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Pair of Campus Economists Predict Signs of Improvement in 2010

Published: May 15, 2009

A pair of CSULB economists predict that the regional economy will show signs of improvement over the next 12-18 months, but that “improvement” still doesn’t translate into positive job growth or an increase in taxable sales. It just means the declines in those areas won’t be as severe as the previous 12 months.

Such was the tone of the 15th annual Regional Economic Forecast, which was delivered by CSULB professors Joe Magaddino and Lisa Grobar to more than 300 local business and civic leaders on May 14 at the Hyatt Regency Long Beach.

Those wondering when there might actually be an actual increase in employment and taxable sales are going to have to be patient for a little longer, according to the 2009-10 report. The economists don’t anticipate any sustained growth in jobs or taxable sales until 2011, when they believe “a real recovery finally gets underway.”

The CSULB Regional Economic Forecast features information on and predictions for the five-county Southern California region that includes Los Angeles, Orange, Riverside, San Bernardino and Ventura counties. Because job growth is the measure for overall economic activity at the state and local levels, much of the forecast focuses on these figures.

Magaddino pointed out that the U.S. economy is in a steep and challenging recession, and that national recession has severely hampered the prospects for the Southern California region. So, he believes that when the U.S. economy improves, the region’s economy will follow suit.

“I think the good news is that the national economy should start to generate some positive economic growth by the end of the fourth quarter of this year. The growth next year will be pretty modest,” he noted. “The unfortunate reality is that unemployment tends to lag output. So, even though the economy is showing some signs of recovery, we’re still going to see rising levels of unemployment. That’s just how the economy works.”

Regional Employment
Overall, employment in the region fell by 1.9 percent in 2008 (a loss of 139,800 jobs), and the forecast anticipates a 1.5 percent decline this year. The job market will improve slightly in 2010 with losses falling to 0.9 percent. The economists say it will be 2011 before any sustained job growth returns to the region.

Taking the brunt of those job losses is the manufacturing sector, which is described as “cyclical and sensitive to macroeconomic trends.” Durable manufacturing employment will see losses of more than 8 percent this year while the non-durable sector will decline by 4.6 percent.

Because the national recession has produced a sharp pull-back in consumer spending, the retail sector is struggling, and many establishments are shutting down operations as a result of economic losses. Retail employment saw a decline of 2.8 percent in 2008, and this year, the sector is expected to lose another 4.1 percent of its jobs.

The sharp decline in the retail sector has also translated into a freefall in taxable sales. The forecast estimates taxable sales fell by nearly 7 percent in 2008 with much of the decline in the last quarter. This year, the expectation is another 12 percent decline in taxable sales followed by another smaller drop in 2010.

The lone bright spot for employment continues to be the health services sector, which added jobs at a rate of 3 percent in 2008 despite the generalized economic decline. The sector is expected to increase its job number by another 2.8 percent this year and in 2010.

“The health services sector is relatively immune to cyclical pressures and continues to add jobs at a pretty good clip,” said Grobar, director of the Economic Forecast Project. “The reason for this growth has to do with long-range demographic issues, such as the aging of the population and health technology improvements. These factors give us a long-run, robust trend in employment growth in the sector. So, it’s going to continue to be a very stable sector, an area where there is just going to be a demand for workers in the long term.”

Economic Forecast
Photo by Victoria Sanchez
Joe Magaddino speaks at May 14 event.

Housing News
The forecast also includes a brief report on housing in the region, and this year, unlike last year, the news is more on the positive side. Even though there isn’t good news to report just yet, both Magaddino and Grobar noted that they believe the housing market will bottom out this year, despite the fact that the region is in the midst of this recession.

“We do think housing starts will bottom out. There were dramatic cuts in inventories during the fourth quarter of last year and the first quarter of this year. So we don’t believe that there is much more ability to cut inventories,” Magaddino said. “The other bit of good news is we feel there is a lot of pent up demand (for housing in the region). So, when consumers start feeling confident and are willing to spend their income, we should see a fairly healthy surge in consumption expenditures.”

Grobar is attributing the cuts in inventory and the favorable forecast to a couple of factors, not the least of which is affordability. For the last two or three years, she has noted in the forecast that home prices in the region — Los Angeles and Orange counties, in particular – were climbing so high that fewer and fewer families were able to afford to buy a home in the area.

“Affordability in the region has skyrocketed with the plunging home prices. So, there is a silver lining to the housing market downturn,” Grobar pointed out. “In particular, we’re finding that buyers now are able to either afford a house or afford a house in a nice area that would have been out of reach just a year or two ago.

“Ultimately, that increase in affordability is going to set the stage for recovery,” she added, “but because a lot of people are uncertain about their jobs and the credit market being what it is, it’s going to take a little time.”

Magaddino noted that when consumers start feeling confident enough to spend their income, the next thing to fall in place will be more of a willingness of businesses to improve the level of capital equipment that they have. “That’s how the economy gets back on track,” he said.

County Highlights
Los Angeles County was the best performing area in the region in 2008 with a decline in employment of “only” 1.3 percent. The forecast calls for a similar drop in employment this year followed by a 0.8 percent decline in jobs in 2010.

The forecast predicts that economic conditions in Orange County will start looking considerably better in 2010. In addition, the forecasters expect that Orange County will lead the region out of this recession and be the best-performing among the five counties by 2011, which is when they expect “a real recovery finally gets underway.”

The housing market and sub-prime crisis have fueled a deteriorating economy in the Riverside and San Bernardino county areas. Employment declined by nearly 4 percent in 2008, and the forecast expects job losses of 2.6 percent this year. Looking further down the road, the economists another decline of 1.7 percent in employment in 2010 followed by “very modest growth” in 2011.

Ventura County lost jobs at a 2.5 percent pace in 2008 and that is expected to slow to 1.3 percent job loss rate this year. However, conditions are expected to improve in 2010 as employment flattens out and then posts a gain in 2011.