The California Chamber of
Commerce Economic Advisory Council concluded that the U.S. economy
will be in the 2 percent-plus growth mode for a while, which
represents a slowdown from the approximately 3 percent-plus
long-term growth rate that the United States has experienced since
World War II. Moving forward, real world gross domestic product
(GDP) is likely to grow at around 2.5% for several years, which is
down from its long-term growth rate as well.
World growth has been decelerating in 2012 because of the euro
crisis and the significant reduction in the speed of economic growth
of formerly fast-growing Asian and Latin American economies. The
economic weakness worldwide triggered export declines from
California to Europe and China during the first half of this year.
However, California exports were still positive in the first half
because of relative export strength to Mexico, Canada, Japan and
The main notions about the current situation coming out of the
discussions of the council’s distinguished economists are the
The U.S. economy disappointed again in the third quarter of 2012,
but it did not slip back into another recession. Real consumer
spending increased 2 percent in the third quarter and was up from
1.5 percent the quarter before. Meanwhile, nonresidential fixed
investment decreased 1.3 percent, while equipment and software was
virtually flat. Exports declined by 1.6 percent in the third
quarter. Residential fixed investment, however, increased 14.4
percent and government spending rose .71 percent, which was driven
by sharp increases in defense spending.
Recent trends in U.S. job data exhibited job growth, but it was not
strong. Just 171,000 payrolls were added in October this year, and
the unemployment rate stayed at 7.9 percent, unchanged from
Since the beginning of this year, employment growth has averaged
157,000 jobs per month, a little more than the average monthly gain
of 153,000 in 2011. In October, employment rose in professional and
business services (+51,000), health care (+31,000), retail trade
(+36,000), leisure and hospitality (+28,000) and construction
(+17,000). Manufacturing showed little change and mining lost 9,000
jobs. Private sector employment growth, which excludes government,
was 184,000 jobs for the month.
With respect to monetary policy, the Fed announced on September 13
that it would rev up the economy with its controversial QE3
(quantitative easing) program. The program will entail buying $40
billion in mortgage-backed securities each month for an unspecified
duration. In tandem with its Operation Twist, the Fed will add $85
billion each month in long-term bonds to its balance sheet, which
could reach $4 trillion by the end of this year, according to some
By keeping rates low and increasing the money supply, the Fed hopes
to boost the stock market and fuel more spending and more hiring.
Meanwhile, bans are sitting on $1.6 trillion in reserves, while
credit standards remain tight. While the ultimate impact may not be
great, the Fed’s policy of two previous rounds of quantitative
easing may already have propelled increases in construction and home
prices. The council worries that the expansion in the money supply
could set up the U.S. economy for inflation in the future if the
economy starts to grow faster.
In light of the signs of continued sustainable but subpar growth in
the private sector and some anecdotal evidence of postponed hiring
and investment plans due to the fiscal cliff danger, the economic
advisers predict that GDP growth will be around 2 percent-plus this
year, while the nation’s unemployment rate could drop just below 8
percent by the presidential elections this November. Looking
forward, economic growth and job gains are likely to continue to be
slow in 2013.
California Economy Subpar But Better
On the surface, it looks like California is maintaining a moderate
momentum. In September, the state added 262,000 jobs on a
year-over-year basis. This was the second-fastest year-over-year
absolute nonfarm job growth in the nation behind Texas. On a
seasonally adjusted basis, California added 8,500 jobs for a total
gain of 508,600 jobs since the recovery began in February 2010. The
California unemployment rate was still a high 9.7 percent, however,
down from 10.4 percent in August this year and down from 11.5
percent a year ago.
The improved job picture was broad-based in terms of industries and
regions. Ten major industry sectors added jobs on a year-over-year
basis in September. Six categories (trade, transportation and
utilities; information; financial activities; professional and
business services; educational and health services; and leisure and
hospitality) added jobs over the course of the month, gaining 28,300
jobs. Leisure and hospitality posted the largest increase over the
course of the month, adding 10,700 jobs. Five categories (mining and
logging; construction; manufacturing; other services; and
government) reported job declines over the month. Government posted
the largest monthly decrease in September, down 6,400 jobs.
The California economic recovery continued to broaden also on a
Looking forward, the CalChamber’s economic advisers continue to be
concerned about California’s high unemployment rate. If there is no
fiscal cliff accident, the state’s overall job growth will continue
to plug along aided by relatively good income and taxable sales
growth. Also, new home construction will turn the corner and will
contribute to the state’s economic activity in 2013, albeit not with
the same vigor as in previous economic recoveries.
A California-specific risk is represented by the passing of
Proposition 30, which will result in the highest top marginal income
tax rate on record in California. The small sales tax increase poses
another risk. The top tax rates could curb so-called angel investor
Business angels or informal investors are affluent individuals who
provide capital for business start-ups, usually in exchange for
convertible debt or ownership equity. A small but increasing number
of angel investors organize themselves into angel groups or angel
networks to share research and pool their investment capital.
The increase in the top bracket income tax rate could reduce
financial support of new enterprises by California’s affluent, who
are one of the most entrepreneurial groups in the nation. Also, the
sales tax increase is regressive and will hurt the less affluent.
Housing Recovery Signs
The California housing recovery began this spring. New housing
production was up on an annual running basis (adding up the last 12
months) by 25.3 percent in September from the year before. This was
driven by a sharp rise in multi-family construction, which grew 38.2
percent during the same time period.
Multi-family construction growth will continue to lead the state’s
housing market next year as more and more public builders rediscover
the urban infill market. However, new housing development action
will also result in more ownership housing construction next year as
the housing market recovers. Many builders have underestimated the
strength of demand for their product this spring and are running out
of finished lots.
The state’s home resale market is growing again with heightened
activity in the Bay Area. The new trend is that with economic
growth, higher resale activity is spreading to all corners of the
state. Major positives are historically high housing affordability
and surprisingly low inventory-to-sales ratios in the state’s
multiple listings systems. Both suggest that the worst of the
California housing crisis is over. In some urban areas, we already
see good home price appreciation and the emergence of a housing
shortage, particularly in rental markets.
Looking forward, the good trajectory in economic fundamentals plus
the higher quality of jobs in coastal areas should continue to
support solid home price appreciation in the urban areas of Southern
California and the San Francisco Bay Area this year and in 2013.
Home price growth in the interior housing markets of California will
resume also. This will be supported by the fact that even in the
California interior markets, unsold inventory is quite low.
Southern California Economy
The counties in the five-county Los Angeles metro area have seen
growth so far this year, but the pattern of growth has varied, with
Orange County leading the way. Unemployment rates have leveled out
in recent months after showing some improvement in the last half of
2012. Job gains have been as good as or better than for the nation
as a whole so far this year. The housing market is showing renewed
life with good sales numbers and an increase in home prices, as more
higher-priced homes are being bought, fewer distressed properties
figure into the mix and high foreclosure discounts become history.
Los Angeles County lagged behind neighboring counties in recovery
from the Great Recession over the last two years, but it has finally
gathered momentum in 2012. The monthly seasonally adjusted
unemployment rate fell by 2.3 percentage points to 10.2 percent in
September 2012 from the year before. The overall rate of nonfarm job
growth also picked up on a year-over-year basis in September this
year, while a number of industries experienced an increase in
activity and more robust job growth.
Orange County has led the region in the economic recovery from the
Great Recession over the last two years, and has an unemployment
rate that stood at 7.1 percent in September. The overall rate of job
growth picked up slightly during the first few months of this year,
with an average year-to-year growth rate of 1.8 percent.
The Inland Empire (Riverside and San Bernardino counties) has
struggled in its recovery from the Great Recession over the past two
years, and has a volatile unemployment rate that stood at 11.6
percent in September. The overall rate of nonfarm job growth picked
up in September to 1.5 percent annually.
Interest Rates and U.S. Dollar
Low Interest rates continue to offset input cost increases and
support recent agricultural real estate appreciation. Moderate U.S.
economic growth and low U.S. interest rates will keep the U.S.
dollar relatively weak, although stronger than 2011.
The U.S. dollar has recently appreciated, as investors seek a “safe
haven” from the growing European financial turmoil. However, it is
not expected to return to historical values until U.S. economic
growth and interest rates rise significantly. Accordingly, U.S.
agricultural and food products will remain relatively competitive
this year for most importers.
The outlook remains mildly positive as global economic growth is
expected to continue to run at 2.5 percent to 3 percent. While
California export growth will slow, it will continue to grow.
Furthermore, the construction industry will finally become a
contributor to economic growth in the Golden State. California
housing prices are already rising at a good pace and will continue
to do so next year. Water and electricity concerns have abated.
Declining government will be a drag on the economy, but this will be
offset by strengthening and sustainable business activity in the
private sector. An encouraging sign is that the economic recovery is
spreading to the California interior.
Source: California Chamber of Commerce,