The Breakdown | Explaining Southern California's economy

California economy: When is a recovery not a recovery?

The UCLA Anderson Forecast, covering the fourth quarter of 2011 and looking forward through the fourth quarter of 2013, came out yesterday. KPCC's Brian Watt provided a report on air, and now I've had a chance to dig into at least some of the forecast. I'll start with the California section, presented by Anderson Forecast economist Jerry Nickelsburg. 

You'll remember that in the previous Anderson Forecast, Nickelsburg explained that California has broken into two distinctive economic regions: a recovering coast and a stagnating inland zone. Here's how I put it in the post I wrote back in September:

Since the financial crisis, two California economies have emerged. On the coast, there's growth. Inland, there's near-stagnation. You can easily see this expressed in the Los Angeles region's unemployment numbers. LA is bad, at at 12.7 percent. But Riverside and San Bernadino counties are far worse, at 15.1 and 14.3, respectively.

The industries that are creating jobs in California are also disproportionately located on the coast. Inland, the blast wave of the the housing bust is still being felt, with industries like construction shedding jobs.

This time around, however, Nickelsburg is in a cheerier, if still not exactly sanguine, mood:

In this California report we will continue our ongoing examination of the bifurcated recovery. What is different this time is that Inland California has finally begun to grow. By examining the employment numbers in some detail together with trade and housing data we find that while the news for Inland California is good, there remains a long road ahead.

In some sense the employment numbers for Inland California may not be surprising. Unemployment rates above 15% lead to falling wages on the one hand, and entrepreneurship on the other. Eventually a bottom is reached and the economy turns around. In the past, the engines of growth for Inland California have been migration-induced construction and government. In the September and October job numbers we find that neither of these  is driving hiring, and unlike the past three decades, there are no clear engines of job growth throughout Inland California.

He goes on to elaborate:

But, before we start shooting off fireworks, we must temper all of these very encouraging results with a dose of reality. The end of a recession does not mean “recovered from a recession.” It only means the contraction has ended. The pain remains real and persistent until solid and sustained gains occur. Throughout the counties of Inland California, with a few exceptions such as Tulare and Kern Counties, employment after the gains of the last two months remains 8% to 12% below 2006-2007 levels. There is clearly a long way to go and these trends in Inland California, if they were to prove to be trends, are only the beginning of the process. In the last California report we presented some analysis that suggested that “a long way to go” is about five more years. Though gains in agriculture, food processing, energy, and education have begun this process the question remains, “what will be the engine of economic growth in Inland California over the next decade in the absence of growth in construction and government?” 

He doesn't really answer the question, which is right thing to do under the circumstances, given that the damage done to the housing market during the financial crisis should prevent a construction comeback for the better part of the decade. 

But it's important to see this problem in the context of what's happening in California that's now fairly positive. As the above chart shows, the state is adding jobs at a pace well above the national level — and it's doing so effectively in the regions most hard-hit by the downturn. 

Of course, with extremely high levels of unemployment relative to the national level, California generally and the Inland Empire particularly had almost nowhere to go but...down. Even tepid GDP growth, which is what we've had for much of the past year, is enough to provide the conditions for a bottoming-out, then a sluggish resurgence. The good news is that a mostly limited recovery is being shared throughout the state.

The key takeaway from the Anderson Forecast's California report is the light at the end of the long, dark tunnel may finally be appearing. But the tunnel itself is still long and dark.

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