July 2008 Quarterly Forecast
> Conclusion
By Ryan Ratcliff
The rest of 2008 is going to be pretty tough on the East Bay, as an overdue contraction in Construction employment comes together with continued weakness in Financial Activities and the beginnings of another ice age in State Government hiring, as the one-off losses related to the Lawrence Livermore National Laboratory are overtaken by the more widespread weakness expected when Sacramento finally passes a budget. Retail employment has been putting up some ugly numbers, but a closer look reveals that this is more likely a contraction in housing-sensitive retail like furniture and building supplies, rather than widespread losses across retail sectors. Similarly, the big negative in 2008Q2 in Leisure and Hospitality was due to a less-than-expected seasonal bump in the already volatile restaurant sector. The fact that substantial job losses have yet to spill over to sectors outside of real estate is somewhat encouraging. If this best case scenario continues, we’ll basically have more of these doldrums for the rest of the year. If the East Bay does start to see significant job losses outside these sectors, thing could get a lot worse. The recent bankruptcy filing by East Bay department store chain Mervyn’s was somewhat ominous: in addition to this chain’s direct importance to the region, it may also mark the beginnings of the more widespread decline in consumption that we’ve been fearing for some time. The balance of evidence from other parts of California at this time suggests that “what happens in housing stays in housing” – but it’s hardly a sure thing.
Obviously, the fate of the East Bay housing market hinges in no small part on the answer to this question. More of the same on the jobs front will likely mean more of the same on the housing front. But if layoff-related distress sales compound bad-mortgage distress sales, we could see a return to the freefall of Phase 2. Another crucial variable right now is the mortgage market. The initial phase of the credit crunch last summer was simply not to loan money. Money is flowing now, and lenders are even offering interest only payment options again. Now the issue is price: over the past three months, uncertainty about Fannie Mae and Freddie Mac, bank failures, and stock market turbulence have played havoc with mortgage rates, often generating 0.5% moves in the space of a few days. While foreclosures will be the main story of 2008, whether we are able to consolidate the uptick in sales volumes that we’ve seen in recent months absolutely requires stabilization in the mortgage markets.
So far, we’ve mostly focused on the cyclical side of the current slump: a year more of distress-driven housing markets, a temporary but painful slump in building activity, some belt tightening in the state government, and so on. But there is one part of the aftermath of the housing bubble that will cast a much longer shadow over the East Bay economy: the unprecedented decline in Financial Activities employment. Since its peak in June 2005, this sector has shed 18% of its total employment, or just over 12,000 of some of the highest paying jobs in the economy. And, in our opinion, many of these jobs are not coming back. Thanks to a combination of low interest rates, a hunger for post-tech bust investment opportunities, and a slow-to-adapt regulatory environment, non-bank mortgage lenders became this decade’s dot-com boom. Now that the market has turned, consolidation in this industry is inevitable. And this consolidation will leave a major hole in the employment base of the regions where it boomed the most: Orange County, San Diego County, and, unfortunately, the East Bay. 12,000 jobs is almost a year’s worth of “normal” job growth in the East Bay, that will have to be made up from across the board growth in other sectors. Forecast economist Jerry Nicklesburg recently estimated that Orange County will not recover to its previous peak employment level until 2012. And simply replacing 12,000 finance jobs with retail or tourism is a terrible trade in terms of personal income in the region.
As sobering as these estimates are, these figures are relatively small in the scheme of structural adjustments: it’s not the Rust Belt, it’s not aerospace… it’s not even on par with the tech boom. The same factors that have made the East Bay successful will continue to do so in the next decade – but the ride there will be a little bit rough.
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