California’s economic recovery to trail Midwest, Northwest

INDIANAPOLIS — California’s recovery from the current economic downturn will lag behind states in the nation’s midsection and the Pacific Northwest, a spokesman for one of the nation’s leading economic rating services told a group of state capitol reporters and editors Friday.

Stephen Cochrane, senior managing director of Moody’s Economy.com, told the annual meeting of Capitolbeat, that current economic models indicate that the Pacific Northwest states of Washington and Oregon, the Northern Great Plains (North and South Dakota) and Rocky Mountain regions (Colorado, New Mexico and Wyoming) and the Gulf coast region (Louisiana and Texas) will experience the strongest relative growth in 2010 compared with projections for 2009.  Another pocket of prosperity is likely to be Washington, D.C., and its suburbs, which have largely replaced New York as the locale for job growth connected with the renewed government employment sector, Cochrane said.

Overall, however, the pace of the recovery is likely to be slow everywhere, Cochrane added.  Even though he predicted the national recession that began in December 2007 is likely to end in September, growth in employment will be stagnant nationwide throughout 2010 even in some of the areas of stronger recovery.

Also, state and local governments will continue to suffer from lower revenues from state income and sales tax collections while the private sector will lead the recovery, Cochrane predicted.  “The (federal) economic stimulus is having a fairly significant impact on the economy,” Cochrane said, noting that a 3 percentage point growth in the economy during the current quarter is due to congressional passage of the economic stimulus package last winter.  However, the impact of the federal stimulus package will subside in future quarters, slowing the growth of economic recovery in future quarters minus a rebound in housing, Cochrane said.

“The stimulus is having a fairly significant impact on the economy,” Cochrane said. “(However), we have to get some housing (growth) going.”

California might be poised for a recovery in housing before other regions hard hit by the sharp downturn, Cochrane said.  The sharp decline in housing values over the past two years in California has helped spur demand, as it has helped increase the ability of many people to afford homes, Cochrane said.

This means California might recover more quickly than other regions hard hit by the economic downturn such as Florida, which has little population growth and no pent up demand for housing, and New York and much of the Northeast, where the recession began later and housing prices still haven’t bottomed, Cochrane said.  However, the housing sector, still plagued by foreclosures depressing prices, must recover what is likely to be another wave of foreclosures over the next year due to layoffs and loss of income, Cochrane added.  House prices likely will bottom nationwide in the middle of next year, Cochrane predicted.

Cochrane said the Cash for Clunkers program, in which car buyers get cash incentives for trading in gas guzzling models, is helping the auto industry recover.  However, he said that the longer-term prospect for the auto industry is less rosy without incentives like the clunkers program, which ended Monday.

“There’s little demand for vehicles without some kind of stimulus,” Cochrane said. “There is no pent up demand for cars.”

His report came on the same day that other analysts reported signs that the worst of the recession might be over based on an increase in existing home sales.  The National Association of Realtors reported home sales across the nation rose 7.2 percent compared with a year ago. In California, sales of all types of homes were up 14.1 percent in July from the same month a year earlier, according to the San Diego research firm MDA DataQuick.

Cochrane directs a broad range of the firm’s economic research activities. Dr. Cochrane directs the regional economic service in which he manages a large-scale econometric system of regional models that are used to provide projections of economic, demographic, real estate, and financial indicators. Dr. Cochrane oversees the forecasts for all 50 states. He directs current work in developing regional models for the Moody’s Economy.com international services.