(September 8, 2008) California continues to underperform the rest of the United States by most economy indicators, largely as a consequence of its extensive housing-mortgage related problems, according to the latest quarterly report of the California Chamber of Commerce Economic Advisory Council (EAC).

Economic statistics for the nation were on the weak side during the past three months. Gross Domestic Product (GDP) growth was an important exception, as the second quarter came in at a not-so-bad 1.9 percent annual rate, better than the 0.9 percent pace registered in the first quarter and the -0.2 decline of the fourth quarter 2007 but well below the 4.8 percent pace of the second and third quarters of 2007.

Other news also has been downbeat. Marked weakness persists in the residential construction, manufacturing, and retail trade and the financial sector. Worse yet, employment growth has slowed in other—presumably unaffected—industries as well, reflecting employers’ uncertainty and cautious attitudes. Meanwhile, the nation’s unemployment rate moved up from 4.6 percent in June 2007 to 5.0 percent in December and 5.7 percent in July 2008.

Consumer sentiment is hovering near its lowest level since 1982. Sentiment usually reflects current labor market conditions and recent trends on the inflation front.

Concerns about recession have grown as the incoming data worsened. While economic growth remained positive in the first half of 2008, most economic forecasters have marked down their projections for growth in the second half, with a significant proportion now expecting a shallow downturn (in GDP terms) late in the year and/or early 2009.

 Read the full report.

Interest Rates

An upsurge in inflation pressures complicates matters for monetary policymakers. While prices of many consumer products are rising at a moderate pace, most energy, industrial and agricultural commodity prices have risen dramatically and remain at high levels, pushing inflation as measured by official consumer price indexes to rates not seen since 1991. Fighting inflation is one of the Fed’s two primary missions (the other is maximizing employment).

At minimum, the Fed likely will sit on the sidelines for a while to determine if capital markets and the economy can manage on their own in light of all the expansionary monetary and fiscal policy moves that are in the pipeline.

California

Employment performance among the state’s industries has been decidedly mixed over the past 12 months. Jobs counts have declined in California’s construction, bank and non-bank financial, manufacturing, retail trade, real estate and leasing and information sectors.

The state’s unemployment rate rose from 5.3 percent in June 2007 to 6.9 percent in June 2008. This was a much bigger increase than experienced by the U.S. as a whole; the margin between the state and the nation doubled from 0.7 percent to 1.4 percent.

Exports of goods made in California are providing a much-needed boost to the state’s economy. Total state exports grew by 12.7 percent during the first half of 2008.

Comparing the state’s major metro areas, regional employment performance has been mixed.

Nonfarm employment growth between June 2007 and June 2008 was positive in the San Francisco area, Bakersfield, Stockton, and San Jose. At the other end of the scale, employment declines have been most severe in Ventura County, Riverside-San Bernardino and Orange County, with lesser declines in Alameda-Contra Costa, Modesto, Los Angeles, San Diego, and Sacramento counties.

The San Francisco and San Jose areas continue to outperform other regions of the state. In large part, this reflects the renewed strength of the Bay Area’s high tech sector, where employment is rising nicely, and the biotech sector, which continues to develop.

In Southern California, the motion picture industry hasn’t returned to normal even though the writers’ strike has ended. Elsewhere in Los Angeles, the stronger industries are health care, tourism, technology, and some professional services (consulting and architecture and engineering).

Agriculture and Resources

California’s agriculture sector is holding up well. Prices are high for most products and exports are growing strongly. Livestock producers are suffering from high feed costs. All farmers bewail this year’s high costs of energy and labor. Land prices are still rising in many agricultural areas.

Drought restrictions have forced a number of California farms to make hard decisions about which products to produce and which to reduce or eliminate. The uncertain water supply situation seems likely to continue through the fall and into 2009.

The supply of electricity in California should be adequate in 2008. No outages are expected though there are some constraints in the southern part of the state. Electricity prices will be sharply higher in 2009, reflecting the utilities’ higher costs of natural gas plus the costs associated with utility investments to reduce their environmental footprint.

Real Estate and Construction

The downturn in housing continued over the past three months, but some interesting changes are taking place. Here are some of the revealing statistics for the state’s re-sale home market:

Existing single-family homes sales in California jumped by +17.5 percent over the year to June 2008, while condos sales were down by -20.8 percent.

Prices continued to fall, with the median price of single-family homes sold in June 2008 (at $368,250) down by -37.7 percent compared to June 2007.

The number of homes available for sale represented just 7.7 months supply (at June’s sales rate) compared to 10.7 months a year earlier.

While higher than in previous months, June’s home sales were still -35 percent below the peak sales pace of 2005. Further, home sales seem unlikely to grow much as long as primary mortgage lenders are limiting risk by tightening up the standards borrowers are required to meet. In addition, many lenders offer only traditional “conforming” mortgages, which makes financing for high-priced homes even more difficult to obtain. The conforming limit has been boosted—which helps the situation in California—but loan fees are reportedly high.

Risks

Troubles in the state’s housing markets could worsen further, taking sales volumes down again.

Continued volatility in global capital markets could further reduce the willingness of financial institutions to take on non-mortgage debt and also to engage in ordinary business and consumer lending, thereby worsening the current credit crunch and slowing business and household spending.

High energy and rising food prices continue to be an important risk factor. Higher prices of gasoline and groceries actually shrink the amount of consumers’ income available for other types of purchases. Consumer surveys in recent months showed that confidence levels sank as gasoline prices were shooting up. Billions of dollars in tax rebates kept retail sales on keel in May-June-July, but their impact will fade going forward.

 Read the full report.

Staff Contact: Dave Kilby