The reports of California's death have been greatly exaggerated

Given the recent spate of articles which (again) are predicting the demise of California, Time magazine has a pretty impressive counter-attack in the Nov. 2nd issue. From the article:

Ignore the California whinery. It's still a dream state. In fact, the pioneering megastate that gave us microchips, freeways, blue jeans, tax revolts, extreme sports, energy efficiency, health clubs, Google searches, Craigslist, iPhones and the Hollywood vision of success is still the cutting edge of the American future — economically, environmentally, demographically, culturally and maybe politically.

It's the greenest and most diverse state, the most globalized in general and most Asia-oriented in particular at a time when the world is heading in all those directions. It's also an unparalleled engine of innovation, the mecca of high tech, biotech and now clean tech.

In 2008, California's wipeout economy attracted more venture capital than the rest of the nation combined. Somehow its supposedly hostile business climate has nurtured Google, Apple, Hewlett-Packard, Facebook, Twitter, Disney, Cisco, Intel, eBay, YouTube, MySpace, the Gap and countless other companies that drive the way we live...

Take that, The Guardian! Read the entire article here.

No California recovery until 2011?

In a particularly pessimistic report, the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp. tell us to not expect an economic rebound in California until 2011. Of course in the past, Kyser was often more on the optimistic side, so perhaps this shift to the dark side is an attempt to reclaim some street cred. From an L.A. Times story:

Unemployment in California and Los Angeles County will increase well into 2010, continuing to exceed the highest levels since at least the end of World War II, according to a local economist whose projections for the Southland economy are among the most negative to date.

Continued sluggishness in key industries such as construction, retail, international trade and hospitality will keep the state from a full recovery until 2011, said the report, released by the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp...

California's jobless rate, which was 11.6% in June, will average 12.6% next year, according to Kyser, who also projected that Los Angeles County's unemployment rate will be even higher, averaging 12.8% in 2010. The county's jobless rate was 11.3% last month.

Home construction will continue to fall, and the commercial real estate market will go through more distress as vacancies climb, the report predicts. As a result, it says, Los Angeles County will lose 168,000 jobs this year, led by the manufacturing sector, which is projected to shed 38,800 positions.

Some areas outside Los Angeles County are expected to fare even worse.

In San Bernardino and Riverside counties, where unemployment already tops 13%, the jobless rate will climb next year to an average of 14.7%, the forecast said...

Even quiet Ventura County is in for a rough ride, pulled down by layoffs at corporate giants Countrywide Financial and Amgen. The county will shed 5.1% of its jobs in 2009, pushing average unemployment for 2010 to 10.3%, the forecast said. Ventura posted a jobless rate of 10.2% last month, up from 5.9% in June 2008...

The Kyser Center report may be a little too glum, said Esmael Adibi, an economist at Chapman University in Orange.

"To me, it looks very pessimistic," Adibi said. Kyser predicts the state will lose 694,000 jobs this year, but Adibi's figure is 37% lower, at 437,000 jobs lost.

Monday's resolution of the state's budget crisis is more reason to be optimistic about the future, Adibi said, especially because the governor didn't raise taxes. The psychological effect of the agreement shouldn't be underestimated, he said. What's more, federal stimulus money will buffer some of the cuts in education and transportation...

Kyser did not agree that the budget fix would help matters. Losses in revenue will continue to dog municipalities throughout the state, he said, potentially even pushing some into bankruptcy. Budget cuts will make it even more difficult to create jobs...

The Kyser Center forecast also measures the health of key economic drivers in Southern California, including aerospace, trade and motion picture production.

Some of the key drivers are in danger of shrinking permanently, Kyser said. Aerospace could shrivel if the Defense Department cuts funding for Boeing's C-17 cargo aircraft program and commercial air travel continues to lag. As international trade stays slow, ports in Canada and Texas and on the East Coast will try to lure business from Los Angeles. Production in the motion picture industry is increasingly taking place out of state, and cutbacks in advertising are hurting the broadcast TV industry.

Perhaps hardest hit is apparel and textile manufacturing, once a key regional driver. In Los Angeles County the industry will shrink 14% between 2008 and 2010, shedding 13,300 jobs, the report said.

About that California economy...

Wonder just when the California economy is expected to revive itself? According to economists at Chapman University, although the recession may technically lift by the second half of the year, we won't feel better about things until 2010. First, from an L.A. Times story:

The Chapman forecasters expect nonfarm payroll employment in California to continue falling into next year before beginning to rebound in the fourth quarter of 2010. California will lose an estimated 437,000 jobs in 2009 and an additional 56,000 jobs next year, they said...

Job losses have spilled across all sectors as layoffs in the construction industry led to cutbacks at law firms, accounting firms and most other sectors, excluding health and education. Even as the economy turns around, cautious companies will probably be slow to begin hiring again, which will lead to a sluggish recovery in the state...

The Southern California median home price last month was $249,000, down 51% from May 2007, according to figures released Wednesday by MDA DataQuick of San Diego. It's the fifth straight month that median prices have hovered around $250,000, though May did show a slight increase in prices for the region.

Chapman forecasters expect home prices to strengthen in 2010 as banks become more willing to lend to prospective buyers and fewer new homes come on the market. Home prices will rise 0.8% in the state next year after falling 35% in the state in 2008, the economists say...

A few days earlier, the UCLA Anderson Forecast released its own projections on the local and regional economy, and pretty much rained all over Chapman's parade, citing increasing unemployment and an economy that won't bounce back until at least late 2011. Also from an L.A. Times story:

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state's budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today...

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California's population, sowing the seeds of another housing bubble, the report said...

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted...

So who's right and who's wrong? Well, UCLA insisted there was no recession until it was so painfully obvious they had no choice to reverse themselves (and without ever admitting any fault), and Chapman was so off on their projections for Orange County that the local BIA group decided to give another economic forecasting group a try for awhile. I guess we'll have to wait until 2011 to see!

The future of the the California economy

The 1990s recession in Southern California was bad -- so bad, in fact, that people were wondering if the state's economy would ever fully rebound. I'm now hearing those voices rise again, although this time the reasons are more numerous. From a column by Steve Perlstein at The Washington Post:

The recession hit here earlier and harder than the rest of the country -- the statewide unemployment rate topped 10 percent last month -- and chances are it will linger here longer.

The severe downturn reflects the region's central role in the Bubble Economy.

As the headquarters for Countrywide Financial, Washington Mutual, New Century Financial and IndyMac, along with several of the nation's largest home builders, Southern California is ground zero for the mortgage crisis and the residential real estate bust.

As the capital of conspicuous consumption, its heavy reliance on auto sales, fashion, electronics and entertainment is now out of sync with the country's new frugality.

And as the gateway through which a majority of the country's imports flowed from Asia to American homes and businesses, its ports, warehouses and distribution channels, which once strained to keep up with the volume, now find themselves with large amounts of unused capacity.

More significantly, the receding economic tide has revealed serious structural problems and challenges in key sectors. The music, entertainment and electronic gaming industries are being turned upside down by the Internet.

The real estate industry is bumping up against the limits of population growth and exurban sprawl. And state and local governments that have long financed themselves by pushing costs off into the future have finally met their day of reckoning...

It is hard to overstate how reliant the Southern California economy has always been on population growth to drive its economic growth -- in oversimplified terms, building houses for the next wave of home builders...

But in recent years, this perpetual growth machine has pretty much run out of steam as residents old and new confronted the realities of two-hour commutes, bad air, a shortage of water and a backlash against illegal immigration.

Moreover, without the steady growth in tax revenue that came with population growth, the Ponzi scheme that passes for public finance in California was suddenly and painfully revealed. Much of the blame lies with public employee unions and a handful of other special-interest groups that have essentially hijacked political control of state and local governments.

Now, despite decades of high taxes and rapid growth, state and local governments find that they not only don't have the revenue to provide even basic services, but are saddled with hundreds of billions of dollars in unfunded pension liabilities and infrastructure needs...

Clearly, no matter how well the economy rebounds, the future cannot be business as usual.

Click here for the entire column.

UCLA Anderson Forecast calls for dark days ahead

After completely missing the boat on the recession (and even doubling down last year on the premise that there would be no such thing), it seems that once presented with evidence to the contrary, the economists at the UCLA Anderson Forecast have climbed to the highest hills to shout "danger ahead!" So is this just PR-based histrionics to regain some credibility or do they have a point? From an L.A. Times story:

Wall Street may be seeing glimmers of a recovery, but UCLA economists are coming out with a new forecast today that offers a grim picture of the year ahead. Nationwide, the unemployment rate will worsen -- peaking late next year at 10.5%.

And in California, which has been battered by tumbling housing, retail and manufacturing sectors, the jobless rate will soar to 11.9% by mid-2010, the latest UCLA Anderson Forecast says...

In releasing their report, however, UCLA economists noted the challenge they faced in trying to forecast the future in the current volatile environment. With dramatic changes in federal policy occurring almost on a weekly basis and few historical parallels with which to compare the current recession, forecasts are being delivered in the most uncertain of times for economists...

Early last year, UCLA said the nation would suffer from tough economic conditions but would ultimately avert a recession. Leamer said that at the time, he did not believe consumer spending could tank the way it did in the latter part of 2008.

This time, the closely watched UCLA report does not hold back...

The financial crisis, they say, has swelled into such a global problem that national policy may be ineffectual. The United States needs its international trading partners to reverse their slowdowns and reignite the exchange of imports and exports.

Nationally, the UCLA forecasters say the economy will begin to grow slowly by the fourth quarter of this year. That's when residential construction should also begin to turn around, but exports will continue to slide downward until the beginning of 2010.

Consumer prices should snap out of a downward trend the second half of this year, but disposable income rates will not match the high levels of 2004 until 2011.

In California, the economy may stop shrinking by the fourth quarter, but it will remain flat and probably will not grow until the beginning of 2010. Normal growth won't return until the middle of 2010, and high unemployment will remain until 2012 or longer, the forecasters said...

Recession deepens; California unemployment rate exceeds 10%

The U.S. economy fell into a much deeper recession than forecast during the fourth quarter of 2008. Much of this pain was felt in California, with its unemployment rate jumping to 10.1%.

First, from an L.A. Times article on the national economy:

Reporting from Washington -- The depths of the recession became much clearer this morning as the government announced that the economy shrank at a dramatic pace of 6.2% in the final three months of last year, the country's worst economic performance since 1982.

The Commerce Department sharply revised its earlier estimate of a 3.8% contraction in the fourth quarter for gross domestic product, the value of all goods and services produced by the economy. That initial figure was more optimistic than the 5% to 6% drop that most economists had predicted...

The only major sector to show an increase in spending was the federal government. It's spending was up 6.7%, highlighting the key role U.S. officials are playing in trying to keep the economy afloat, Gault said.

Next, from another L.A. Times article on California unemployment levels:

Reporting from Sacramento -- More than 1 in 10 California workers were unemployed in January, the largest percentage in nearly 26 years, the state reported today.

The 10.1% jobless rate is the highest since June 1983 and not far below the 11% record set in November 1982 at the worst point of a severe recession, according to the governor's office. Job losses escalated in January, with the state's unemployment rate jumping by 1.4 percentage points from a revised 8.7% for December...

Both numbers underscore that the U.S. and California economies are locked up because of a wrenching drop in demand for goods and services from businesses and consumers alike, economists said...

The perils of only planning for best-case scenarios

According to Financial Times columnist Martin Wolf, Barack Obama may be facing serious consequences to his Presidency if his stimulus plan only plans for best-case scenarios. From the column:

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

Ouch!

Read the rest of the column here.

UCLA expects a dismal 2009

After being somewhat late in calling the current recession, the UCLA Anderson Forecast is now predicting a dismal 2009 while dissing the private Chapman University's own forecasts. From an L.A. Times story:

Two million jobs could be lost nationwide next year under the weight of a severe global recession that shows no sign of relenting soon, UCLA forecasters say...

The nation's unemployment rate will rise to 8.5% by late 2009 or early 2010, according to the forecast -- further straining a job market that matched a 34-year high last month by shedding 533,000 positions.

Undergirding the joblessness will be a continued decline in real estate values, diminishing wealth as a result of the stock market crash and weaker consumer spending.

The negative forces are predicted to help change the trend in the nation's real gross domestic product from a growth of 1.3% this year to a 1.6% contraction next year. In 2010, the authors say, there might be a turnaround...

The forecast for California also appears grim. Manufacturing jobs are expected to disappear and tourism is likely to suffer from recessions overseas, the report said.

The state's unemployment rate, which is currently at 8.2%, could rise to 8.7% and remain there until 2010...

Retail, transportation, warehouse employment and temporary jobs are expected to suffer the most, while education and healthcare could hold steady...

The UCLA forecast comes two days after a similar report was released by Chapman University in Orange. A tongue-in-cheek rivalry has formed between the two schools.

James Doti, Chapman's president, chided UCLA for failing to call a recession during its forecast in June. He also trumpeted his economists for being among the first to deem the nation's economy in recession last year.

Leamer downplayed the issue in a phone interview Wednesday. "We don't particularly notice them," he said about Chapman.

Although San Francisco California's strongest economy, home prices still falling

According to a conference on October 21st at the Hyatt Regency in San Francisco (for which MetroIntelligence authored the real estate sections), the region's economy remains the strongest in the state and is not expected to experience a repeat of the tech-related bust earlier in the decade. Although home prices in the City of San Francisco are not expected to decline as other parts of the state, the neighboring counties of San Mateo and Marin are projected to suffer some additional pain through 2009. From a story in the San Francisco Chronicle:

Home prices and taxable sales will fall in the San Francisco metropolitan area while rents rise and unemployment climbs.

But the 1.8 million residents of Marin, San Mateo and San Francisco counties still live in California's strongest economic region and should suffer less from the housing bust than the rest of California, says a forecast being issued Tuesday. "Things will be rough here, but not nearly as rough as the Inland Empire (in Southern California) or in Contra Costa County," said Chris Thornberg with Beacon Economics...

The 113-page report calls the three-county metropolitan area "the strongest economy in the state of California at the moment," but warns that it still will be hurt by the housing collapse that has crippled the global financial system and undermined the world economy.

The forecast tries to predict economic conditions in the three-county zone through the first quarter of 2010 and suggests that:

-- Home prices will fall roughly 25 percent from their peak.

-- Taxable sales will drop by 10 percent across the region.

-- Payrolls will shrink by 2.5 percent over the next two years.

-- Rental rates are likely to continue to rise, particularly in San Francisco, where 60 percent of households are renters...

Economic softness is expected to hit commercial real estate, which had begun to recover from the dot-com bust. But the forecast assumes that the region's prestige and proximity to Silicon Valley will merely slow the growth of rental rates in the metropolitan area - put at 11 percent last year - rather than lead to a collapse.

"Rent growth is expected to fall to just 1 percent over the next year, although over a five-year horizon it should average a more moderate 3.5 percent in the region," according to the forecast.

But individual renters will get no such relief as the region's relative economic strength and desirable lifestyle draws job seekers and shrinks the vacancy rate which, at about 4.3 percent, is among the lowest in the state. "Over the last two years, average asking rents have continued to rise," noted the report, which expects the landlords' market to continue for now.

Click here for full story.

If you missed the conference, you can still download the book and the presentations here:

• San Francisco Economic Forecast Book (PDF - 39M)
• Christopher Thornberg Presentation (PDF)
• Jon Haveman Presentation (PDF)
• Fred Silva Presentation (PDF)
• Event Agenda (PDF)
• Speakers' Bios (PDF)

UCLA Anderson Forecast finally sees market reality, issues gloomy forecast

The UCLA Anderson Forecast, which had previously insisted that the general economy would withstand the housing bust, has (probably since enough time has passed from the last forecast to erase people's memories) issued a much gloomier forecast for the state. From an LATimes story:

Housing prices will hit bottom some time next year, but the California economy will be in distress for months to come, according to a closely followed UCLA economic report scheduled to be released today.

In a series of dire predictions echoed by experts throughout the state, the UCLA Anderson Forecast says that unemployment will continue to increase, consumer spending will decline and tax revenues will plummet...

The proposed $700-billion federal bailout of the financial system will have little effect on these longer-term trends, several economists said.

The massive government relief plan, if implemented, will stop the downturn in housing, said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto, "but is unlikely in the short term to reverse the sharp falloff in wealth and the loss of jobs that's already occurred."

The problem is that the housing crash caused severe job losses in construction and finance, and pulled down property values and consumer spending, leading to a shortage of tax revenue for the state. So even if housing levels out, it will take months or years to repair the damage in other sectors...

State and local governments are now seeing property tax collections fall because of lower property values and foreclosures. Sales tax revenues are also slipping as strapped individuals spend less...

There could be other looming dangers in the economy, said Sung Won Sohn, an economist with the Martin V. Smith School of Business and Economics at Cal State Channel Islands. Among them are commercial building, high-tech manufacturing, logistics and warehousing.

Other economists point to travel, tourism and entertainment, all areas in which people have reduced spending following the housing crash.

The forecast also predicts that increased government intervention in the economy will spur inflation and result in higher taxes -- no matter which candidate is elected in November...

Massive defaults on home mortgages also caused banks to tighten lending, not only to individuals but to businesses as well. Businesses unable to finance new ventures have in turn laid off workers and unemployment in the state has climbed to 7.7%, with 240,000 jobs lost in the last year...

Other sectors that might have compensated for declines in government spending and construction also appear troubled, said economist Sohn. Tourism and exports, for instance, will probably be weakened as foreign consumers face their own economic challenges...

Many economists now agree with the Anderson prediction that home prices will stop falling next year.

But the economy is too weak for prices to start rising any time soon, most economists said, and prices will remain low as long as the state has a staggering inventory of unsold homes, growing unemployment and tight credit.

Quick passage of a bailout package could keep California's economy from free fall, but it's unlikely to bolster business enough to create the tens of thousands of new jobs needed to stimulate growth, several economists said.