(March 7, 2006) The economic outlook for both the California and U.S. economies remained stable through 2005, according to the latest quarterly report of the California Chamber of Commerce Economic Advisory Council.
The national economy weathered last summer’s hurricanes with minimal damage outside the impacted regions, entering 2006 with “good momentum” according to the report, although the advisory council expects a gradual slowdown. The California economy has continued to track national trends fairly closely.
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Interest Rates
The Federal Open Market Committee (FOMC) has raised interest rates 14 times since June 2004, bringing the Fed Funds target to 4.5 percent as of this writing. The Fed may raise rates again in March; however, inflation currently remains well-contained.
January 31 marked the end of Alan Greenspan’s 18-and-a-half year chairmanship of the Federal Reserve Board. The new chairman, Ben Bernanke’s, approach to monetary policy should be broadly similar to Greenspan’s but will favor more formal inflation targets.
California
California' s payroll jobs expanded 1.6 percent, and job growth also became more broad-based in 2005. The housing sector was a key driver of job and economic growth. The California Department of Finance predicts payroll job growth of 1.3 percent in 2006. California’s personal income growth is expected to slow from 6 percent in 2005 to 5.8 percent in 2006.
Economic growth was more evenly distributed across California regions. Recovery of the San Francisco Bay Area economy was noteworthy. Robust growth was centered in the East Bay but other parts of the Bay Area improved as well. The technology sector continued its turn around.
Southern California growth remains solid with a record level of orders for Boeing and Airbus and good performances in the international trade, technology, and tourism industries. Caution is warranted, however, for the motion picture and television production industry.
Industry Highlights
Real Estate: U.S. home sales had another record year in 2005, but the pace of sales has slowed. Home price inflation has begun to taper off, a welcome development for home affordability. The advisory council believes that the housing market will experience a gradual slowdown. The apartment sector has lagged in its recovery, but improved in 2005 and should see further improvements.
Commercial real estate markets saw steady improvement in 2005 and have remained healthiest in Southern California. Northern California markets have not been as strong, but have seen steady improvements in recent quarters that are likely to continue in 2006.
Tourism: California tourism performed well in 2005, and early reports for 2006 show strong activity for key Northern and Southern California tourist and convention destinations. Jobs in the leisure and hospitality sector increased 2.5 percent, a percent better than overall job growth.
Banking: California and national consumers have seen considerable reductions in home equity lending and mortgage refinancing. Credit card lending has also experienced slower growth. Commercial and industrial lending has gain strength, and the council expects the banking sector to remain healthy.
Agriculture and Resources: California agriculture turned a good year in 2005 with strong and stable agricultural commodity prices, rising farmland prices and a growing demand for California-grown agricultural products. This year is expected to be similar.
Recent storms have boosted California’s snow pack, which bodes well for the state’s water supplies. State electricity supplies look sufficient for 2006 due to some new capacity and rising electricity imports resulting from transmission line improvements.
Risks
There remains some uncertainty about how much further the Fed will raise interest rates. If rates are raised too much, it will have an impact on the real estate market and discourage consumer spending. The council also warns that more instability in the energy market may drive up energy prices.
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Staff Contact: Dave Kilby