New Wells Fargo report bullish on state economy

Aug. 22, 2012

By Joseph Perkins

A new report by Wells Fargo Securities Economics Group declares that “California’s economic recovery has gained considerable momentum over the past year.”

It cites the decline in the state’s jobless rate, increase in sales of existing single-family homes, growth in social networking and gains fueled by international trade as evidence, in the words of Herbert Hoover — the Stanford graduate, the nation’s Depression-era president — that “prosperity is just around the corner.”

“The progress made to date,” states the Wells Fargo report, “probably surprises many people who have been mesmerized by all the headlines surrounding municipal bankruptcies and the seemingly never-ending state budget battles, but California’s economy has made significant strides.”

Yet, for every silver lining Wells identifies, there is a corresponding dark cloud suggesting that the report’s authors, economists Mark Vitner and Sarah Watt, are decidedly more upbeat than the data warrant.

Indeed, while the state Employment Development Department reported last week that California posted three straight months of job growth between May and July, nearly 2 million California workers remain idle almost three years after the state’s economic recovery began, and the Golden State’s 10.7 percent unemployment rate remains the nation’s third-highest.

Meanwhile, the Wells Fargo report predicts that, even with recent job growth, California“will need another two and a half to three years simply to recover the jobs lost in the Great Recession.”

Distressed sales

Home sales were nearly 14 percent higher last month than in July 2011, according to the latest report from San Diego-based DataQuick. However, “distressed sales,” sales of foreclosed homes and “short” sales of homes facing foreclosure, accounted for 41 percent of the state’s resale market.

Social networking companies like Twitter, Pinterest, Yelp, AirbnB have moved into more spacious offices here in California to accommodate their expanded operations. Yet hanging over the still-maturing industry is the specter of Facebook’s post-IPO meltdown, which has seen its stock price plummet nearly 50 percent.

Indeed, warns the Wells Fargo report, “lingering questions about the long-term potential for social networking and interactive entertainment might set the state for a letdown along the lines of what was seen following the dot-com crash a decade ago.”

As to foreign trade, while California remains a net exporter, rather than importer, exports to many of the state’s major trade partners — including China, South Korea and the Eurozone — have declined on a year-over-year basis. That could be a harbinger of state trade deficits to come and a net outflow of trade-related revenues.

Finally, the Wells report seems to suggest that the public is unduly “mesmerized” by news reports of fiscal crises facing the state government as well as local governments.

Yet, the report’s authors, themselves, expressed concern that the state closed fiscal year 2012 with revenues falling $1.4 billion short of spendingl and that the current fiscal year, which began on July 1, got off to a disquieting start with revenues coming in 10 percent lower than Gov. Jerry Brown and the Democrat-controlled Legislature projected.

Vitner and Watt conclude their report stating, “We remain relatively optimistic about California’s near-term outlook.”  However, their sentiment is not shared by the overwhelming nine of 10 state residents, according to a recent Field Poll, who describe theCalifornia economy as being in bad times.