E-Communicator Article

U.S. Economy Remains a Concern
as State Economy Continues to Improve

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 Korea.

The main notions about the current situation coming out of the discussions of the council’s distinguished economists are the following.

U.S. Situation

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 September 2012.

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 estimates.

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 than Nation

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 regional basis.

High Unemployment

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 activities.

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, Alert

January 2013 - CMSA Communicator

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