Explaining Southern California's economy

California's economy is headed in the right direction, but recovery will be slow

Los Angeles skyline

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Los Angeles should start to catch up on its economic recovery in 2012 and 2013, according to LAEDC economists.

The Kyser Center for Economic Development, part of the Los Angeles Economic Development Corp. (LAEDC), has just released its 2012-13 mid-year forecast for the nation, the state, and various metropolitan regions in the Southern California. The data contained in the report is considerable, so I'm going to focus on the national and regional picture in this post, with an emphasis on Los Angeles County.

The Kyser economists aren't predicting a recession in 2012 or 2013. But they do anticipate sluggish, subpar growth: 2 percent GDP growth in the U.S. for this year, and only 2.2 percent growth for next year. They don't see the unemployment rate falling nationally by much over the next two years. It's currently at 8.3 percent — and by the end of next year, it will be at 8 percent.

There's a very big however in all this fairly grim prognostication: inflation should remain low for the 2012-13 period. This means that we're not seeing a repeat of the dreaded "stagflation" of the 1970s, when we had weak growth, high unemployment, and prices rising through the ceiling. What's happening now is different: the economy is wading through muck and mire, struggling to make any gains, and people have become so frustrated with the job market that they're dropping out completely, possibly never to return. I call this this "stuckflation." This is an economy that isn't tipping into recession, but that can't gain any momentum.

The national story is gloomy, but in L.A. County, we're finally beginning to see some improvement. Not surprising, as the region accounts for 4 percent of total U.S. GDP ($550 billion in a roughly $15-trillion economy, which according to LAEDC is bigger than Sweden and just a bit below Saudi Arabia). California accounts for about 13 percent of U.S. GDP. So when economies of this size get moving, they can start to generate some meaningful returns.

This is from the forecast:

Los Angeles County lagged its neighbor counties in recovery from the Great Recession over the past two years, but it finally gathered momentum in 2012. The monthly unemployment rate fell by two percentage points in less than a year from the cyclical peak of 13.2% in July 2011 to 11.2% in May 2012. The overall rate of job growth picked up slightly during the first few months of this year, while a number of industries experienced an uptick in activity and more robust job growth.

Unemployment should continue to fall in L.A. County, according Kyser's economists, with industries such as aerospace, entertainment, education, healthcare, and trade leading the way. However, as we've learned from the recent financial troubles of cities such as San Bernardino, Compton, and even L.A. itself (facing a $200-million-plus budget), local government is shrinking rather than growing. The sector will continue to shed jobs through 2013. LAEDC expects the L.A. County unemployment to fall to end 2012 at 11.5 percent and fall to 10.8 percent by the end of 2013.

If you're playing along at home, this means that L.A. Country should outpace the nation as a whole when it comes to adding new jobs.

There are some potential risks to think about. If the eurozone imploded, that could tip the U.S. into a recession, and California and the L.A. region with it. The so-called "fiscal cliff" — a series of tax-cut expirations and the implementation of required spending cuts — could knock U.S. growth down so far that the economy will be in negative territory, which define a recession.

On balance, however, the Kyser forecast follows forecasts from UCLA's Anderson School and Pepperdine's Graziadio School that predict slow growth in Southern California coupled with an extremely gradual decline in unemployment. That's good, if not great, news.

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