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Updated Sunday, December 30, 2012 at 09:46 AM

New calendar, same stubborn economic quandaries

By Jon Talton
Special to The Seattle Times

At this time last year, The Atlantic issued a wild prediction that Microsoft would be the company of the year, buying Nokia to build a smartphone better than Apple’s iPhone. Such are the perils of forecasting.

My aim is more modest: to examine the economic and business trends, issues and potential turning points facing us in 2013. As has been the case since the Great Recession, these are no ordinary times. Discontinuity is our future.

Last year’s column identified risks with the eurozone, a China slowdown and Iran or North Korea doing something crazy. Some didn’t happen. None tipped the world into recession or worse. Yet they're still hanging around, like holiday visitors that won't leave.

So is climate change, happening at a faster pace than feared. So is the ongoing crisis and fragility of global finance.

Last year’s worries over slow growth and persistent unemployment remain, too. On the other hand, U.S. gross domestic product clocked a revised 3.1 percent annual increase in the third quarter. Also, the housing sector hit bottom and is modestly reviving. America is actually doing better than many nations in a troubled world economy.

It’s impossible to know what damage will be incurred by the so-called “fiscal cliff”, or as University of California, Berkeley economist Brad DeLong calls it, the austerity bomb. But make sure your seat belts are fastened and your seat backs and tray tables are in their full, upright and locked position, because it's likely to happen.

One element is the Jan. 1 expiration of the Bush tax cuts; rates will revert to those of the Clinton era. A second part is entirely contrived: Deep, automatic federal spending cuts that were intended as an incentive for Congress and the White House to reach an agreement on deficit reduction.

Congress could repeal the automatic cuts in a day if it were of a mind to do so. The House, especially, is not, despite warnings that these spending reductions could send the economy into a recession.

In reality, the damage would probably come slowly. Pressure would mount on Congress as the year goes on. If mindless austerity is avoided, the economy won't take a serious hit.

The more immediate danger is the debt ceiling, which was routinely raised by Congress until the Obama presidency. We're set to hit the statutory borrowing limit Dec. 31, and the Treasury can keep financing flowing normally for about a month. If Congress balks, as it did in 2011, expect markets to be roiled.

The danger is not that America faces a sovereign debt crisis any time soon. Indeed, the world is hungry for Treasurys and interest rates are near historic lows.

Rather, the debt-ceiling paralysis raises questions as to whether the most powerful nation in the world can still govern itself.

January in the Puget Sound region will bring new pressure on negotiators for Boeing and its engineering union, the Society of Professional Engineering Employees in Aerospace (SPEEA). A federal mediator is expected to join in. SPEEA could call a strike vote.

Life is unfair and growing more so in America. Boeing is doing quite well in an environment where corporate profits after taxes have reached record levels as a share of gross domestic product. Labor’s hand is weak. No question Boeing has presented SPEEA a disappointing offer.

But a strike would mark a dangerous pivot for the future of the Puget Sound region as a major aerospace cluster. Boeing will potentially announce new airliner projects in 2013. The company has plenty of land in nonunion South Carolina where it can expand its new North Charleston operation.

Another big question mark is Microsoft, still the backbone of the region’s software industry. Contrary to Chief Executive Steve Ballmer, 2012 was not an epic year.

If 2013 continues the disappointments against Apple and Google, one has to wonder when a Carl Icahn-like figure will appear and start a proxy fight.

Microsoft has the cash and size to fend this off, but not forever.

Real estate and construction look to be strong locally in 2013, barring a major shock. Seattle ranks well among the most appealing commercial and multifamily housing markets. Construction will also get a boost as the deep-bore tunnel moves ahead. Washington is one of 12 states where the American Road & Transportation Builders Association expects growth in contracts next year.

Seattle’s fortunes will continue to be more intertwined with those of Amazon.com. Its urban campus has transformed South Lake Union and Amazon plans headquarters towers in the Denny Triangle. This is no longer a cute online retailer but a major technology company with global reach. We can only hope Wall Street continues to believe in the Amazon mystique.

Washington agriculture will continue to be a major economic engine, especially for trade. The challenges aren’t difficult to predict: Labor scarcity, weather and a farm bill bottled up in the U.S. House. The first could be addressed by immigration reform. It might actually happen.

A new governor and Legislature will face the same old dilemma: Washingtonians want government services but don’t want to see their taxes go up. This raises many problems in making the public investments to keep the state competitive as the high-quality, relatively high-cost global player that it is.

Job No. 1 must be repairing the funding damage done to higher education, especially to the University of Washington. It is an irreplaceable asset in attracting talent and encouraging innovation.

Happy New Year.

You may reach Jon Talton at jtalton@seattletimes.com


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