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Oregon economic forecast: Bad news for small business, real estate

July 28, 2011

Dan Hamilton,
CLU Center for Economic Research & Forecasting
Oregon Economic Forecast Highlights, July 2011

We expect Oregon’s economy to grow only very slowly throughout the remainder of 2011, only achieving solid 3 percent growth in 2012. Job growth will likely be even more anemic, implying that the economic growth we expect to see will be driven mostly by continued productivity growth.

The modest forecast reflects continued weakness among small business and in the Real Estate sector.

As discussed in the Real Estate Essay, virtually all of Real Estate’s subsectors are likely to be extremely weak throughout the forecast horizon. This is a problem because real estate transactions drive a large amount of economic activity. Every transaction required the services of several professionals. These include appraisers, lenders, real estate brokers, title people, and with commercial transactions especially, attorneys.

Real estate transactions also often generate activity in many other sectors. People and businesses spend significant amounts of money sprucing up a project prior to sale. Buyers often invest much more after the purchase. This spending can have economy-wide impacts.

Real Estate’s collapse has also diminished small business’s prospects. Small business owners tend to own much more real estate than average Americans. Consequently, this has decimated their balance sheets, making it much more difficult to finance the sort of strong and sustained growth that would drive vigorous job gains.

Small business owners’ financing challenges are exacerbated by continued weakness in the Financial sector and by changes over the past couple of decades in the way banks lend to small business.

In the past, bank lending to small business was what is called Asset- Based Lending. Business financed growth by pledging business assets, such as inventory and receivables. Over time though, attitudes about pledging homes to support business borrowing changed. It lost its social stigma. Both banks and borrowers embraced real estate secured loans as cheaper and safe, as everyone knew that “real estate prices always go up.”

Eventually the situation reversed itself. Pledging real estate to support the loan became the norm and asset-based borrowing came to be seen as a weakness. This makes it more difficult to finance job-creating business growth.

The prospects for economic and job growth would be significantly improved if lenders and borrowers were to embrace asset based borrowing.

Even our forecast for modest economic and job growth could turn out to be optimistic. Forecasters are increasingly discussing the prospect of a double dip, a slip into a new recession. We don’t believe that a double dip is the most likely outcome, but the prospects of one are increasing and risks are serious.
The continuing disturbances in the Middle East are something we are watching closely. Our economy is extremely susceptible to interruptions in our oil supply. Certainly, the Middle East’s uncertainty could lead to supply interruptions, with potentially devastating economic impact.

Financial turmoil in the Euro zone is another source of uncertainty. It is our opinion that the Euro zone is too large. Several countries must leave it and implement their own currencies. How that happens is unknown. It could very well involve social unrest, default, and another financial crisis. If so, the United States economy would not be spared. Interconnected financial networks are international, and our institutions, still not fully recovered from our own crisis, are ill-equipped to cope with sudden new stress.

We also have plenty of domestic financial issues. These involve the potential impacts of a failure to increase the debt ceiling and the separated but equally dangerous possibility of government defaults at the state and local level.

Professionally, we attempt to be as accurate as possible, but we’re people too. We’ve become very tired of presenting forecasts that disappoint. We hope as much as anyone that outcomes exceed our forecasts.

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The Small Bank Problem: Why We Are 40000 Properties Away From Recovery – Seeking Alpha | Financial News One July 28, 2011

[…] GroupReProp Financial Offers New Loan Program for Small BusinessesPR Web (press release)Oregon economic forecast: Bad news for small business, real estateOregon Business News (press release)all 4 news […]

Bad Boy Brown July 28, 2011

Face it folks – the Oregon economy is in the toilet and no matter what the pathetic retread in Salem says – it will stay that way for years to come.
It will be really funny in about another 18-20 months when it becomes obvious to everyone except government employees, that the state can’t afford these folks anymore and mass layoffs finally happen.
The wailing from the public piggie unions will be music to many taxpayers ears…
OH – and since the Federal government is also essentially broke, don’t expect much in the way of funding for BOONDOGLE projects like trollies and light rail. Got that SCAM ADAMS and you morons at METRO?

Rep Thatcher August 2011 Newsletter « August 5, 2011

[…] economic situation and they did not paint a rosy picture. In the Oregon Business Report […state]there was an article on the bad news for small businesses and real estate. It showed Oregon’s […]

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