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EAST BAY QUARTERLY UPDATE

JANUARY 2010 EDITION

INTRODUCTION
East Bay EDA is pleased to provide the East Bay Quarterly Update, with an introduction and outlook authored by Jerry Nickelsburg, Senior Economist with the UCLA Anderson Forecast.

To view the Bay Area "by the numbers", download the Quarterly Indicators Sheet for Q4 2009. This one-page summary includes GDP, CPI, employment, housing, construction permit, hotel, airline passenger, and foreign trade data.

Recovery in the East Bay: A Microcosm of California

The recovery from the current recession is at hand and there is widespread anticipation of better times in 2010. How will the East Bay fare in this recovery? Economists are of somewhat different views on the answer to this question and for good reason. The East Bay economy straddles the two distinct parts of the divided California recovery. On the one hand it is well situated for growth in exports, in green technology, in research, engineering and development, and in medical technology, much like the other coastal urban areas in California. On the other, East Bay employment has been disproportionately weighted towards residential construction, trade, and government jobs much like the interior areas of California.

All signs are pointing to the former leading the state out of recession and the latter lagging well behind. It is the weight ascribed to these two forces which is the source of the differences in views on the shape and speed of the recovery in the East Bay. The view of the UCLA Anderson Forecast is that the East Bay may be a little more like the other coastal regions than the interior regions, and therefore, will grow slightly faster than the state as a whole, but will not see rapid growth until the latter part of 2010.

With respect to employment the worst seems to be over. Over the last four months the seasonally adjusted unemployment rate spiked at 11.7% and then returned to the level of last August. Though payroll job loss continues, there were 3,000 fewer payroll jobs in November than in September, the rate of decline is slowing and the pattern is suggestive of job increases in the early part of 2010. In particular, a key area of East Bay employment, durable goods manufacturing, saw a net addition of jobs in the last two months compared to the 3rd quarter. In addition, temporary services, a precursor of general hiring, and education and health care, traditional engines of growth, are now adding jobs in the East Bay.

One of the two principal reasons for optimism going forward is the robust recovery of exports. Since the 1st quarter of 2009 the number of full containers designated for export through the Port of Oakland has steadily grown. Growth has occurred in other California ports as well, but Oakland, as the port of embarkation for produce and processed foods, and forest products from the Central Valley has led the state in returning to pre-recession levels. In addition, growth in manufactured goods exported from the East Bay has begun.

This positive trend ought to continue through the next few years as China’s growth rate is accelerating and world trade is returning from its collapse in 2008. High valued exports through SFO are still about 15% below October 2007 levels but are also growing. This export led growth is one of the important engines of growth for Coastal California and its continuation depends upon both the growth of California’s trading partners and competitive exchange rates. Our U.S. forecast places both of those events as being likely.

The other reason for optimism is the East Bay's manufacturing base. The inventory cycle currently fueling the national recovery will soon be felt in new hiring over a broad spectrum of manufacturing. Moreover, the long awaited Obama stimulus package research funds are now being spent and the Bay Area, with its critical mass of technology firms and universities, is winning a sizable proportion of contracts. These initiatives in green technology along with the venture capital and private equity investments in green, med, and information technology will incubate new manufacturing in the East Bay. Thus, while some aspects of manufacturing in the East Bay are in decline ( e.g NUMMI and associated fabrication facilities) on balance the base is solid and growing.

The East Bay’s comparative advantage as a locus of trade for the Bay Area has its downside as well. The low retail inventories of the 2009 holiday season as well as the fall off in imports has made retail, wholesale, transportation and warehousing the source of the greatest private sector job loss in the last few months. If, as we are forecasting, consumption returns slowly during this recovery, firms in these sectors will be forced look for ways to economize and continue to trim payrolls.

The bubble in home prices in the Bay Area fueled a boom in new home construction in the middle part of the last decade. This was particularly true in the inland portions of the East Bay as astronomical home prices near the Bay forced households seeking affordable housing further to the east. According to the Case Shiller / S&P home price index, prices in the San Francisco/East Bay metropolitan area rose 76% from 2001 to 2006. In a dramatic reversal they declined from their peak by -46% earlier this year, and in a turnaround over the last six months have risen by 15%. This is a good indication that housing markets have stabilized in the Bay Area. But, the FHFA quarterly index, which breaks out the East Bay from the Metro area, shows that East Bay inflation adjusted home prices in the 3rd quarter of 2009 were the same as they were in the 1st quarter of 2002 and it does not show the same stabilization.

The weakness in the East Bay relative to the overall Bay Area housing market is being driven by the overhang of excess housing in the eastern part of the region. With home prices more affordable in the western part of the region and unemployment remaining high, residential construction will be a second source of drag on the recovery.

The third and largest problematic sector for the East Bay remains government. The state and local government sector, which includes public education, comprises 16% of all East Bay jobs. Over the last two months, local government job loss has made up 2/3rds of the total payroll job loss. State budget cuts in the first five months of fiscal 2009 have resulted in a small state employment reduction. As we approach the new fiscal year more cuts are in store. The bottom line is, as a consequence of the 2009 and 2010 state budgets, more reductions in government spending are to come. The way in which the legislative and executive branches address the looming 2010 budget deficit will have a significant impact on the shape of the recovery.

So as we look at the recovery for 2010, The East Bay, being somewhat of a microcosm of the California economy should begin to turn the corner slowly with more rapid growth at the end of 2010 and into 2011. The East Bay’s considerable advantage as an export center and as a cost effective manufacturing location close to technology research and development centers argues for a robust recovery once the three downside sectors stabilize and are no longer a source of contraction for the region.

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CONTACT This report was prepared by: Stephanie Brown Economic Development Analyst (510) 272-6843 East Bay EDA 1221 Oak St., Ste. 555 Oakland. CA 94612 For more information on the East Bay, click on www.eastbayeda.org

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