Five years after Lehman Brothers filed the largest bankruptcy case in the nation’s history, Southern California’s economy is still recouping its losses. To be sure, California is adding jobs at a faster pace than most of the nation - second only to Utah. But when you break the economic numbers down by region, there are sharp contrasts.
Los Angeles County’s unemployment rate remains at 9.9 percent, 2.5 percentage points higher than the national rate. Home prices in L.A. county, which plummeted 45 percent then stagnated for years, only recently showed a sharp, double-digit hike. Most economists say slowly, but surely, the region is pulling out of the slump.
“The economy is clearly making recovery happen,” said Robert Kleinhenz, chief economist with the Los Angeles County Economic Development Corporation. “It has been taking a lot longer than is typically the case.”
According to Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast, the time frame for recovery is uneven throughout the state.
“Prior to the 2008-2009 recession, we really did have two California economies," Nickelsburg said.
Coastal areas like Orange County and San Diego, have jobs focused on knowledge communities, technology, innovation and trade, and they have recovered jobs faster than areas like the Inland Empire, which depended on growth in residential construction, government and more traditional manufacturing, Nickelsburg said.
Both Orange County and the Inland Empire were hard hit by the recession; but Orange County has recovered half of the jobs it lost during the recession, whereas the Inland Empire has recovered only 20 percent, Nickelsburg said in his report.
Usually, the economy recovers two years after a recession ends, but the last recession, which ended in 2009, is different according to Kleinhenz. While debate continues over the true causes of the overall recession, most experts agree on the main elements behind the housing meltdown. Poor underwriting and mortgage lending practices allowed and even encouraged borrowers to take on high-risk loans. Banks approved large numbers of mortgages for customers who were unlikely to be able to make their payments. Many banks backed their financial securities on these problematic mortgages and when borrowers defaulted on their loans, many of the nation’s financial institutions were in trouble.
That set off a chain reaction with banks putting a halt on lending, freezing up the credit that is crucial for entrepreneurs and businesses. Construction stalled. Fewer jobs were created and with a dwindling customer base, businesses laid off employees. The stock market plunged and home sales plummeted. Those losses continue to reverberate today.
In 2007, before the recession, Los Angeles County had 4.12 million non-farm jobs, according to the state's Employment Development Department. Last year, the number of non-farm jobs in the county was 3.86 million.
“The pace of job growth has been really slow,” Kleinhenz said. “Recovery has been slow in part because the financial crisis has hampered activity all the way around.”
It could take years before jobs reach pre-recession levels
According to Kleinhenz, it could take years before local job growth reaches the peak levels seen before what has now become known as the Great Recession. Even though the economy is improving, the nation's Gross Domestic Product -- the market value of goods and services produced in the country -- is growing at a slower pace than normal.
“Just about every industry lost jobs in the recession,” Kleinhenz said.
But he also pointed out that in Southern California, some sectors buck the trend, with industries like leisure and hospitality showing continued improvement and consumers spending again in areas like hotels and restaurants. For example, The Habit Burger Grill, based in Irvine, has announced plans to open about 20 new restaurants this year, and that will translate into more than 600 new jobs nationwide.
But hindering growth are state and federal budget cuts. The automatic spending cuts known as sequestration have hurt some defense-related Southern California companies. Aerowire Technical Services in Palmdale handles wire harness fabrication and electrical component assembly for planes. Owner, Velma Searcy said if it weren’t for sequestration, she could have doubled her number of employees. Back in May, Searcy told KPCC she would have hired technicians who generally earn $15 to $20 an hour. But instead, she cut the hours of one-third of her workforce.
Home prices continue to rise
In August, Southern California’s home prices rose 28 percent to a median of $429,000, according to the San Diego-based firm DataQuick. Analysts say prices have been soaring in part because there are fewer homes for sale. Many people who’d like to sell their homes are waiting for prices to rise and there are fewer bargain-priced foreclosures and short sale properties for sale.
Even with the sharp uptick, the prices haven’t reached pre-recession levels, according to DataQuick. The median price of a home in Los Angeles County was $550,000 in August 2007. That fell to a low of $300,000 in April 2009. In August 2013, the median home price in Los Angeles County was $429,000.
Still, first-time homebuyers are often finding themselves priced out of the market. Currently, about one-third of Southern California homebuyers are investors or people purchasing additional homes. Many of these buyers pay in cash and that makes it hard to compete for first-time homebuyers, said Eugenio Aleman, senior economist with Wells Fargo Economic Group. As a result, Aleman said, we are seeing fewer potential first-time homebuyers and more people living with their families.
How the financial services industry in Southern California has evolved
Prior to the Great Recession, Southern California was a center for financial services. Both the Calabasas-based Countrywide and Pasadena-based IndyMac specialized in second mortgages. When the housing market started to fail, the two companies were forced to lay off thousands of employees.
Many of those who suddenly found themselves out of work moved to places like Texas, said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California.
“Basically, financial services has gone away as a major employer in Southern California,” Green said.
Prior to the recession, Southern Californians got their mortgages through lenders like Washington Mutual, Countrywide and Independent National Mortgage Corp. (IndyMac). Those outlets don’t exist as standalone businesses anymore.
Bank of America purchased Countrywide in 2008. Washington Mutual is now a part of JPMorgan Chase and Co. and parts of IndyMac now belong to One West Bank. Today, many Southern Californians get mortgages through JPMorgan or Wells Fargo, Green said.
With so much turmoil in Southern California’s financial services market, the construction industry suffered, especially in Riverside and San Bernardino counties, Green said. “Construction was really important to the Southern California economy and it all went away in a short period of time,” Green said.
According to Green, part of the problem is access to capital for smaller, private homebuilders, a shortage of land in Southern California and difficulty finding skilled laborers.
“We have all these unemployed people (in the U.S.), but they don’t know how to do framing,” Green said.
He added that some construction workers who used to do the job moved back to Mexico.
What happens next?
In a bit of good news from the UCLA Anderson Forecast, Nickelsburg said he believes California’s unemployment rate will drop about two points from its current level to 6.7 percent by the fourth quarter of 2015. But Nickelsburg said the recovery won't be spread evenly across the state and consumers should take the news as a mixed bag.
"The good news is that we are growing and that the rate of growth is going to increase," Nickelsburg said. "The bad news is that we're in our fifth year of recovery and we're still not back to, in many cases, where we were in 2006."