Explaining Southern California's economy

Jeff Gundlach shows why US economic growth has become very expensive

The U.S. has added a huge amount of debt since the financial crisis, but it hasn't yielded higher levels of growth.

Southern California is home to a trio of important bond funds: PIMCO, TCW, and DoubleLine Capital. All of these have executives who routinely comment on the global financial system, although PIMCO and DoubleLine usually get most of the attention.

At Newport Beach based PIMCO, which manages $1.8 trillion, co-Chief Investment Officer Mohamed A. El-Erian acts as a sort of wise man for both his firm and for a variety of blue-chip news outlets (and the co-CIO and founder Bill Gross is a regular on CNBC and other financial broadcast outlets). 

Bond fund managers tend to be very macroeconomic and global in their outlook. They can see wheels within wheels and large-scale patterns because bonds are how countries, states, cities, and companies all fund themselves. If something is going right, bond markets can tell you. And if things are going to go wrong, bond markets can send the signals. Just ask Greece. Or California, which has one of the lowest credit ratings of any of U.S. state.

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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.

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U.S. GDP growth is revised lower, but that's no reason to panic — yet

Should have gotten to this yesterday, but better late than never. And just in time for Black Friday, the traditional kickoff for the holiday shopping season!

The Bureau of Economic Analysis revised down its data for U.S. GDP growth in the third quarter. What was 2.5 percent, which was pleasantly surprising when it was announced, became 2 percent. So the economy grew in the third quarter, just not as much as was originally thought.

This isn't really a good thing — that 2.5 percent figure caught observers off guard and gave economists firm reason to believe that the economy isn't going to fall into another recession. But under the circumstances, 2 percent isn't terrible. And losing half a percentage point of GDP doesn't mean that we have to gird ourselves for a double-dip. In fact, it means that the economy continues to grow, a sign that if nothing else, unemployment won't climb higher than 9 percent.

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Stuckflation continues: 80,000 new jobs in October does not a recovery make

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Unemployment in America grinds on as job seekers confront a weak recovery.

The BLS released October employment numbers this morning, and the numbers were disappointing. We were looking for around 100,000 new jobs, but we got only 80,000. The pattern for the past few months has been for a low number to be revised up. August, for example, came in at zero (yes, zero) but was later revised up, as was September.

So that's the silver lining. Taking revised data into account, we added about 100,000 more jobs than the BLS originally thought at the end of the summer and into the early fall. 

Altogether, this was enough to shave 0.1 percent off the unemployment level: we went from 9.1 to 9.0 (Hooray, U.S. economy!). Obviously, this is a dismal pace of improvement, unlikely to do much at all to bring the economy back to "full" employment of around 4 percent anytime soon. 

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Let the battle begin: Stagflation or 'Stuckflation'?

This CNBC video features the musings of Barry James, who manages the James Golden Rainbow Fund, which "seeks to provide total return through a combination of growth and income and preservation of capital in declining markets." More to the point, Barry was asked to consider whether we're currently experiencing a replay of the 1970s, a decade that will be forever known for "Saturday Night Fever," the Bicentennial, punk rock...and stagflation, a scary economic phenomenon that combines low growth and high inflation.

We certainly have the low growth part right now, even though the third quarter 2011 data showed that U.S. GDP was 2.5 percent, much better than expected. The high inflation side, on the other hand, hasn't really materialized. Our current rate is 3.9 percent, just slightly above the historic average of 3.38 percent. And this is with the Federal Reserve pouring money into the economy.

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