Anxiety about future weighs down U.S. economy

Friday, March 27, 2009

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By Peter S. Goodman

PORTLAND, Oregon: Over the last four decades, Powell’s Books has swelled into the largest bookstore in North America — a monument to reading that occupies a full city block. But this year, growth has given way to anxiety.

Michael Powell, the store’s owner, recently scrapped plans for a $5 million expansion. An architect had already prepared the drawings. His bankers had signaled that finance was available. But the project no longer looked prudent, Mr. Powell concluded — not with sales down nearly 5 percent, retirement savings evaporating, home prices plunging and jobs disappearing.

‘‘It’s going to take a period of time to recover,’’ Mr. Powell said. ‘‘Whether it’s two years or 10 years I don’t know, but I don’t think it’s going to be quick. People are nervous.’’

Throughout the U.S. economy, retrenchment is begetting retrenchment. Grim expectations about the future are becoming self-fulfilling prophesies, as nervous companies scrap investments and households defer purchases.

This dynamic was the significant problem that policy makers failed to tame nearly 80 years ago, when a banking crisis swelled into the Great Depression. As the administration of President Barack Obama confronts what some economists describe as perhaps the worst downturn since then, the same confluence of forces appears at play.

As goods pile up unsold, demand weakens, and expectations of lean months ahead cause businesses to cut production, the downward spiral is prompting nervous comparisons with Japan’s so-called lost decade of the 1990s. Then, as now, a collapse in real estate prices left banks in tatters. Even as the Japanese central bank dropped interest rates to zero in a bid to spur growth, it had little effect because companies and households were too fearful to borrow.

The Fed’s target for interest rates is now near zero, yet even healthy American companies are hunkered down. Even wealthy households are cutting back.

The $787 billion stimulus spending bill signed by Mr. Obama last month is expected to generate fresh demand for goods and services. If the plan for the financial system is successful at removing the detritus of the real estate bust from bank balance sheets, this, too, could substantially alleviate the crisis. But the ultimate question is whether these measures can crystallize confidence in the future, so businesses and ordinary people resume transacting, generating fresh opportunities throughout the economy.

‘‘You could fix all the problems in the financial system and we’d still spiral down because of the problem of expectations,’’ said Joe Cortright, an economist at Impresa, a Portland-based consulting group.

Portland, a metropolitan area of 2.2 million people, affords an ideal window onto the spiral of fear and diminished expectations assailing the U.S. economy. The area has long attracted investment and talented minds with its curbs on urban sprawl, thriving culinary scene, and life in proximity to the Pacific coast and the snow-capped peaks of the Cascades. In good times, Portland tends to grow vigorously, elevated by companies like Intel, the computer chip maker that employs 15,000 people in the area, and Nike, the athletic clothing giant.

But in recent months, Portland has devolved into a symbol of much that is wrong. Housing prices have fallen more than 14 percent since May 2007, according to the S&P/Case-Shiller index. Foreclosures more than tripled last year, according to RealtyTrac.

The unemployment rate for the metro area surged from 4.8 percent at the end of 2007 to 9.8 percent in January 2009, according to the U.S. Labor Department.

With a major deepwater port on the Columbia River, Portland has benefited from the growth of global trade, gaining jobs for stevedores, truckers and warehouse workers. But as the global recession tightens, Portland’s docks are a snapshot of diminishing fortunes.

Volumes of so-called bulk minerals — including potash, a fertilizer brought in by rail from Canada and then shipped to China — have fallen by more than 12 percent over the past year. Docks once jammed with shipping containers showed visible gaps between the stacks, reflecting diminishing demand for Asian-made furniture and clothing.

‘‘We’re going to have to recalibrate to a new normal, and it will be lower,’’ said Sam Ruda, the port’s director of marine and industrial development.

As trade slows, so does business for Greenbrier, an Oregon-based manufacturer of rail cars. General Electric is seeking to renegotiate a huge order, an eight-year deal worth more than $1 billion.

Greenbrier relies upon a $100 million line of credit from Bank of America to buy raw materials and pay workers while it waits to collect from its customers.

But with the potential loss of business from G.E., the company worries that the bank will view its credit line as a risk and demand significantly higher interest rates.

‘‘If you had to go and renegotiate the terms of debt today, they’d rip your face off,’’ said William A. Furman, Greenbrier’s president and chief executive.

With that fear in mind, Mr. Furman has aggressively cut costs. Last month, Greenbrier laid off 150 workers at a local factory. It plans to soon lay off 150 more, spreading the wave of forced austerity.

Columbia Sportswear, a family-owned business headquartered in Portland that employs about 1,100 people in the area, seems immune to the credit crunch: It has zero long-term debt and $253 million in cash. But the company is losing sales as its customers sink into trouble. Columbia typically does not get paid for many months after it begins producing its orders, making it loath to sell to credit-risky companies.

‘‘We’ve got customers we won’t sell to because their credit is now no good,’’ said the company president and chief executive, Tim P. Boyle. ‘‘We’ve become more conservative.’’

Columbia laid off more than 50 people in the area last year, contributing to a rollback of local spending power. Daria Colner took a voluntary layoff from a high-level marketing position last May, gaining a severance package through the end of the year. She figured she would quickly find another job, but she remains without work.

Ms. Colner’s husband works at Oracle, the software giant. Together, they once enjoyed an annual household income exceeding $250,000, making it easy to pay their $3,000-a-month mortgage. They grew accustomed to vacations that brought them to New York, Alaska, Hawaii and Europe.

They plan no vacation this year.

‘‘It’s not like people have any confidence that we’re on the cusp of turning around,’’ Ms. Colner said.



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