fell at a 3.4% annualizedrate – one and a half percent faster than expected lastyear. Te rate of job loss slowed in the second quarter,

as employment fell at a 1.9% rate, but still 1.5% abovelast year’s forecast. Te rate continued easing in thethird quarter with employment in Pierce County downone-half of one percent. Nonetheless, this was still worsethan forecast last year when the forecast was for thebeginning of some job growth. Te depth and severity of this recession kept employers cautious and unwilling toexpand employment.

Te number of nonagricultural jobs in Pierce Countwill begin to increase during the fourth quarter of 20Employment will move up at an annualized rate of four-tenths of one percent, a slow start and below thgrowth anticipated last year. Te small positive movat year end will not oset the job losses from the rsthree quarters, so during 2010 employment will netdecline by 1.4%, the second worst annual performanon record.

As the Pierce County recovery builds momentumduring 2011 job growth will occur. But, the rate of employment increase will lag the growth of the overeconomy. Some employers will increase hours forcurrent workers before hiring new employees. Otheremployers, cautious about expanding payrolls, will use less expensive part-time and contingent workersbefore increasing the permanent workforce. Employwill wait to make sure the expansion is rm beforetaking on the cost of new workers.

In the rst quarter of 2011 employment in PierceCounty will move up at an annualized rate of 1.1%,adding about 3,000 new jobs. Te rate of job growthwill improve to 1.4% in the second quarter and movup again to 1.75% in the third. Job growth will slow bit in the fourth quarter to an annualized rate of 1.7%In 2011 employment opportunities in Pierce Countywill increase by 1.5%, adding about 4,000 jobs over t2010 level. However, employment in Pierce County be still 12,000 below the pre-recession peak in 2007.

Labor Force

Unlike a typical recession when the labor force declithe civilian labor force in Pierce County increased,although at a moderate rate, throughout this downtuNo doubt the Pacic Northwest region’s reputation fbetter than average employment prospects attracted

Labor Activity and Unemployment




new workers to the area. Extended unemploymentbenets allowed workers to remain in the labor forcesearching for jobs for a longer than normal time. Inaddition, educational programs curtailed enrollmentsdue to budget cuts and space shortages, so a larger thantypical fraction of the workforce had no viable alternativethan to continue searching for work. And, some workers“doubled-up” housing or returned home to reduce living

expenses, remain in the labor force, and search for work.

Te number of people looking for work in Pierce County increased by 2.5% in 2008. Growth continued into therst half of 2009 with the labor force increasing by 2%.Te labor force started to decline in the third quarter.It continued moving down in the fourth quarter. Forthe year the Pierce County civilian labor force in 2009increased by one-half of one percent.

Te two percent drop during the last quarter of 2009

continued into the rst quarter of 2010. Te supply of workers, though, started to increase by the spring of 2010. In the third quarter of the year Pierce County’slabor force was increasing at an annualized rate of 1.6%and then increased to 2.8% in the fourth quarter of theyear. Te labor force will grow by about one-half of onepercent during 2009. For the two year period of 2009and 2010 about 3,600 new workers entered the county’slabor force. Te local recovery, the attraction of thePacic Northwest, the expiring unemployment benets,and an increasing number of students completing

educational programs will continue to add new entrantsto the local labor force in 2011. During the rst quarterof the year the civilian labor force in Pierce County willgrow at an annualized rate of 2.4%. Te growth rate willincrease to 3.2% in the second quarter, then 3.3% in thethird quarter, and end the year rising at an annualizedrate of 3.6%. For the year as a whole the county’s civilianlabor force will be up by 3.2%, which means 12,500 morePierce County residents searching for jobs.

Unemployment

When there are fewer jobs and more people looking forwork, the unemployment rate increases. Tese forcestook hold in late 2008 as the downturn began. During2009 the Pierce County unemployment rate continuedto show the adverse eects of a recession, as the localunemployment rate increased from 6% to 9%. Tisrun-up was in line with last year’s forecast. In the

rst half of 2010 the unemployment rate continuedmoving up, although more slowly. In Pierce County the rate reached 10.8% in the rst quarter and thenmoved to 9.4% during the second. Te downwardmove continued in the third quarter as the localunemployment rate reached 9.1%. Te rate will droplittle during the fourth quarter to 8.5%. For the year,average unemployment rate for Pierce County will b

9.4%, a level not seen in the county since the mid-19

Te expansion in the labor force will combine withweak job growth and seasonal lay-os (following theend of the holiday season hiring) to push the countyunemployment rate up to 9.4% in the rst quarter of2011. Positive job creation and moderate labor forcegrowth will allow the unemployment rate to fall durthe rest of 2011. Te Pierce County unemploymentrate will drop to 8.9% in the second quarter, thendecline to 8.7% for the third quarter, and end the yea

at 8.6% in the fourth quarter. For the whole year, thePierce County unemployment rate will average 8.9%a bit better than the 2010 rate. During the recession(2009 through 2011) the Pierce County averageannual unemployment rate will be 9.2%. In the growperiod preceding this downturn (2000 to 2008) thecounty’s average annual unemployment rate was 6%Te recession, then, pushed up the area’s average rateby 3.2%. Based on the average size of the labor forcebetween 2009 and 2011, the recession created anadditional 12,800 unemployed Pierce County reside

each year.




Total Personal Income

Total personal income drops when an economy is in arecession. The rate of growth for personal income inPierce County began to slow in 2008, moving up by 4.5% -- one-half the rate of the previous two years.In 2009, the total amount of income going to county households declined by 2.9%.

This translated into a loss of $920 million during the year. This was the steepest one year decline in PierceCounty’s total personal income on record. In fact, 2009was the rst time on record that total personal incomedeclined on an annual basis.

Total personal income for Pierce County residents willincrease in 2010. During the year total county householdincome will move up by two and one-quarter percent,adding back $683 million dollars to household budgets.

Total personal income growth will accelerate in 2011,moving up by 4.1% during the year. This will add almost$1.3 billion to the county’s households’ accounts.

Most of this increased income will come from laborearnings as jobs and employment increase in the county.Low interest rates, moderate returns on investments, andrestricted payments by governments will keep non-laborincome at.

While moderate, ination does erode the purchasingpower of personal income. When adjusted for the effectof price increases, real total personal income barely increased in 2008 – up by just six-tenths of a percent.Real total personal income fell by 2.6% in 2009, withpart of the dollar income loss mitigated by a lowerprice level.

Much of the dollar gain in 2010 will be offset by ination. The increase in real personal income wibe just three-quarters of one percent.

In 2011 the larger income growth, combined withlow ination, will mean a 3.1% increase in total rpersonal income.

Per Capita Personal Income

Per capita personal income growth started to slow2008, due both to the smaller gains in total personincome and the increasing number of people in thcounty. Per capita income in Pierce County rose b2.7% in 2008 reaching a new high of $39,858.

However, this increase did not keep pace withination. Real per capita income in 2008 fell by one percent.

In 2009 Pierce County per capita income fell by $1,700 dollars, down 4.4% from the year before.This decline reected a lower amount of total dolpersonal income and an increase in population. Since ination was very low, the loss in real percapita income was about the same, down by just o4%. This will be the deepest drop in real per capitpersonal income on record.

The economic recovery and rising total personalincome will produce per capita income gains forPierce County residents in 2010 and 2011. In 2010the per capita income will move up by 1.1%, butpopulation growth will take away half of the growin total income.

Then, per capita income will increase by 2.5% du

Personal Income




Housing and Real EstateHousing and Real Estate

Single-Family

No question, no doubt, and no surprise – the residentialreal estate market has taken a beating during thisrecession. In particular the single-family, home-ownership part of the market took the most severebeating. Everything that could go wrong did: homeprices declined putting many homeowners “underwater” on their mortgages, reduced incomes andemployment cut deeply into the demand side of themarket, the construction of new homes came to a nearhalt as sellers were ooded with foreclosed propertiesand unsold inventories, credit ows for mortgagenancing came to a halt, and governmental help(principally the rst-time home-buyers assistance)had only a little benecial impact.

The single-family housing activity in Pierce County started its decline as 2006 came to end and the PCEI’sHousing Index (a measure of the volume of activity, notprice or value) fell by almost 5% in the fourth quarter.

The downturn worsened in 2007 as the Housing Indexfell by almost 9%. It got worse in 2008 with the HousingIndex off by another 18%. In at least relative terms 2009showed signs of improvement as the decline in housingactivity started to moderate.

Through the rst three quarters of the year theannualized rates of decline got smaller. In the fourth

quarter, the Housing Index actually moved up by 4% --the rst increase in almost three years. However, for the year as a whole the net Housing Index dropped by 5.5%in 2009.

As forecast last year, the rst half of 2010 showed signsof signicant improvement. In the rst quarter theHousing Index moved up by almost 12%.

A 9.4% gain was registered in the second quarter, nethe 11% upturn anticipated last year.

Mortgage nancing concerns and increased rates of foreclosures during the second half of 2010 startedto erode the upward momentum in the single-familresidential market. In the third quarter the HousingIndex was up by only 2%, not the 10% anticipatedlast year.

Buyers found it difcult to qualify for mortgagenancing even though rates were very attractive andaffordable. Many households were unable, or unwillto trade-up since they were “under water,” with thevalues of their homes less the outstanding mortgagebalances. So, two main sources of demand for singlefamily homes dried up.

Lacking qualied buyers and with the ow of mortgcredit still an issue, activity in the single-family markactivity will fall during the fourth quarter of 2010. THousing Index will decline by 4%. Nonetheless, for year as a whole the Housing Index in 2010 will moveby 4.6%, only one-half the rate expected last year.

Pessimism from the end of 2010 and continuingtroubles with lending will carry over into the single-family housing market for 2011. In the rst quarterthe Housing Index will decline by 11.3%, the largestannualized drop in two years. Although the activity will continue to be off during the rest of the year, thedeclines will be smaller.

In 2011 the Housing Index will fall at an annualizedof 9.4% in the second quarter, and then be off by 4.2in the third quarter, and fourth quarter with a declinof 1.7%. For the year, the annual Housing Index willdecline by 6.8% in 2011.




When 2011 comes to a close the Housing Index willhave fallen by 31% from its 2006 peak. The HousingIndex will be 161 (1990 = 100) for 2011, the same levelit was at in 2000.

Multi-Family

Thanks to Tom Cain, Apartment Insights

for assistance.

The multi-family (apartment) market in Pierce County remained soft as 2009 came to a close. The county-wideoverall vacancy rate was 9.2%, up from the third quarterlevel of 8.3%, and still well above the recent record lowof 4.3% reached during the third quarter of 2008.

Rents fell or remained at in most of the county sub-markets. In the county the average rent was $817 permonth (or 97 cents per square foot), down by $10

from the third quarter. Overall the average rental rateremained below the peak levels of just one year ago.

Troop deployments, primarily to Iraq and Afghanistanin 2009 from the area’s military bases contributed asignicant negative impact to the multi-family market,as did the general economic slowdown.

As some troops returned in 2010 to the county anddeployment rates leveled off, the apartment marketbegan to improve in the rst quarter. The overall

vacancy rate dropped to 8.5%, with the most signicantimprovements in the Lakewood, South Tacoma, andUniversity Place sub-markets (the areas most impactedby Joint Base Lewis-McChord). Rents remained atfrom the prior quarter, with a county-wide average of $819 (97 cents per square foot) – up by two dollars.

The multi-family market registered signicantimprovement during the second quarter of 2010. Thevacancy rate dropped to 7.1% and the average rentlevel moved up to $829. University Place and Fircrestcontinued to show lower than average vacancy rates.The sub-markets near Joint Base Lewis-McChordcontinued with above average vacancies.

During the second half of 2010 the apartment marketin Pierce County will continue to improve. The roughly 18,000 troops returning to Joint Base Lewis-McChord

will stimulate demand for housing, especially in theUniversity Place, Lakewood, and South Tacoma areasWith little new building or conversions over the pasttwo years the increased demand will mostly be met breducing vacancies. Rents will begin to increase, or atleast concessions will become less common.

The outlook for the multi-family market through

2011 will depend to a great extent on the conditionof the single-family residential market. To the extentthat foreclosures, “under water” mortgages, and credirestrictions move households out of the ownershipside of the housing market, they will have to turn to trental side.

Combined with increases in the numbers of the milit(and their families), the demand for apartments willbe strong throughout the year. New construction andconversions will increase, but will not have a signica

impact on market conditions in 2011. Thus, rentsshould be increasing and vacancy rates should be fallthroughout the year. Sub-markets near the military installations will experience the largest increases inactivity, with the DuPont and Lacey markets also seeiabove average improvement.

Commercial, Industrial and Ofce Real Esta

The bright spot for the Pierce County economy durinthis recession has been the industrial and commerciareal estate sectors. Activity in the county remainedstrong through 2008, even as other areas in the centrPuget Sound region were showing signs of weaknessSpace absorption remained positive and rents stable the local economy moved into the downturn at the eof 2008.

More uncertainty and bad news hit regional commerand industrial markets as 2009 started.

The announcement that Boeing would expand in SoCarolina rather than in Puget Sound was not good nfor an already over-built regional market. In additionBoeing planned to reduce local employment by 4,300workers in 2009 and by another 2,000 in 2010. As onthe major users of commercial and industrial space, tannouncement increased market pessimism.




Thanks to Josh Adams, Business & Economic

Analyst, Commercial Group, Port of Tacoma

Shipping Industry

After losing a combined $15 billion in 2009, the world’stop container lines have returned to protability in 2010.While last year was marked by a race to the bottom interms of dropping rates in an effort to maintain marketshare, by contrast 2010 has become a year for puttingprots ahead of market share.

As global trade has picked back up over the course this year, carriers have been able to reactivate muchof the vessel capacity that was idled last year whendemand plummeted. Moving forward, however,carriers are cautiously managing their capacity through the re-instatement of service strings andlaid-up vessels, careful price increases, and slow-steaming, a trend that began last year and hascontinued through 2010.

How well the container lines maintain their newfouprotability depends on how well they continue tomatch vessel capacity with shipper demand. Over thnear-term, the general sentiment of ocean carriers one of cautious optimism.

Cargo Activity

Throughout 2010 the Port of Tacoma’s containerbusiness continued to feel the effects of decisionsmade by ocean carriers in 2009. The loss of one mashipping line and one of the service strings of anotin mid 2009, began a year-over-year decline in cargvolume that would continue throughout muchof 2010.

In addition, a small local population base and alimited number of carriers and services have precluthe Port from participating in the double digit carggrowth that most of the rest of the U.S. West Coast

is experiencing. After dropping 17.0% in 2009,containers declined an additional 7.1% in 2010.

Throughout the recession and after, the Port of Tacoma’s domestic business has served as both a brpoint and a stabilizing factor to the Port’s overallcontainer business.

Port of Tacoma

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250

3500

2007 2013

Forecast

2009 2011

Estimate

2015 T E U s

2006 20122008 2010 2014




Serving Alaska and Hawaii, and accounting forabout 34% of total container volume in 2010, thedomestic business consists largely of staple items, or“necessities,” such as food, clothing, and materials forhome building and repairs. In addition, the Alaskaeconomy was not as hard hit by the recession as therest of the U.S. and is recovering faster. Overall, thePort’s domestic container business is up approximately 2.8% for 2010.

After a signicant drop in volume in 2009, the Port’sbreakbulk business is down again in 2010. Breakbulkconsists heavily of items too large or awkward forefcient shipment in containers, and is made up inlarge part of special project and military cargo.

One bright spot, however, is the return of the Port’slog business due to surging demand for logs in China.

ForecastEstimate

Total TEUs (000)

Breakbulk (000 ST)

Autos (000 units)

Lifts (000)

2009 2010 2011 % Change2010-2011

Domestic

International

1,546

1,076

470

284

117

93

0

1,436

952

483

344

112

86

79,797

1,499

1,007

491

397

121

87

100,800

4.40

5.80

1.70

15.50

8.10

1.00

26.3Logs (000 board ft)

While breakbulk is down 6.5% in 2010, this has beenoffset by new log business coming through the Port

Auto imports for the year are projected at 112,000units, down 4.5% from 2009, as many U.S. consumecontinue to delay major purchases amidst continuinuncertainty around the economy. Looking forward,2011 will see a return to modest growth for the PortTacoma’s container business. After three straight yea

of volume declines, container volume will increase b4.4%, driven mainly by growth in international trad

Breakbulk will remain relatively at, logs will jump dramatic 26.3% as 2011 is compared against a partia year of volume in 2010, and autos will increase 8.1%manufacturers increase their import volume througthe Port.




Data Tables

2006-2011 PCEI Summary and ForecastNote: Data used to construct the charts, graphs and tables ∙ Pierce County, Washington

Year Quarter

PCEI

Index

1985=100

Non-

Agricultural

Employment

(x1000)

Percent

Unemployment

Rate

Taxable

Retail Sales

(millions

of $)

Housing

Activity

Index

1990=1002006

2006

2006

2006

Qtr 1

Qtr 2

Qtr 3

Qtr 4

191.77

192.87

193.60

195.27

266.57

272.63

273.77

278.07

5.43

5.20

5.03

4.57

1332.298

1481.413

1544.780

1596.354

236.50

237.22

231.89

227.54

2007

2007

2007

2007

Qtr 1

Qtr 2

Qtr 3

Qtr 4

196.69

198.07

199.10

200.32

275.67

281.73

282.13

285.50

5.00

4.57

4.60

4.47

1411.882

1518.671

1553.893

1601.366

226.25

220.37

207.81

197.51

2008

2008

20082008

Qtr 1

Qtr 2

Qtr 3Qtr 4

200.28

201.12

201.40199.60

279.33

282.40

281.10280.00

5.27

5.23

5.536.13

1340.916

1434.081

1411.2581373.646

188.29

174.21

170.44164.83

2009

2009

2009

2009

Qtr 1

Qtr 2

Qtr 3

Qtr 4

198.07

194.55

190.37

187.84

270.83

271.13

266.93

267.03

8.97

9.50

9.37

9.17

1182.046

1266.311

1320.564

1358.523

160.54

161.55

165.54

171.38

2010

2010

2010 Forecast

2010 Forecast

Qtr 1

Qtr 2

Qtr 3

Qtr 4

187.21

188.93

191.03

193.23

261.67

266.03

265.43

268.11

10.83

9.37

9.07

8.45

1197.449

1289.481

1335.603

1385.610

179.66

176.73

168.55

164.54

2011 Forecast

2011 Forecast2011 Forecast

2011 Forecast

Qtr 1

Qtr 2Qtr 3

Qtr 4

194.55

195.80196.90

197.78

264.65

269.78270.08

272.74

9.39

8.938.72

8.55

1202.224

1307.7821353.222

1399.509

159.29

160.18161.56

161.77

Forecast




Key and Legend

The Tacoma-Pierce County Chamber presents thePCEI Report annually at the Horizons EconomicForecast Event.

Key local economic variables for Pierce County,Washington are as of November, 2010.

PCEI Quarterly Data gures from First Quarter 2006through Second Quarter 2010 are actual data. PCEIforecast of quarterly gures are from Third Quarter2010 through Fourth Quarter 2011.

Housing Activity Index: A volume of new or usedhomes for sale or sold. A value of 166.68 means thenumber of homes for sale or sold is 66.38% above the1990 average of the number of homes for sale or sold.This is not an index of price or value.

TEU’s = Twenty-Foot Equivalent Units. This is astandard measure of containers, which come in avariety of lengths that are converted to this standardfor data compatibility.

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

Board Feet = A measure of volume in a tree, log orboard. Based on sawn lumber dimensions, measureboard 1 foot by 1 foot by 1 inch, or some combinatithat yields 144 cubic inches. Typically referred to inunits of one thousand board feet.

Total Personal Income Annual Data are actual datafrom 2002 to 2008. The forecast of annual gures fo

Total Personal Income are for 2009 through 2011.

The Port of Tacoma Containerized Cargo Annual Dare actual data from 2006 through 2009. The forecaof annual gures for the Port of Tacoma ContaineriCargo is for 2010-2015.

The Pierce County Economic Index (PCEI)is sponsored by:

Speaker Sponsor: Port of Tacoma

Supporting Sponsor: Puget Sound Energy Contributing Sponsor: Regence BlueShieldReport Sponsor: Business Health Trust-South SounTV Sponsor: Boeing Company Sponsor: Carlile Transportation

Pierce County Annual DataTotal Personal Income

2005$ (x1000)

Percent

ChangeYear Year

Port of Tacoma Containerized

Cargo (TEU’s)

Percent

Change

23,653,095 2.04% 2002 2006 2,067 0.00%

24,085,978 1.83% 2003 2007 1,959 -5.22%

24,620,537 2.22% 2004 2008 1,861 -5.00%

25,580,131 3.90% 2005 2009 1,546 -16.93%

27,169,594 6.21% 2006 2010 1,436 -7.12%

28,289,802 4.12% 2007 2011 1,499 4.39%28,466,959 0.63% 2008 2012 1,532 2.20%

27,717,395 -2.63% 2009 2013 1,579 3.07%

27,923,845 0.74% 2010 2014 1,613 2.15%

28,784,883 3.08% 2011 2015 1,654 2.54%




Special thanks

The 2010-2011 Pierce County Economic Index (PCEI)Report was presented to the community at the Horizons2011 economic forecast event.

Complementing the conference were presentations by several noteworthy individuals.

Robert F. Baur, Ph.D. is the managing director and chief economist for Principal Global Investors. In this capacity,he establishes and directs global economic policy and strategy, oversees and conducts macroeconomic

and quantitative research, forecasts economic trendsand anticipates market movements, and advisesthe investment staff in making economically soundinvestment decisions.

He joined The Principal in 1995, and prior to assuminghis current role, he oversaw equity, xed income andcurrency trading.

Dr. Baur received a Ph.D. in economics and a bachelor’sdegree in mathematics from Iowa State University.

He also completed post-doctoral study in nance andeconomics at the University of Minnesota. He hasnumerous speaking engagements in the US and aroundthe world.

Dr. Baur is frequently quoted by the nancial newsmedia and appears regularly on CNBC andBloomberg TV.

Dr. Bruce Mann

Dr. Douglas GoodmanUniversity of Puget Sound A very special thanks is extended to University of Puget Sound, for their active support of Dr. BruceMann and Dr. Douglas Goodman, authors of the PCEI.

The University of Puget Sound is an independentpredominantly residential undergraduate liberal arcollege with selected graduate programs buildingeffectively on a liberal arts foundation.

The University, as a community of learning, mainta strong commitment to teaching excellence, scholengagement, and fruitful student-faculty interactio

Sponsor thanks

Speaker Sponsor: Port of TacomaSupporting Sponsor: Puget Sound Energy Report Sponsor: Business Health Trust-South SounTV Sponsor: The Boeing Company Contributing Sponsor: Regence BlueShieldFloral Sponsor: Carlile Transportation Systems

Special Thanks

Dr. Robert F. Baur, Ph.D.

Chief Global EconomistPrincipal Global Investors




PCEI Report Sponsor

Business Health Trust - South Sound

The Business Health Trust program providescompetitive group rates through contracts with thelargest and most respected insurance carriers in thestate of Washington.

For groups from 2 to 149 employees, this comprehensiveprogram provides ease of administration withconsolidated service for one stop billing and eligibility.

Included as well are the discounted Section 125services, COBRA administration, and electronicfulllment with plan booklets, summariesand forms.

Ask your broker for a proposal through theBusiness Health Trust today or contact by [email protected].

South Sound

Program Managment provided by:

Brown & Brown of Washington

Sponsored by:

Tacoma-Pierce County Chamber

www.businesshealthtrust.com

Beneft Program

Competitive Pricing

Comprehensive Products

Consolidated Adminstration

Worksite Wellness



950 Pacic Avenue, Suite 300Tacoma, WA 98402

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