(January 6, 2009) California’s economy has faced the same headwinds as the rest of the United States, according to the latest quarterly report of the California Chamber of Commerce Economic Advisory Council (EAC).

Economic statistics for the nation deteriorated markedly during the past several months.  Plunging consumer spending for goods and some services was the main reason the economy fell last quarter, slicing -2.2 percentage points from quarterly growth. 

Other news also has been downbeat.  Nonfarm payroll employment has declined every month since December 2007, and the cumulative loss through October was nearly 1.2 million workers.  Job counts are falling especially fast in construction, manufacturing, retail trade and the financial and real estate sector. Worse yet, employment declines have spread to many other industries, reflecting employers’ uncertainty and cautious attitudes. 

As the economy tipped into negative growth, most economic forecasters marked down their economic projections for the fourth quarter and 2009, with a significant proportion now expecting a serious downturn similar to that of 1990-91 (in GDP terms).

Interest Rates and Financial Markets

The Federal Open Market Committee (FOMC) dropped the fed funds target rate to 1.00 percent at its October 29, 2008 meeting, the second 50 basis-point cut that month.  The Fed’s main concerns were the “intensification of financial market turmoil” around the world and related fears that tight credit conditions (partly induced by that volatility) could bring down the U.S. and other nations’ economies.  Leading central banks have taken vigorous actions to increase market liquidity and ease interest costs, and governments are injecting equity to shore up banks’ capital positions. 

California

Employment performance among the state’s industries has been mixed to negative over the past 12 months. Jobs counts have declined in California’s construction, retail trade, finance and insurance, manufacturing, information, real estate & leasing, and wholesale trade sectors. On the plus side, industries with higher job counts included education and health, with payrolls up by 2.8 percent; mining (includes oil and gas drilling); professional, scientific, and technical services; and leisure and hospitality.

Exports of goods made in California have provided a much-needed boost to the state’s economy. Total state exports grew by 12.8 percent during the first nine months of 2008. Exports of other important California-made products also grew rapidly, like chemicals, miscellaneous manufactures, and agribusiness products (farm produce, livestock, fish, processed food products, and beverages & tobacco), which increased by a healthy 17.1 percent.

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

The San Francisco and San Jose areas continue to outperform other regions of the state. In large part, this reflects the stability of the Bay Area’s high tech sector, where employment is rising (for now), and the biotech sector, which continues to develop nicely. Tourism-related activities are holding their own, though there is concern about the coming months. However, construction plays an important role in the Oakland/Contra Costa metro area, and many retail trade and finance industry jobs have disappeared, especially in Oakland and San Francisco.

In Southern California, the motion picture industry has faced numerous challenges in 2008.Though the writers’ strike ended, negotiations with the Screen Actors Guild are dragging on, and shooting of major studio feature films has dropped sharply. While the timing of the industry’s recovery is unclear, the major studios are beginning to ramp up new production. 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 many products and exports are growing strongly.  Livestock producers’ profit margins are suffering from high feed costs, though they are coming down.  All farmers bewail this year’s higher costs of energy and labor. 

Indeed, there is great concern about water supply across the state. The major unsettled issue is how much water will be permitted to transit the Delta. Resolution of this issue depends on a new Delta fish plan still being developed by the U.S. Department of Fish and Wildlife.

The supply of electricity in California should be adequate in the near term, but electricity prices will be sharply higher in 2009, reflecting the utilities’ higher costs associated with mandated investments to reduce their environmental footprint and to increase their distribution networks.

Real Estate and Construction

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

• Existing single-family homes sales in California soared by +96.7 percent over the year to September 2008, while condo sales were up by +41.7 percent. 
• Prices continued to fall, with the median price of single-family homes sold in September 2008 (at $316,480) down by -40.9 percent compared to September 2007. 

The number of homes available for sale represented just 6.5 months supply (at September’s sales rate) compared to 16.0 months a year earlier.

New home builders still have sizable inventories of unsold homes and lots.  Construction of new homes has dropped fast and effective selling prices are falling; so the unsold inventories are beginning to decline. However, this process will take a while.  Industry observers do not expect any significant improvement before 2009, with some areas not reaching bottom until a year later.

Most of California’s commercial real estate markets have held up better than the residential sector, but cracks are beginning to show.  Specifically, availability rates have risen in 2008. The situation is most problematic for retail and office space. 

As for office space, demand has declined, reflecting employment trends in office-based industries, especially finance and insurance. Vacancies are high and rising in Orange County, Sacramento, the Inland Empire and San Diego. As considerable new product is coming into most of these markets, rents also look weaker there than elsewhere.

Risks

One key risk appears to be continued volatility in global capital markets. Central banks and governments around the world have poured trillions of dollars into their financial industries and various submarkets, but new problems continue to crop up, calling for still more relief. At minimum, this volatility limits financial institutions’ ability and willingness to take on more debt and to engage in ordinary business and consumer lending, thereby worsening the current credit crunch. 

A second risk is that the tightening credit crunch and rising joblessness could worsen the current troubles in the state’s housing markets, taking sales volumes back down again. Housing markets can’t begin to approach normal until unsold inventories are reduced significantly. 

Read the full report.