(September 9, 2005) The economic outlook for various sectors of the California economy has brightened considerably in 2005, according to a report released by the California Chamber of Commerce Economic Advisory Council this week.
Read the full report.
Hurricane Katrina
The report indicates that the potentially huge impacts of Hurricane Katrina currently have been muted by the strength of the national economy and national job growth. Adding “supply shock” to “demand shock” in the oil and gas sector could slow the economy somewhat because the Gulf area accounts for 25 percent of domestic oil and 50 percent of domestic gas production.
Katrina will have some serious local and regional repercussions, however, including large human and psychological tolls, displacement of 1 million workers, damage to oil rigs and refineries, a devastated tourist industry in the coastal Gulf states and mounting pressures on community resources in the southern United States.
The hurricane also may have an impact on strategic national and global resources, as well, particularly in oil production and refinery capacity and in insurance claims, which are estimated to range between $20 billion and $100 billion.
Despite these unforeseen risks, the national and California economies are strong and growing.
United States
The real gross domestic product (GDP) of the United States has increased 4.1 percent in the last eight quarters, and business investment growth recovered to 9.2 percent, up from 5.7 percent in the first quarter of this year. Private sector wage and salary growth is up and should bolster consumption. Net exports, fixed investment and car purchases all are up in the second quarter of 2005. Inflation numbers are very positive and are not expected to accelerate too much. Whether consumer spending is up or not is not clear at this time. The housing market is expected to slow considerably.
California
California non-farm payrolls gained 29,900 in July, following a gain of 16,600 in June. Compared to the same period last year, job growth was 189,700 in July. Growth sectors included construction, manufacturing, trade, transportation and utilities, financial activities, professional and business services, leisure and hospitality and government.
The first quarter of this year showed a 7.1 percent annual growth rate in personal income. Taxable sales growth in the fourth quarter of 2004 was 7.4 percent. Tax withholdings grew 6.7 percent over the year before during the second quarter. Taxable sales growth was up 7.4 percent in 2004 fourth quarter of 2004.
Industry Highlights
Banking — Lending continued with economic growth and supported it. Loans in the United States were up $125 billion in the second quarter from the first quarter of this year. Over half of U.S. loans were in real estate, which were up $70 billion during the second quarter from the first quarter of this year. Commercial and industrial loans were up $29 billion in the second quarter from the first quarter of this year, an increase for the fourth quarter in a row. In California, the number of bank offices and deposits has increased, a good signal for the industry.
Real Estate — This industry is still attractive to investors, who are still buying real estate actively, particularly in the office and industrial portions of this asset class. However, the housing market is cooling somewhat, with sales volumes declining and price increases flattening out due to growing numbers of listings.
Tourism — The industry has reason to be guardedly positive. Governor Schwarzenegger restored $7.3 million to the tourism marketing budget, which should help bring even more business to the state. Business n the camping/RVing sector, the hotel sector and at various theme and local destinations is improving, overall showing the best performance since 2001.
Agriculture — Overall, 2005 has been a good year for agriculture. Higher spring precipitation helped cattle feeding. The grape industry remains strong. Tree fruit is of better quality and, though yields are down, the market is nearly evening out due to better prices. Nuts – including walnuts, pistachios and almonds – are very strong due to an increased export demand and lower yields than anticipated.
Resources — California resources are faring well, with water levels in most in-state reservoirs reporting above average levels for this time of year. The electric supply is holding up, with outages this summer caused by lightening strikes rather than system shortages.
Risks — Because the housing pricing frenzy has begun to wane, the council warns of a possible speculator-induced housing market correction. The risk continues that the national defense budget may be trimmed and some weapons and space programs based all or in part in California may be cut back. Interest rate risks are more severe for California than for other states because of its dependence on residential real estate. Finally, electrical transmission lines are a concern, being the weakest link in the state’s electricity supply system.
Overall, California’s economy is in line with the rest of the nation. Job growth, exports and banking are all strong. Southern California is doing well, and the Bay Area is improving. Oil and interest rates will determine where the state’s economy — and the nation’s — goes.
The California Chamber’s Economic Advisory Council provides quarterly forecasts of the California economy and coordinates special economic studies. Council members include business economists from a variety of industries and from government.
Read the full report.
Staff Contact: Dave Kilby