Explaining Southern California's economy

Today's California economy, brought to you be the letter 'L'

The UCLA Anderson Forecast is out for the third quarter of 2011 and through 2013. The story for the country as a whole is an "L" shaped recovery from the Great Recession — which basically feels like no recovery at all. For California, the story is the same — except that the eventual recovery will probably be even more sluggish

The national economy is limping along at near-stall-speed: barely growing, with a prediction for 0.9 percent GDP growth through early 2012; and creating jobs at far to low a rate to lower the employment rate below it's current 9.1 percent. In fact, the Anderson Forecast is predicting unemployment will go up in the short term, to 9.5 percent, before falling to a still-mortifying 8.6 through 2013.

You look at those numbers say "Oh, man, what are we gonna do?" Then you look at the California outlook and you get really depressed. Our growth rate is at 0.7 percent, and our unemployment rate stays in double-digits until 2014. Plus, the state is beginning to split into two distinct economic geographies, with the coastal regions mounting a modest recovery while the inland regions go from stall to, potentially, stagnation.

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Reportings: No grocery strike; pulling a Qwikster; space boom; Jarritos!

The grocery workers union comes to tentative terms on a new contract with the Big 3 chain stores in Southern California. No details, but early indications are that the stores made concessions on health-care funding. But this would be a take-back from the 2007 negotiations, when the union and the chains agreed to underfund the healthcare surplus. (KPCC.org) 

 

Netflix (NFLX) is getting hammered again today, after the decision to spin-off the DVD-by-mail business into something called "Qwikster," which is now dangerously close to to becoming a word that people use to characterize the destruction of market value. "Remember those guys?" "Yep, they were riding high and then they pulled a Qwikster." Sort of reminds me of Research in Motion (RIMM) introducing a tablet with no native email. #Fail (Google Finance)

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Why Southern California's housing crash could lead to an entrepreneurship boom

The Economist's Ryan Avent has a Kindle Single out, titled "The Gated City." Reuters ran a short except last week, which included this:

If you can believe it, Silicon Valley’s main metropolitan centers were losing residents to other parts of the country during the Dot Com boom…The reason...was housing costs. From 1997 to 2000, average earnings in the Silicon Valley area increased by nearly 40%. But from 1997 through the end of 2000, home prices in San Francisco nearly doubled, according to the Case-Shiller index of home prices. As fast as compensation was rising, it wasn’t keeping up with housing costs. And so even as the demand for skilled workers in Silicon Valley soared, residents trickled away to other locations. That made for a too-tight labor market, and that, in turn, squeezed out entrepreneurs....And what did that mean for the American economy? The workers that moved elsewhere didn’t give up working. They found employment in other metropolitan areas, many of which developed thriving tech sectors. Those sectors weren’t fallow fields for new firm creation….But what the economics of metropolitan geography tell us is that many small collections of firms will often be less productive and less innovative than fewer, larger firm clusters. The forces that repelled workers from Silicon Valley, which was the intellectual heart of the country’s tech industry, reduced the potential economic impact of the tech boom. And in a not unimportant side effect, it reduced national productivity and total compensation in the economy.

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Gov. Brown's veto means that borrowing is more important than state services

Gov. Jerry Brown just vetoed a measure that would have forced him to debate whether so-called "trigger cuts" will kick in if the state runs short on its revenue goals this year. As the LA Times PolitiCal blog notes: "If those taxes don't materialize, up to $2.5 billion in cuts would occur automatically, including the option for local schools to reduce the academic year by up to a week." 

What Brown wants is for the state to retain its capability to borrow at historically low interest rates. This is from the governor's press release:

"I am vetoing a third bill that would have undermined investor confidence in California by altering the budget’s mechanisms for automatic trigger cuts. The trigger mechanisms were adopted when I signed the budget and were essential to improving our credit standing. Indeed, our no-gimmick, on-time budget was the reason S&P assigned its highest rating to the short-term notes sold this past week—the first time that’s happened since 2007,” said Governor Brown.

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Visual Aid: Cheap stuff from China is getting...more...expensive

 

This chart is from a Federal Reserve Bank of New York analysis of why Chinese imports to the U.S. are moving up in price. For some people — those who have issues with the flood of inexpensive Chinese goods that have hit our shores in recent years — this is good news. Stuff made right here at home will now stand a fighting chance!

However, you have to look at the trend more broadly. For one thing, rising import prices mean that Chinese wages are also rising, a generally beneficial thing for a country trying to lift much of its population out of poverty. That's the positive. But there's also a negative, on our side of the equation: The last thing Americans probably need right now is for inexpensive goods they've gotten used to being inexpensive — from clothing to electronics — becoming pricier. This could cause reluctant consumers to become more reluctant. We don't need that, given that a lack of demand is preventing our economy from recovering fast enough. It's also keeping employers from hiring.

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