Dueling projections of the gray science

“Both the nation and California appear to be in the midst of a modest, drawn-out recovery,” says Gov. Jerry Brown’s updated budget plan released May 16.

“Drawn out” is the operative phrase – both in the Democratic governor’s economic forecast and those of private sector groups.

“Financial crises historically lead to prolonged readjustment periods that last for years,” the budget cautions.

Brown predicts the state won’t recover the jobs lost during the recession until the fall of 2016 – 86 months after the recession’s “end.”

The unemployment rate will still be in double digits – 10.8 percent through 2012, declining only slightly from the 12.1 percent the budget says will be the statewide average this year.
At the University of the Pacific’s Eberhardt School of Business in Stockton, there’s less optimism.

Their April 19 forecast predicts 11.4 percent unemployment statewide in 2012 and 10.5 percent in 2013.

While the Bay Area shows stronger economic recovery, the Central Valley stays in double-digit unemployment through 2014. Sacramento does the best at 10 percent with Merced falling from a current 18.1 percent unemployment rate to 16.1 percent in 2014.

Sacramento’s government and housing-dependent economy is the only area in Northern California still in recession, the forecast says.

“That gap that appeared between Sacramento and other areas that appeared in 2010 is deepening in 2011,” said Jeff Michael, director of the Forecasting Center.

The Kyser Center for Economic Research at the Los Angeles Economic Development Corporation sees statewide unemployment at 11.5 percent in 2012.

Only four of 13 large metropolitan areas registered job growth as of the end of 2010, the center says. One of the four was Modesto, which posted an employment increase of .4 percent – a good thing since the University of the Pacific pegs unemployment in the area at over 16 percent.

The rosiest view is offered by the University of California at Los Angeles Anderson Forecast, which predicts statewide unemployment to fall to 9.7 percent during the first three months of 2013.

“Job creation, though more rapid in late 2011 and in 2012 and 2013 will not be fast enough to push the unemployment rate below double digits until the start of 2013,” writes Jerry Nickelsburg, the senior economist who penned the California forecast.

Grubb & Ellis in their 2011 forecast says the state’s job loss hit bottom in 2010. Thirteen of 16 major industries recorded lower employment last year. The largest losses were in construction, manufacturing, retail and state and local government.

While Grubb & Ellis predicts some job growth in 2011, it says that unemployment will stay in double digits throughout most of California this year.  They also say the media’s focus on the number as an economic yardstick impedes recovery.

“The prominence of this indicator in media discussions exacerbates feelings of uncertainty and economic insecurity and results in low levels of consumer and business confidence,” Grubb & Ellis write in their overview of Southern California’s economy.

“However, high jobless rates mask the underlying changes taking place as the state economy moves into recovery mode. These changes will be more visible as 2011 progresses.”
There are positive signs.

The Kyser Center and Grubb & Ellis point to an increase in tourism dollars and retail sales erasing some of their losses from 2009.

All of the private sector forecasts point to steady growth in the health care industry.

“This industry grows no matter what the economic weather. Demand is driven by the state’s ever-increasing population, especially those over 60 years of age who use medical services intensively,” writes Nancy Sidhu in the Kyser forecast.

Car sales are higher. Agriculture revenue is up thanks to higher prices and more international trade.  Activity at the state’s ports has increased.

Grubb & Ellis points to a nearly $1 billion replacement of the Gerald Desmond bridge at the Port of Long Beach and a $300 million expansion of Union Pacific’s intermodal container transfer facility as boosts for the Southern California economy.

There’s unanimity in every forecast – from Brown’s budget to those of the private sector – that California’s housing industry has been hit the hardest by the recession and been the slowest to recover.

“The steep drop in home values means that a full recovery in residential construction and all associated sectors could be delayed for several years,” Brown says in his budget.
New home construction hit bottom in 2009 with just 36,421 construction permits issued. Last year, 44,601 permits were issued. That’s a 79 percent drop from 2004 when nearly 213,000 permits were issued.

“Though activity picked up in 2010, new home construction continues in a near depression state,” writes Sidhu in the Kyser Center forecast.

Not even record low mortgage rates enticed buyers in 2010, Grubb & Ellis notes although predicting a slight up tick this year.  

Commercial real estate also is in the doldrums, as the numerous “For Lease” or “For Sale” signs along the streets of cities from Montecito to Montclair attest.  

“California commercial real estate markets have shown virtually no sign of improvement since our last survey. Indeed, some markets look worse than before,” writes Nickelsburg in a January 2011 UCLA examination of the state’s office and industrial real estate markets.

“Overall, construction has diminished, vacancies have risen and rental rates have fallen. Permits for new building increased slightly in Orange County and San Francisco and fell from low to virtually zero in most other markets.”

However, Nickelsburg says the market’s contraction is slowing and that the June 2010 survey “picked up the first indication of a turning point in the latter part of 2012 or the early part of 2013. The current survey … bolsters those results.”

Grubb & Ellis says that while office vacancy rates in Southern California are “elevated” – a high of nearly 24 percent in the Inland Empire and 17 percent in Los Angeles – leasing and sales are up.

Nickelsburg also notes that a recovery in commercial real estate lags recovery in the rest of the economy.

And, the forecasts say, California economic comeback will be affected by how the state pulls itself out of its budget woes.

“Whatever the ‘solutions’ turn out to be, they will weaken the state’s economic recovery,” writes Sidhu in the Kyser Center forecast.

“On one hand, government spending and public employment could be reduced. On the other, taxes or fees could be increased. The choice affects the distribution of the deficit burden across California’s regions and industries.”

Says Grubb & Ellis more succinctly:

“All of these solutions will hurt somebody somewhere in California; the difference is only in the ‘who’ and the where.’ “

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