"Great recession" could redefine employment in the future

As jobs in certain industries continue to be cut, it's unclear which ones will return, which will not only require re-training for new occupations, but likely raise what may be a new level for an economy that's neither growing nor decreasing. That, of course, means a variety of difficult political decisions, as forcing an artificially low rate of unemployment could result in inflation, whereas doing nothing could mean lower tax revenues and continuing payments for unemployment. From a Bloomberg story (hat tip: Patrick.net):

Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”

That has implications for policy makers as well as workers. The Obama administration and the Federal Reserve are counting on the jobless rate to fall to a medium-term equilibrium of about 5 percent as the economy recovers. A natural rate significantly above that would drive up the annual budget deficit -- which will top $1 trillion for the first time this year -- by reducing tax revenue and pushing up spending on unemployment benefits.

A higher rate would also require the Fed to make a choice: Accept an economy with more Americans permanently out of work, or try to boost employment at the risk of heating up inflation...

Already, almost a quarter of the unemployed have been out of work for 27 weeks or longer, the highest proportion since 1983. Permanent layoffs -- for workers who don’t expect to ever regain the same job -- hit a record 51.5 percent in March. Mass layoffs, those that affect 50 or more people, rose to a record 2,933, comprising almost 300,000 lost positions.

“We’re shedding jobs in industries in a significant way, and we’re not going to see those same industries be the source of job creation,” Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, said in an April 21 interview. “We’re going to be living in a world in which we’re going to be feeling that the normal on the unemployment rate is above 6 percent....

“People tend to think that when you come out of a recession you get the labor market you had when you entered it,” says Lawrence Mishel, president of the Economic Policy Institute in Washington. “This time you may get something quite different.”

Unemployment spikes in California, Oregon and Nevada

Job losses continued to mount in not just California in February (to 10.5% unemployment), but also rose in Nevada and Oregon to 20-year highs. First, from a Bloomberg News story:

California’s jobless rate surged in February to the highest level since 1983 while unemployment in Oregon and Nevada climbed above 10 percent for the first time in more than two decades.

Unemployment in California rose to 10.5 percent from 10.1 percent in January, its Employment Development Department reported today in Sacramento. Neighboring Oregon’s jobless rate rose a full percentage point to 10.8 percent, and Nevada’s increased to 10.1 percent.

“The West Coast is more heavily dependent on real estate and the decline there has been more pronounced” than in the rest of the U.S., said Sung Won-Sohn, an economics professor at California State University-Channel Islands in Camarillo, California. “We are not seeing any signs of stabilization in the job market.”

Unemployment across the nation may top 9 percent by the end of the year, according to economists surveyed by Bloomberg, and it could go higher. The national jobless rate rose to 8.1 last month, the highest in more than a quarter century, and the economy has lost 4.4 million jobs since the recession began in December 2007...

Meanwhile, on Monday California legislators in the Assembly couldn't muster the votes required to approve a provision that would have extended unemployment benefits by another 20 weeks. For many people, the benefits they now receive as a result of the last federal stimulus package will expire in mid-April, but if they take federal funds this time they'd have to adjust the law so part-time and seasonal employees would also be eligible, which would drive up unemployment taxes for employers.

Instead of doing nothing, why don't they just make the change in the unemployment law temporary like other states have done? Too obvious of a solution? From the L.A. Times:

After an hours-long partisan debate, Republicans in the state Assembly on Monday defeated a bill that would have authorized spending more than $2.5 billion in federal stimulus money to provide 20 weeks of extra unemployment benefits.

The bill would have provided extended benefits this year to an estimated 260,000 jobless Californians, including 74,000 whose unemployment checks are due to run out April 12. They are now eligible for up to 59 weeks of benefits...

Many Republicans said they voted no because they wanted more time to analyze the measure to make sure that it would not cost California taxpayers any money.

Democrats countered that the proposal by Assemblyman Joe Coto (D-San Jose) had to be rushed through the Assembly and the state Senate and to Gov. Arnold Schwarzenegger in time to meet next month's deadline, when about a fourth of the state's chronically unemployed are scheduled to lose benefits...

The California Chamber of Commerce and other business organizations have questioned whether increased eligibility might raise costs for employers by eventually forcing a hike in payroll taxes.

Assembly Democrats said they would bring the unemployment bill back up for another vote soon.

Prepare for the coming battle for water

Due to its agriculture industry and far-flung suburbs, California has long been at the mercy of the water gods, and lately they've not been very friendly. With the Governor calling a water emergency, dramatically reducing output to the state's farms and with Nevada's Lake Mead at its lowest level ever, new development in outlying areas will be just as dependent on energy prices as it will be on the availability of water. Future conflicts between countries are expected to hinge on water supplies, and I expect we'll see similar ones here in the West. While we can in theory turn to converting sea water to fresh water, that will be far more expensive and drive up the cost for a natural resource most people in the U.S. have always thought of as almost free.

First, from an L.A. Times article on the Governor calling a water emergency:

Gov. Arnold Schwarzenegger today proclaimed a state of emergency because California is in the third year of a drought. His declaration sets the stage for additional steps to conserve water. Although precipitation is about 75% of normal for the year, key reservoirs, including the one in Oroville, are down to 35% of capacity.

In his proclamation, the governor uses his authority to direct all state government agencies to utilize their resources, implement a state emergency plan and provide assistance for people, communities and businesses affected by the drought...

The governor's order directs actions including:

* That all urban water users immediately increase their water conservation activities in an effort to reduce their individual water use by 20%.

* That the Department of Water Resources expedite water transfers and related efforts by water users and suppliers.

* That the department offer technical assistance to agricultural water suppliers and agricultural water users, including information on managing water supplies to minimize economic impacts and implementing efficient water management practices.

Next, from a Bloomberg News article on the serious water shortage hitting Lake Mead and what that means for those states which depend not only on its water, but the cheap electricity provided by Hoover Dam:

The crew is in a hurry. They’re battling the worst 10-year drought in recorded history along the Colorado River, which feeds the 110-mile-long reservoir. Since 1999, Lake Mead has dropped about 1 percent a year. By 2012, the lake’s surface could fall below the existing pipe that delivers 40 percent of the city’s water...

There’s no global marketplace for water. Deals for property, wells and water rights, such as the ones Mulroy must negotiate to build the pipeline, are done piecemeal. As the world grows needier, neither governments nor companies nor investors have figured out an effective and sustainable response...

Water upheavals are intensifying because the population is growing fastest in places where fresh water is either scarce or polluted. Dry areas are becoming drier and wet areas wetter as the oceans and atmosphere warm...

Yet local governments that control water face unyielding pressure from constituents to keep the price low, regardless of cost. Agricultural interests, commercial developers and the housing industry clash over dwindling supplies. Companies, burdened by slowing profits, will be forced to move from dry areas such as the American Southwest, Udall says.

“Water is going to be more important than oil in the next 20 years,” says Dipak Jain, dean of the Kellogg School of Management at Northwestern University in Evanston, Illinois, who studies why corporations locate where they do...

Over the Sierra Mountains from Las Vegas, Shasta Lake, California’s biggest reservoir, is less than a third full because melting snow that fed it for six decades is dwindling. A winter as dry as the previous two may mean rationing for 18 million people in Southern California this year, says Jeffrey Kightlinger, general manager of the Metropolitan Water District...

Robert Glennon, a University of Arizona law professor, says governments must provide enough water for human survival. Beyond that, only freely functioning markets can allot it to people who need it most, he says.

Fast-growing cities should buy from farmers who use water on marginal land, says Glennon, author of “Unquenchable” (Island Press, 2009). That would cut inefficiency caused by irrigating deserts, such as those around Las Vegas, to raise alfalfa or beef, he says.

Worldwide, about 60 percent of fresh water goes to irrigate crops through flooding, losing 70 percent of the moisture to evaporation, Lux Research says...

In 2005, after 19 years of negotiations, Los Angeles’s Metropolitan Water District signed a 35-year “dry year option” with the Palo Verde Irrigation District south of Las Vegas in California. Los Angeles pays 7,000 farmers to leave land fallow during droughts and ship their water to city residents. The city gives a one-time payment of $3,170 an acre (0.4 hectare) to farmers who sign up and then $630 per year for every acre not farmed..

Finding the water for casinos is one reason crews are working around the clock at Lake Mead.

In 2002 alone, lack of rainfall lowered the deep-blue waters by 24.6 feet, leaving white bathtub-ring-like marks on the brown cliffs and stranding docks half a mile from shore.

Today, the lake is 1,112 feet above sea level. Should it fall to 1,075 feet, the federal government would cut the water to seven states that depend on the Colorado River, according to an agreement they all signed in 2007. If that happens, the states would likely renegotiate a 1922 pact that divided up the river’s water rights in the first place, Mulroy says. Mexico’s allocation under a 1944 treaty could also change.

If the drought persists and more water is diverted from the Colorado, the lake could drop to 1,050 feet. That would prevent water from flowing into the intake pipe and cut 40 percent of Las Vegas’s supply -- the disaster Mulroy is trying to head off. Hoover Dam, completed in 1935 to regulate the river and form Lake Mead, wouldn’t be able to produce electricity for the 750,000 people it supplies in Los Angeles...

At 1,000 feet, the remaining intakes and the rest of the Lake Mead water would go. Because of climate change and population growth, chances of this are as great as 50 percent by 2026, the University of Colorado’s Udall says...

Click here for full story.

Apartment rents now falling across the U.S.

Although rents in many places of Southern California started falling at least 12 months ago, it's been more recently that the declines have shown up in multiple markets throughout the U.S. Bad news for flippers hoping to earn cash flow until the market rebounds, but generally good news for potential renters. Some advice for landlords: if you keep your rents slightly under the market and resist the urge to push them up as high as possible, you'll keep your tenants longer, which will more than even out for vacancies you'll suffer over the long run.

First, from a Bloomberg News story:

U.S. apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent, Reis Inc. said.

Job losses and lower wages are cutting into the pool of potential renters in their twenties and thirties, defying the expectation that apartments would benefit from the housing slump, the New York-based research firm said.

Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. They rose 2.4 percent from a year earlier. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter and up 2.2 percent from a year earlier...

Next, from an L.A. Times story:

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home...

Los Angeles apartment rents fell 0.7% in the fourth quarter, the first decline since 2001, although overall rents for the year were up slightly over 2007.

Property owners and real estate agents say the supply of rental units has climbed in the last year. Overbuilding during the real estate boom added vacant units to the rental pool, and some home sellers discouraged by the moribund real estate market are renting their houses or condominium units rather than trying to sell. Foreclosures add both supply and demand to the rental market, as foreclosed homes become rentals and former owners seek places to rent.

Declining incomes and rising unemployment also mean people have less to spend on rent.

Mark Verge, owner of the property listings service Westside Rentals, said he'd seen rents fall faster in the last three months than at any time since he founded the company 13 years ago.

"I used to have to beg owners to lower rents. Now they ask me, 'What do you think I should lower it to?' " Verge said.

Verge said his service had 24,000 units listed for rent -- a 33% increase from the 18,000 he had at this time last year.

Rents had been holding up in the early part of last year, Verge said, as property owners accustomed to annual rent hikes continued to ask for relatively high amounts. In recent months, however, owners have found they must lower rents or let their units lie vacant, Verge said...

Finally, from the Lansner on Real Estate blog:

It may take landlords awhile to catch on, but rising vacancies should result in lower apartment rents in 2009, a local Grubb & Ellis Co. manager says.

Grubb & Ellis, a Santa Ana-based national commercial brokerage, issued its 2009 outlook saying that Orange County is the third-best multi-family market to invest in out of 56 U.S. apartment markets.

But Kurt Strasmann, Grubb’s regional managing director in Newport Beach, said the high ranking is due more to Orange County’s “long-term fundamentals” (good job growth, diverse economy, etc.) rather than prospects for landlords in the coming year.

Rents will be affected by two contradictory trends, the Grubb outlook said:

• The pool of renters is increasing because foreclosures have forced more homeowners into apartments and because many would-be homebuyers are waiting for home prices to fall further.
• There’s also been an increase in supply as more houses and condos that don’t sell are leased out. Many new college grads unable to find work are doubling up with room-mates or moving back home, decreasing the pool.
  

Good riddance to 2008!

Was 2008 the worst year for most people under age 70? A story at Bloomberg ponders the question:

This wasn’t just a bad year for the economy. By some measures, it was the worst year any American under age 70 has ever seen.

The loss of jobs in the U.S. may be the biggest since the end of World War II. This year’s declines in stock and home prices haven’t been exceeded since the Great Depression. The slump in holiday spending may set a record; foreclosures already have. Credit markets seized, halting the longest expansion in consumer purchases.

Europe and Japan also sank as U.S. demand faltered, marking the first simultaneous recessions since the Second World War ended. High-flying emerging economies, such as China and India, weren’t immune, signaling the world economy is just as interconnected in bad times as in good...

Click here for full story.

Land developer Empire Land files BK

Empire Land, the land development firm founded by building veteran Jim Previti after selling his homebuilding company, Forecast Homes, to K. Hovnanian in 2001, has recently filed for bankruptcy to stave off its creditors. It's a tough time to be a land developer -- land is expensive to carry and can't be depreciated -- so even though Empire was one of the largest land holders in Southern California's Inland Empire, falling values have taken their toll. From an L.A. Times story:

Empire Land, an Ontario-based land development company, has filed for bankruptcy protection, joining at least a dozen home builders that sought protection from creditors in the last 10 months as home sales and prices slumped...

The closely held company listed assets and debt of $100 million to $500 million in its filing and asked for more time from the court to provide specific financial information. Developers including Tousa Inc., Levitt & Sons and Kimball Hill Inc. have sought bankruptcy protection since June, hurt by the housing crisis.

Empire Land and its affiliates build so-called master-planned communities, large-scale projects that include commercial buildings and schools, in California and Arizona. Empire Land had assets with a book value of about $106.4 million as of Jan. 31, according to the court papers.