Research Facts & Figures
> Economic Forecasts & Updates
>
April 2009 Quarterly Forecast
> Tech Sector Suffers: Business Investment and Exports Plummet
Levan Efremidze, UCLA Anderson Forecast
The East Bay economy is well known for its high tech sector, as an integral part of the overall Bay Area technology cluster. The overall economic recovery in the East Bay will largely be determined by the growth in this sector. Two important elements of this growth have been and will be the U.S. domestic demand for equipment and software, and exports.
Domestic equipment and software spending in the U.S. plummeted by 34% during the first quarter of 2009, in real terms, and this downturn is reflected in East Bay employment numbers. The East Bay’s durable goods manufacturing, nondurables, information, and professional and technical support services sectors are under pressure and continue to slash payrolls. In addition to these direct costs, the downturn also causes indirect losses in many other sectors that depend upon growth in the high tech sector. Spending by information technology workers by some estimates equals one third of the overall local expenditures (in the Bay Area) and a fall in earnings in such a large part of the economy will spillover to other sectors.
For hints on the timing of the recovery of the high tech sector, we can look at East Bay computer and electronic goods employment as it relates to U.S. business spending on equipment and software. When demand for these products falls, it takes a few months for manufacturers to respond and adjust payrolls. The peaks and troughs in this employment sector occur 3-4 months later than in the U.S. spending on the equipment and software (Figure 5). Moreover, there may be more employment losses ahead for this sector during the next few months, as business spending is not expected to recover until the end of the year – coincident with the expected economic recovery.
Figure 4. U.S. Equipment and Software Contribution to GDP
Figure 5.
Sources: BEA, UCLA Anderson Forecast
The second biggest factor relevant to East Bay manufacturing in general, and to the high tech sector specifically, is the performance of U.S. exports. Here the news is no better. The sales of semiconductors globally are down by 30% in March from a year
earlier. The U.S. exports were down 30% in the first quarter of 2009 in annualized real rates, following a 24% drop during the previous quarter (Figure 6). Prospects are slim for a recovery in exports over the next two quarters; as much of the global economy is also experiencing the current recession. According to International Monetary Fund estimates, the European Union and Japan are in bigger economic pain than the U.S. It is unlikely that the U.S. trading partners will recover faster than the U.S., thus exports will not be an engine pulling the East Bay and U.S. economies out of this recession.
Figure 6. U.S. Exports and Imports
Sources: BEA, UCLA Anderson Forecast
Moreover, for businesses to be able to start investing they need to see an improvement in financial market conditions. East Bay businesses are borrowing money in the same financial markets as others in the U.S. Since the credit crunch started in September, borrowing costs have skyrocketed for large and small businesses alike. The vast majority of the firms in the U.S. would have to pay the rates that are comparable to high-yield bonds. These rates still imply huge risk premiums and they are much higher than in the previous recession (Figure 7). Although rates have come down slightly from the September peak, the spread with U.S. treasury bills is still above 12%. Corporate sales and profits are down, while borrowing costs are high. This is not a good environment in which to expect businesses to spend more money on long-term projects. But as soon as credit markets improve and consumer spending persists, business spending will follow. Moreover, as business investment is a highly volatile component of overall spending, current losses will quickly be reversed by large gains.
Figure 7. High Yield Bond Spread vs. Treasuries, Daily Data
Source: Barclay’s Capital
However, despite all the negatives mentioned, the East Bay does have an advantage reflected in large venture capital investments in the emerging technology firms and in its nascent “green” economy which will soon start receiving federal government incentives. These investments will generate jobs in small start-up companies and will supply a much needed boost to local output and income. While new legislation on the carbon cap-and-trade system will not be costless for the overall economy, if implemented sooner rather than later, well positioned regional economies like the East Bay will see a net gain in job creation and income as the new law will induce many businesses to invest in energy efficient equipment and renewable energy innovation in the near-term.
Footnotes
http://online.wsj.com/article/SB124117330343176947.html
Next: "Overall Employment Conditions in East Bay"
| 
