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Research Facts & Figures
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Economic Forecasts & Updates
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April 2010 Quarterly Forecast
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East Bay Outlook
EAST BAY OUTLOOK
In the last East Bay outlook we were optimistic about the potential for export trade to turn around and lead the East Bay recovery. We still are. Exports continue to grow and employment in durable goods manufacturing, the source of 10% of job loss during the recession, is growing once again. With the IMF predicting an earlier and faster recovery of more of California’s trading partners , we expect these positive trends to continue. The balance of the trade sectors will begin to see some growth induced by last quarter’s inventory correction in the U.S., but robust growth in these sectors will not return until consumers start spending again.
In addition to manufacturing, the next quarter should see the beginnings of a recovery in residential construction and the ultimate infusion of investment in renewable energy products, health care and infrastructure. None of these will happen quickly, but they are clearly on the way. The first allocation of research funds from the Department of Energy saw 20% go to Bay Area firms and the first allocation of $5B of medical research and technology funds resulted in over $200M in grants to Bay Area research projects. These funds were for storage technologies, CO2 scrubbing technologies, transmission technologies, and for primary research in to disease prevention and control. The balance of the funds has been allocated and while California received a lower percentage in the second round, the percentage going to the Bay Area remains high.
Infrastructure funds, which make up a large part of the Obama National Recovery Act, are typically slow to arrive. Engineering, EIR’s, land assemblage, public input and legal wrangling must all be put to bed before contracts are let and workers are hired. The first of these projects has begun in Southern California and Bay Area projects are not far behind. Venture capital investment also dipped in the fourth quarter, but is still above its recession lows.
Our national forecast foresees slow growth from the current quarter through the end of 2010 as U.S. consumers align their personal balance sheets with today’s reality and as energy, autos, and finance adjust to a new, larger role for the Federal Government. The state forecast is also not much changed from last quarter and calls for a more muted 2010 as the contraction in state expenditures through the middle of the year will provide a drag on state growth. This will be felt more heavily in the East Bay than in many other parts of California and we are expecting very modest growth in East Bay income and employment through the next two quarters. Thereafter, California should grow faster than the U.S., led by all three sub-regions of the Bay Area, Los Angeles and Orange Counties.
All forecasts are best guesses at where the economy is going and this East Bay Forecast is no different. What is different about this forecast is the asymmetry of the risks. The chance of being very wrong on the downside is not too great given the state of the recovery and all of the indications of stabilization and modest growth. Another dip in employment and income would require either a stalled recovery in Asia, which does not seem very likely, a sharp rise of interest rates by the Federal Reserve, also not very likely, another serious financial panic, also probably not in the cards, or some unpredictable catastrophic event. Baring these, history tells us that we are in a recovery and our forecast is towards the lower end of what one ought to expect in such a recovery.
There is a far greater risk of being wrong on the up side though. Deep recessions are usually followed by rapid expansions. If the expectations we discussed at the beginning of this essay change dramatically inducing consumers to be confident in their spending and business to be optimistic about the growth in demand for their products, the growth of income and employment in the East Bay could be much faster than we are predicting.
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