A Downturn Wraps Portland in Hesitance
By PETER S. GOODMAN
Published: March 26, 2009
http://www.nytimes.com/2009/03/27/business/economy/27portland.html?_r=1&hpw
PORTLAND, Ore. — Over the last four decades, Powell’s Books has swelled into the largest bookstore in North America — a capacious monument to reading that occupies a full square block of this often-drizzly city. But this year, growth has given way to anxiety.
Michael Powell, the store’s owner, recently dropped plans for a $5 million expansion. An architect had already prepared the drawings. His bankers had signaled that financing was available. But the project no longer looked prudent, Mr. Powell concluded — not with sales down nearly 5 percent, stock markets extinguishing savings, home prices plunging and jobs disappearing.
“It’s going to take a period of time to recover,” Mr. Powell said. “Whether it’s 2 years or 10 years I don’t know, but I don’t think it’s going to be quick. People are nervous.”
Throughout the American economy, retrenchment is begetting retrenchment. Falling home prices, weak consumer spending, diminishing investment and a fresh reappraisal of risk are combining to bring more of each. Grim expectations about the future are becoming self-fulfilling prophesies, as nervous companies cancel investments and households defer purchases.
This vengeful dynamic was the main problem that policy makers failed to tame nearly 80 years ago, when a banking crisis swelled into the Great Depression. As the Obama administration confronts what some economists describe as perhaps the worst downturn since then, the same constellation of forces appears at play.
Even as stock markets have rallied in recent days on hopes that the latest government plan to rescue the banks can finally restore order to the financial system, this fundamental problem continues to constrict the economy. Credit remains tight for troubled households and businesses, while even those able to borrow often demur because they are afraid to invest and spend in the face of so much uncertainty.
The needed ingredients to change this psychology are unclear, and history underscores the difficulties. Economists suggest the same forces now pushing the economy into a downward spiral must be reversed; housing prices must level off, stock markets stabilize and consumers — now deferring purchases of items like cars and appliances — must start to replace older models.
Banks now confront accusations of clinging to their money, depriving the economy of growth, while the picture, as Mr. Powell attests, is more complicated. Even banks that are eager to lend find some of their best customers reluctant to extend themselves.
“The problem is trying to get qualified people to borrow,” said Raymond P. Davis, president and chief executive of Umpqua Bank, a regional lender based in Portland.
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 Japan’s 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. These days, the Fed’s target for interest rates is near zero, yet even healthy American companies are hunkered down. Even wealthy households are cutting back.
The $787 billion stimulus spending bill signed by President Obama last month is expected to generate fresh demand for goods and services. If the financial system plan 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 a Portland-based consulting group, Impresa Inc.
Portland, a metropolitan area of 2.2 million people, affords an ideal window onto the spiral of fear and diminished expectations assailing the 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 the computer chip maker Intel — which employs 15,000 people in the area — and the athletic clothing giant Nike.
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 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.
On a recent day, parking lots at the port were full of 30,000 automobiles that had been shipped in from Japan and South Korea, yet sat unclaimed by dealerships as sales plummeted. Volumes of so-called bulk minerals — including potash, a fertilizer that arrives by rail from Canada and is then shipped to China — have fallen off by more than 12 percent over the past year. Docks once jammed with shipping containers showed 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 Companies, 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 lay off 150 more soon, spreading the wave of forced austerity.
“I’m not really spending anything because I don’t know what’s going to happen,” said Alrenzo Ferguson, who lost his job at the local Greenbrier plant last month.
Columbia Sportswear, a family-run business based in Portland that employs about 1,100 local people, seems immune to the credit crisis: 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’s president and chief executive, Timothy 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 at Columbia 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 the $3,000 monthly mortgage on their Arts and Crafts house with mahogany beams and stone fireplaces. They grew accustomed to far-flung vacations — to New York, Alaska, Hawaii and Europe.
They plan no vacation this year. When Ms. Colner’s BMW recently came due for its 90,000-mile service check, she deferred the work. When their front awning rotted away, they decided not to replace it, merely painting over the gap.
“It’s not like people have any confidence that we’re on the cusp of turning around,” Ms. Colner said.
That gnawing sense of not knowing the future is increasingly coloring the present.
“People are wondering, ‘Well, should I spend money on my house right now?’ ” said Debbie Kitchin, co-owner of InterWorks, a Portland-based general contractor. Her business has fallen by nearly half over the last year, prompting her to trim her work force to 7 from 11. She has put off the purchase of a new, $15,000 computer system.
With jobs, credit and confidence all tenuous, the problem is reverberating back to the initial source of trouble: real estate. Even in older, historic neighborhoods, sales are stalled.
“We’re off in terms of number of sales about 40 percent,” said Shannon Spence, principal broker at Remax Equity Group in Portland. “Job fears are keeping people from buying.”
Community Financial Corporation, a Portland-area mortgage lender owned by Banner Bank of Walla Walla, Wash., recently began offering 30-year, fixed-rate mortgages for less than 4 percent on new houses for which it extended a construction loan, in a bid to overcome anxiety with easy money.
“The people that want the money don’t deserve it, and the people that deserve it don’t want it,” said John B. Satterberg, president of Community Financial Corporation. “Everybody’s sitting on the fence.”
The cheap loans have generated sales, he said. Yet one recent refinance application could not be closed, because the bank could not verify the value of the house: With no sales of similar properties in the area, there was nothing to compare.
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They (Powells), no doubt, probably had a lot of input so I wouldn't count on many changes to the plans.
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