POSTED: Thursday, Jan. 28, 2010

State economist expects bumpy ride to recovery in 2010

BELLINGHAM - The economic recovery is under way, but expect 2010 to have a few bumps along the way, according to Washington state's chief economist.

Arun Raha spoke about what's good and what's not so good about Washington's economy to more than 100 people at the monthly City Club meeting, held Wednesday, Jan. 27, at Northwood Hall. Much of the economic data Raha presented points toward continued recovery, but it could be slow, especially if real estate and regional banks continue to struggle.

"Overall I'm cautiously and guardedly optimistic," Raha said.

Raha expressed concern about a variety of issues, much of it centering on what could happen later this year if the federal government ends stimulus programs and whether businesses and consumers will make up the difference by increasing spending.

If that does happen, the economy will start gaining traction, leading to a recovery of state revenue. If it doesn't happen, it increases the risk of a double-dip recession, which Raha currently predicts as a 15 percent chance of happening.

"In the middle of the year, we will need private and business spending to pick up again," Raha said.

Washington is in a better position than many other states to recover faster because of the amount it exports, he said. Many countries had significant economic growth in the third quarter of 2009, including some in the Pacific Rim that are significant trading partners with Washington.

Even during economic recovery, employment and job growth will continue to lag. Raha expects Washington's unemployment rate to peak in March, then remain flat before starting to drop later in the year.

One of the biggest challenges when it comes to economic recovery will be the continuing struggles of many local and regional banks. Those banks are most likely to provide financing for small businesses, which create most of the new jobs. With local and regional banks struggling with non-performing loans, credit conditions remain tight, preventing businesses from getting financing for expansion and growth.

"It's not just true in Washington, but all over the country. Community banks were more exposed to commercial real estate loan problems, so as a result have had to hold on to more cash to cover those non-performing loans," Raha said.

To see if the state economy is gaining traction in the middle of the year, Raha said it will be important to look at housing, equity markets and commodities. If there is increased demand in those areas, Raha believes the recovery would be well under way.