(May 1, 2006) Recent economic indicators indicate the state's economy looks quite healthy and California may be growing a bit more rapidly than the nation, according to the latest quarterly report of the California Chamber of Commerce Economic Advisory Council.
The U.S economy entered 2006 with a “considerable head of steam,” the council said. Retail sales declined in February, but remained healthy enough to ensure that GDP growth in the first quarter will exceed 4 percent. The labor market also has remained strong, with monthly job gains restored to levels seen prior to the 2005 hurricanes.
The council believes that the economy will slow gradually during 2006 as healthy job growth provides support for spending.
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Interest Rates
The Federal Open Market Committee (FOMC) has raised interest rates 15 times since June 2004, brining the Fed Funds target to 4.75 percent. The Fed is poised to raise interest rates by another 25 basis points at the FOMC meeting May 10.
The council believes that inflation will remain well contained. With core inflation remaining low and the economy slowing, the FOMC will likely raise its Fed Funds target to 5 percent in May and then pause. Long-term interest rates will rise in step with short-term rates, keeping the yield curve flat for several more months.
California
The state has recently seen strong job gains in business services, tourism and financial services. Annual job growth based on job gains the first two months of the year came to 1.9 percent, compared to national job growth of 1.5 percent. The state’s unemployment rate has fallen from 5.6 percent to 5 percent over the past year, although it is still a couple of tenths higher than national unemployment rates. California’s personal income growth has outpaced the nation by a small margin.
There has been a more even distribution of growth across California regions. The San Francisco Bay Area economy continues to see improved job growth and a solid demand for high tech products and services. Growth in Southern California remains robust with good performances in international trade, technology and tourism. There has been modest job growth in aerospace, while the motion picture and TV production industry has remained flat over the last year.
Industry Highlights
Real Estate: U.S. home sales have been declining in recent months and there has been a considerable buildup in home inventories, especially in California, where the decline has been steeper than the national average. Home price inflation is cooling, especially in new home and condominium markets where inventories are most abundant. The advisory council believes that the decline in home sales will be gradual, but the housing downturn could continue over a considerable period.
In California, commercial real estate markets are vibrant statewide. Southern California markets remain healthiest, with Los Angeles and the Riverside-San Bernardino area among the strongest markets in the United States. Northern California markets have not been as strong, but have seen steady improvements in recent quarters and are likely to continue in 2006.
Tourism: California’s tourism sector has been particularly strong and is expected to be a key contributor to growth going forward. Hotel occupancy rates continue to rise. Early reports for 2006 indicate solid activity for Northern and Southern California tourist and convention destinations.
Banking: California and national consumers have seen declines in home equity lending and mortgage refinancing activity. Commercial and industrial lending - which has lagged in the current business cycle - has gained strength. Although bank loan credit quality and profits will likely diminish in 2006, the council expects the banking sector to remain healthy.
Agriculture and Resources: California agriculture turned in a good year in 2005, and another good year is anticipated in 2006. Overall, agricultural commodity prices remain firm, foreign demand for California agriculture products remain healthy, and farmland prices have continued to rise.
The wet winter has boosted California snow-pack to 130 percent of normal, which means there will be plenty of water this year from California sources. State electricity supplies look sufficient in 2006 due to some new capacity and rising electricity imports resulting from transmission line improvements. Natural gas has softened in early 2006, but the council expects continued sharp volatility in natural gas prices going forward.
Risks: There remains some uncertainty about how much further the Fed will raise interest rates. If the Fed raises its Fed Funds target about 5 percent, this may cause greater deterioration in real estate markets and discourage consumer spending.
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Staff Contact: Dave Kilby