April 2008 Quarterly Forecast
> Looking Forward
Looking Forward
By Ryan Ratcliff
As we look for the light at the end of the tunnel, there are two issues to consider: how much more damage will we see in real estate related sectors, and how much worse will the non-real estate funk become? While the East Bay has seen a decline in building activity on par with the rest of California, it has bucked the trend when it comes to the employment impact of this contraction. While the boom in Construction employment may have become excessive in other regions, in the East Bay it looks more like a return to trend, suggesting that Construction losses may be less of a factor here than in most other parts of the state. Unfortunately, while Construction losses have been minimal, Financial Activities job loss in the East Bay is the second worst in the state behind Orange County, and looks to be spreading beyond real estate finance. Financial Activities employment has not historically shown anything like Construction’s cyclical swings, so the current situation is largely unprecedented, and feels more like a structural change in the economy akin to the aerospace contraction or the tech bust. As such, this makes the bottom extremely hard to predict. However, the concentration of job loss in Financial Activities relative to Construction does suggest some likely trends for the rest of the year. First, the overall volume of jobs lost to the real estate bust will be lower than many other parts of California, but the loss of these high value-added jobs will take a bigger bite out of personal income than would be the case in other areas. Second, the structural changes in the mortgage industry make these job losses a one-way trip. Since there’s no cyclical bounceback like we’ve come to expect from construction, we should expect a slow recovery in 2009, as the rest of economy grows to replace the hole left by the overgrown mortgage sector – a smaller cousin of the jobless recovery in the wake of the tech bust.
Figure 13: CA Private Employment vs. Government Employment
Outside of real estate, there are two other significant question marks for the East Bay outlook over the next two years, from the Manufacturing and Government sectors. While the service side of the high-tech sector is experiencing slower growth across California, the disconnect between the impressive performance of high-tech manufacturing in San Jose and the job losses in the East Bay is somewhat troubling. While recent history cautions against placing too much hope in any manufacturing sector, the best case scenario is that this trend is just late in coming east, and that the East Bay may get a much needed boost from this sector later in the year. Unfortunately, while there may be a small boost from manufacturing employment later this year, it will likely be undone by the local impact of California’s budget crisis, which we will start to see in the second half of 2008. Predicting the exact mix of solutions that will come down from Sacramento is tricky to say the least. However, history offers some guidance for what to expect in terms of impact on the wider economy. In the recession of 2001, private sector employment in California suffered most of its losses in 2001, followed by a stagnant 2002. But Government employment continued to grow at a 3.5% annual pace until the beginning of 2002. The budget-induced contraction of Government employment didn’t begin until late 2002, and continued on through 2003 (Figure 13). Ironically, in 2003 the Government sector became a drag on growth just as the private sector was beginning to get back on its feet, delaying California’s recovery. We expect a similar situation this time around: housing weakness will have hopefully started to taper off by the end of 2008, but unfortunately this is probably right about when the inevitable cuts in state and local government should start to bite. Locally, we do not expect that this budget-related weakness will derail the East Bay’s recovery in 2009, but it will be a drag on private sector growth.
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