Explaining Southern California's economy

Cal State Fullerton economists ask, 'Where's my boom?'

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Matthew DeBord

The 17th Annual California State Fullerton Economic Forecast did not paint a pretty picture of the national of state economy for the next few years.

Economists Anil Puri and Mira Farka took the stage at the Hyatt Regency in Irvine this afternoon to deliver the 17th annual California State Fullerton Economic Forecast. At this point, given the state of the economy, no one expected the outlook to be good. The news that U.S. GDP growth picked up somewhat in the third quarter, to 2.5 percent, took some of the edge off. The theme of last year's presentation was "Recovery," so it made sense that the question asked this time around was "Where's my boom?"

Yeah, about that boom...

Much like the UCLA Anderson forecast, released in September, the Fullerton forecast — which provides a comprehensive picture of the national and Southern California regional economy — tackled the sluggish nature of the recovery from the 2008 Financial Crisis and subsequent Great Recession. What are economists at UCLA and Fullerton worried about? Well, not about finding a boom. More like avoiding a stall:

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Even if we can reduce unemployment, we'll still struggle with African-American joblessness

Brian Watt and Madeleine Brand reported today on the final stop of the Congressional Black Caucus' jobs tour, which took place in Los Angeles. As they point out, the unemployment rate among African-Americans is around 16 percent, far higher than the national rate of 9.1 percent. In California, the rate for African-Americans is over 20 percent, while the overall rate is 12 percent.

If you think about this, we really have two problems rolled up into one: in California, we urgently need to reduce high general unemployment; but we also need to address the the problem of black unemployment, which is always higher than the general level. This is from the Economic Policy Institute -- in January of 2008, almost a year before the financial crisis hit:

In the best of times, many African American communities are forced to tolerate levels of unemployment unseen in most white communities. The 2001 recession pushed the white annual unemployment rate up from a low of 3.5% in 2000 to a high of 5.2% in 2003. During the same period, the black unemployment rate shot up from 7.6% to 10.8%. National recessions take African Americans from a bad situation to a worse one....In 2007, the black unemployment rate was 8.3%. This figure is still above the pre-recession low and more than twice the white unemployment rate. Goldman Sachs estimates that a new recession would increase the national unemployment rate to 6.4% by 2009. For African Americans, the unemployment rate would be expected to rise to 11.0%.

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Meet the new recession – same as the old recession? Or worse?

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There’s been a fair amount of discussion lately about whether we’re headed for another recession. The last recession -- and I’m not going to call it the Great Recession for reasons that will be apparent in a second -- technically ended in June 2009, more than two years ago. 

If you live in Southern California, you could be forgiven for thinking that the recession didn’t end in 2009 and was in fact a Great Recession that’s still ongoing. California’s unemployment level is at 12 percent and Los Angeles County’s is at 12.4 (both have recently risen, according to statistics released by the BLS). 

But if you feel the recession is still in full swing, consider two things: actual data that points to a recovery since 2009 in some areas; and the business cycle.

Consider corporate profits, which have bounced back vigorously since the onset of the financial crisis. Here’s the LA Times:

Profits aren't rising solely because companies are making and selling more widgets to keep up with customer demand, which would be the case in a healthy, booming economy. Instead, companies are more profitable because it now costs less to make the same widget, often because far fewer workers are needed to make it.

Think it through: High unemployment and a credit crunch has meant that business can’t count on consumers ponying up to buy more stuff. In fact, businesses have created this problem themselves by playing defense and shedding workers. They aren’t paying a percentage of their pre-crisis workforce the money that it needs to buy what business makes. 

So businesses are streamlining productivity to reduce the costs involved with selling roughly the same amount of stuff to fewer people. It’s good for the bottom line -- and in theory when the economy does begin to recover more robustly and demand begins to grow at a faster clip, productivity gains will boost profits even higher.

Sadly, it’s looking more and more like that isn’t going to happen right away. The business cycle is going to dictate that the above-mentioned productivity gains be eroded by things like inflation, which is creeping back into the economy, and the ongoing unemployment problem. Want a double-edged sword? How about layoffs that juice corporate profits but take consumers out of the markets?  

Allow me to quote at some length from a Howard Gold piece at MarketWatch, on the new-recessionary views of economist Gary Shilling:

“I’m predicting another recession next year,” [Shilling] told me.

Not a double dip, he emphasized, because we’re already two years from the end of the last recession and 3 ½ years from the business cycle’s previous peak, in December 2007. Historically, he said, economic expansions last about three years, especially in long down cycles of the kind he thinks we’ve been in since 2000.

So, he’s looking for a brand new cyclical recession beginning in 2012.

Many Americans will be forgiven if they can’t see the difference between that and the recovery we’ve been experiencing.

That’s Shilling’s point. Usually, deep recessions like the one we just lived through are followed by strong snapbacks, like a growth slingshot.

This time, however, the recovery has been “distinctly subpar,” in his words. “As of the first quarter, ..real GDP is barely above its peak in the fourth quarter of 2007, whereas earlier recoveries were well above their previous tops 13 quarters later,” he wrote in a recent edition of his newsletter, Insight.

Translation: More than three years after the peak, we’re still not back to where we were.

Additional translation: After the epic stock market turmoil of the past few weeks, the chances of a new recession are increasing. The UCLA Anderson Forecast already said earlier this year that, for California, there was "no recovery in sight" for 2011. We may not even get the 1.7 percent employment growth that was predicted. That could mean unemployment that won't be reduced to even the current (high) national number of about 9 percent until -- Yikes! -- 2014.  

Photo: Wikimedia Commons

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