Center for Economic Research and Forecasting – CalWatchdog.com

Forecast: California Economy Stagnating

CalWatchdog Staff — Thu, 23 Jun 2011 17:39:09 +0000

JUNE 23, 2011

By JOHN SEILER

California’s economy is growing at a slower pace even than the stagnating U.S. Economy. California jobs creation is sharply lower than U.S. jobs creation. The state, basically, has missed the modest recovery of the past two years — even as the country may be sliding into another recession.

Those are the top conclusions from the economic forecast released today by the Center for Economic Research and Forecasting at California Lutheran University. The conclusions confirm something I’ve been pointing out in articles here on CalWatchDog.com: while the governor and the Legislature have been concentrating on the state’s budget problems, the real economic issue in California is the inability of state businesses to create new jobs. The California government has become a fat, bloated, jobs-killing machine.

Here’s their graph of California unemployment, which they foresee sticking above 11 percent for the next 18 months. That’s total stagnation.

California’s ‘Lost Decade’

The chart clearly shows that California’s unemployment rate (the yellow bars) will continue to stagnate well above the national unemployment rate (the red line). The anti-business, jobs-killing policies begun under Gov. Arnold Schwarzenegger with his beloved AB 32 in 2006, and continuing with his record $13 billion tax increase of 2009, have slammed the state into a “lost decade.” The question now is whether the California economy now will be lost for another decade.

As CERF Executive Director Bill Watkins warned:

For some reason, many California analysts have a hard time accepting the fact that California’s future isn’t what it used to be. Instead, they get pretty creative in making excuses. A few months ago California had a reported 200,000 new jobs month. It was obvious that this was an anomaly and was obviously unsustainable. No matter, the apologists were elated. Press releases were issued, and newspaper articles joyfully touted California’s new-found economic vigor. Alas, their joy was short-lived. Job numbers fell, and last month [May], California lost almost 30,000 jobs.

Outside the glimmer of Silicon Valley and the glamour of Hollywood, the California economy is sick. It isn’t growing. It isn’t performing well.

Watkins continued:

Let’s get real.

California has the second-highest unemployment rate in the United States. It is only exceed by Nevada, and it is worse than perpetually depressed Michigan. In the past year, California has only gained a net 87,300 non-farm jobs. Since the recession started, California is down 1,136,900 non-farm jobs, and that is after the past year’s gains.

Construction jobs are surely down. California has lost 53 percent of its pre-recession construction jobs, but at 304,000 jobs lost, Construction only accounts for about 27 percent of California’s lost jobs. Manufacturing is down over 200,000 jobs. Other big job-losing sectors are Retail Trade, down 166,300 jobs; Financial, down 123,700 jobs; and Professional Services, down 162,600 jobs. Only one sector, Educational and Health Services, is up and only 127,700 jobs.

Rich Counties, Poor Couties

California also is becoming two states economically, with most of the coastal counties doing relatively well, but the inland counties performing abysmally.

San Diego, Orange, and Santa Clara counties are doing better, with unemployment below 10 percent; but those counties account for just 21 percent of the state’s population.

By contrast, “California has 19 counties with unemployment rates in excess of 15 percent.” Economists define unemployment above 15 percent as being in a technical “depression.” Those 19 counties are about one third of the state’s 58 counties. So, about a third of the state is suffering a depression.

Watkins said that California has many advantages, including a great climate, prime location on the Pacific Rim, being part of the vast U.S. economy, a trained workforce, ports and great cities.

The problem is the state’s horrible economic policies. The state’s water, energy and highway systems once were among America’s best. “California once built things,” Watkins observed. “Today, every project is controversial, and everyone seemingly has a veto on every project. Delay is epic and uncertainty accompanies every step of every California project. Regulation and taxes choke the vigor out of private business.”

An education system once among the nation’s finest, he said, “Today it is in decline, unable to muster the ability to effectively deal with budget challenges, reduced to impotent tantrums, like a child demanding attention.”

Indeed, “tantrum” is the right word to use for a state government that, for a decade now, has whined about everything, blaming everyone but its own bloated, repressive self for the state’s problems.

The question is when California citizens will rise up and restore the luster to the former Golden State.

CA Economy Holding Back Nation

CalWatchdog Staff — Mon, 20 Dec 2010 16:49:37 +0000

DEC. 20, 2010

By JOHN SEILER

Strong doses of reality keep throwing cold water over Gov.-elect Jerry Brown. The mess left behind by departing Gov. Arnold Schwarzenegger seems to grow worse every day.

The latest cold water splashing comes from California Lutheran University’s Center for Economic Research and Forecasting (CERF) and its forecasts for the U.S. and California economies. It starts with the “good news. This is CERF’s first published report where we do not forecast any quarter with net United States job losses. It appears that the job recovery, weak as it is, is finally here.”

But even that weak economic recovery is avoiding California. The forecast expects, “Our forecast for California jobs is for small and declining job losses throughout 2011. Output, though, will continue to grow, at rates near those of the United States. Thus, while California will technically be in recovery, few will feel the impacts of that recovery.”

Call it the non-recovery recovery. Only in California.

This chart shows non-farm jobs for California and the United States. Note how California (yellow bars) lost jobs more quickly than did the United States as a whole (red line), and now is creating jobs at a lower rate.

I would add that California’s slow growth is retarding overall U.S. growth. The state that once carried America out of recessions into prosperity now is a straggler holding everyone back.

Deficits and unemployment

There’s no good news here for the state’s $28 billion deficit. “I’m not that optimistic that there is a long-term solution to the budget deficit,” Bill Watkins, executive director of CERF, told me. “That’s just another reason why California’s recovery will be more slow than the nation as a whole. We have a 30 percent unemployment premium over the nation.” This calculation is similar to my “California Jobs Gap” calculation.

“That will persist,” Watkins added. “That’s another reason why California will lag the nation in recovery.”

Here’s CERF’s chart of state and U.S. unemployment rates:

Taxes and AB32

Two big issues facing the state are potential tax increases and the implementation of AB32. On taxes, it’s looking like Brown, once in office, will give voters an ultimatum: raise taxes or endure even greater budget cuts than otherwise would be enacted.

Tax increases “would stifle the recovery,” Watkins warned. “But we don’t see tax increases causing a double-dip recession. A soft recovery would become even softer.”

Another concern is AB32, the Global Warming Solutions Act of 2006. It will be thoroughly implemented in 2011. One study predicted that it would kill up to 1.1 million jobs. Watkins told me the jobs likely won’t be killed, they just won’t be created. “We’re forecasting job losses for the next several quarters,” he said. “AB32 is a big part of it.”

A Dec. 3, 2010 report that Watkins wrote for CERF (separate from the forecast) found:

We performed an extensive review of the economic impacts of one of California’s most important greenhouse gas regulation, AB32, and found that command and control regulation in general and AB32 in particular is inefficient, cost jobs, and depress economic activity. California’s Legislative Analyst’s Office agrees, as evidenced by this report.

The dismal revenue situation is seen clearly in the following graph, of real retail sales growth, which is stagnant in the near future. It means there state revenues are not going to get a boost from increases in sales, and subsequent sales taxes.

The next graph shows that real wage and salary income also will be stagnant. So there won’t be any help for the budget from growth in people’s incomes, and subsequent income taxes.

California’s budget is stuck in an absurd Catch-22. Tax increases to close the budget gap end up reducing the jobs and sales bases from which taxes are taken, requiring even more tax increases.

High cost of business

The new CERF forecast also found, as other studies have, that California is especially hard on businesses:

In a sense, this is what we’ve seen throughout the recession. Nationally, output has recovered far more rapidly than employment, as employers have been very reluctant to increase employment. In California, the process is exacerbated by the high costs of doing business in California.

The simple fact is that businesses must squeeze out more productivity in California if they are to be competitive. They get rid of less-productive employees. They increase the ratio of capital to labor. They get the productivity they need, or they leave….

California is wounded. Its job growth will lag the nation’s growth for years. Domestic migration will remain negative, as middle-class families move to places with more opportunity and affordable housing, unconcerned about the irony of leaving the home of the housing bubble for more affordable housing.

Housing stagnation

The forecast finds that the housing crash is over, but housing prices and construction will not grow:

California’s home prices are not likely to fall significantly. Replacement costs, building restrictions in California’s most desirable communities, and a still-growing total population– domestic migration will not likely exceed the sum of natural growth and international immigration–place a limit on how low California home prices will fall, and it appears that we are at or near that limit. Most likely, changes we seen in California’s median home price will primarily reflect compositional changes rather than actual price declines.

At the same time, California home prices are unlikely to increase much, on average, in the coming year. The Central Valley and the Inland Empire are still way overbuilt. The Inland Empire’s proximity to Los Angeles means that its recovery will likely precede that of the Central Valley, hindered as it is by a depressed agricultural sector and distance from major job centers.

The next chart shows single family residence median home price growth:

And here is a chart of new home building permits:

Can the California Dream be restored?

It looks like the California Dream has become the California Nightmare. In his Dec. 3 report, Watkins noted:

There is no doubt, though, that unless policy is changed, California’s future is dismal, characterized by high unemployment, limited opportunity, and the continued exodus of the working class. California’s political class needs to accept this fact before California’s future can change.

But he still finds hope. Watkins writes:

I recently saw an article comparing Japan’s and California’s efforts at controlling greenhouse gasses. The author claimed that Japan’s adoption of nuclear energy is not available to California, because it is against the law in California. That’s ridiculous. California laws are changed constantly. This sense that California’s future is already written is pervasive. The University of California Commission on the Future’s final report, issued in November 2010, has a phrase that is disturbing: “The future cannot be avoided.”

That is just wrong. California’s future is what California makes it. No place on Earth has more natural amenities or a more benevolent climate. No place has a location more amenable to prosperity, located as California is between thriving Pacific Rim economies and the entire United states market. No place has more economic potential than California.

We are in control. The future is what we make it. California Nightmare or California Dream. It’s our choice.

John Seiler is a reporter and analyst for CalWatchDog.com. His email: writejohnseiler@gmail.com.