ECONOMIC PULSE

An update on the local and national economy

Posted October 7, 2003

Slow Economy Supported by the Housing Market and Consumer Confidence

Leading economic indicators in July edged up slightly, a sign that the economy is recovering moderately as economists predicted. However, the U.S. recovery and/or any growth will be slight according to the June 2003 Economic and Revenue Forecast produced by the Washington State Forecast Council. The publication details current economic activity and an economic forecast for both the U.S. and Washington state. The forecast sights tax cuts, an energy price decline and the lower dollar as activity that will encourage growth nationally.

As before, most economists believe business investment is the key to recovery and new data is encouraging. Non-residential investment spending grew 6.9% in second quarter 2003. Included in fixed non-residential investment, equipment and software spending reversed after first quarter 2003 and continues an upward trend. Structures spending grew for the first time since third quarter 2001; the preliminary numbers for first quarter 2003 indicated growth as reported in the Summer 2003 Seattle Market Update, but were revised down in the final release after publication.

In addition, consumer confidence is up to 81.3 in August from 77.0 in July, beating economists¨ 80.0 forecast. Despite current employment challenges, consumers have a bright outlook regarding jobs in the future. Consumers have also helped keep the struggling economy afloat. In addition to the boost to consumer pocketbooks from refinancing homes due to low interest rates, an estimated $50 billion in tax cuts this year and $350 billion over 10 years will help keep the consumer willing to spend. Consumer spending in recent months has remained just sufficient enough to keep the economy moving forward.

Additional data released in July indicates that even though new-home sales fell slightly they still remain very close to the record high levels of previous months, continuing to be a bright spot in the economy. Economists anticipate a decline in the housing market as the Fed is expected to raise interest rates in December.

During second quarter 2003, Gross Domestic Product grew 2.4%, a surprise to many economists who expected a modest 1.4%. This is a good indication of an economy that could be healthier than many thought. However, the forecast mentioned earlier warns that GDP must climb over 3% in order to keep up with labor force growth. That is, the economy must create enough jobs to sustain the labor force.

Overall, as long as the housing market remains strong and consumer spending continues, the U.S. economy will continue its moderate growth. The recovery could gain speed if business investment and therefore GDP growth picks up.

Any positive growth in the national economy will be reflected in Washington state¨s economy. Currently the local housing market is providing economic strength for Washington. According to the Washington State Forecast Council, the software wage assumption forecast has increased due to an improvement in the outlook for Microsoft stock option income, assuming no major changes in Microsoft stock option activity. Software employment should rebound slightly. However, Boeing is not expected to contribute to aerospace employment until 2005.

Puget Sound Economic Trends

	MONTHLY	Jun-03	Jul-03	Jul-02
	Rates
	Inflation US %	2.1	2.1	1.4
	Unemployment %	7.3	7.2	6.9
	30-Year Mortgage	5.43	5.8	6.57
	Indexes
	Help Wanted	60.1	62.4	64.4
	Numbers
	Total Employment	1,359,000	1,352,700	1,355,400
	— Prof. & Business Services	180,700	182,000	n/a
	— Retail	144,200	144,400	234,600
	— Government	206,000	198,300	190,400
	— Aircraft and Parts	62,400	61,500	72,600
	New Car Sales	10,606	n/a	9,235
	Homes Sold	4,578	5,016	3,835
	Home Prices (Median)	$220,000	$225,000	$205,000
	Airport Passengers (SeaTac)	2,553,344	n/a	2,792,079

* NOTE: The Washington State Bureau of Labor Statistics uses NAICS as of January 2003 and therefore historical data will not be comparable in some line items.

	Quarterly	Q4-01	Q4-02	% Change
	Sales in Millions
	Total Retail Trade	5737.5	5728.9	-0.15
	— Apparel/Accessories	369.0	382.7	3.71
	— Auto Dealers (New/Used)	993.0	892.3	-10.14
	— Building Materials	322.6	384.7	19.25
	— General Merchandise	758.5	737.3	-2.79
	— Home	680.3	666.5	-2.03
	— Restaurants	738.4	781.8	5.88
	Services	1547.0	1548.8	0.12
	— Hotels	182.6	199.4	9.20
	— Personal	82.3	86.2	4.74
	— Business	601.5	575.5	-4.32

Base: Seattle-Bellevue-Everett PMSA includes King, Snohomish and Island counties.
Sources: Data compiled from various federal and state agency reports, including Washington State Employment Security Department.