Research Facts & Figures > Economic Forecasts & Updates > April 2010 Quarterly Forecast > Quarterly Forecast

EAST BAY QUARTERLY FORECAST

APRIL 2010 EDITION

INTRODUCTION
East Bay EDA is pleased to provide the East Bay Quarterly Forecast, 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 Q1 2010. This one-page summary includes GDP, CPI, employment, housing, construction permit, hotel, airline passenger, and foreign trade data.

The East Bay 2010: Waiting for Jobs

“VLADIMIR: We have to come back tomorrow.

ESTRAGON: What for?

VLADIMIR: To wait for Godot. “

“The recovery is at hand and there is widespread anticipation of better times in 2010 … With respect to employment the worst seems to be over. ..and the pattern is suggestive of job increases in the early part of 2010.”

This was the lead in to our last East Bay Report in January. Three months later we appear to be in the same place with unemployment high and not getting worse on average. There is no net gain in employment, though there is evidence of continued growth in output. Our anticipation of the recovery taking hold and net job gain by the end of the first quarter has not materialized and the East Bay economy, while not stalled, is not moving noticeably either. At the end of the play Waiting For Godot, a little boy runs up to Estragon and Vladimir, the protagonists, and proclaims that Godot is not coming today but maybe tomorrow. This is the story of East Bay jobs. Soon, maybe tomorrow, but so far jobs have not arrived on the scene. In this East Bay report we benchmark the current employment, trade and housing situation, and slide our forecast back a couple of months as we await the recovery in employment.

The business of economic forecasting involves analyzing the plethora of current economic data and through the use of our models, comparing it to past experience. In the past, the end of a deep recession has been characterized, in part, by rapid recovery in jobs. In the four recessions from 1958 through 1981, the average job recovery in California during the first six months of expansion was nearly 1% of the end-of-recession labor force. The last two recessions were characterized by the aerospace contraction and the dot-com bust, and they are atypical of California’s recession recoveries. If the typical pattern had occurred in the current recession we would now have seen 130,000 more jobs in the East Bay than have materialized. This delayed recovery in employment is most likely due to two factors: expectations and consumer debt.

What makes this recession different from other deep recessions of the post-war period is the presence of a financial panic and the notion emanating from some economists in Washington and Wall Street, but not shared by the Anderson Forecast, that this recovery is fragile and might not take hold.

There have been many panics in U.S. economic history. The Panic of 1907 has been viewed by many as comparable to the Panic of 2008 as it began with the failure of the Knickerbocker Trust Company, a large unregulated bank, and ran its course with a liquidity crisis spilling over to the real economy . It is interesting to note that the financial system reform growing out of this panic resulted in the Federal Reserve Act. While the comparisons might indeed hold, objective data on the 1907 panic and on other panics in the 19th and 20th century do not exist and cannot be incorporated into our models. Inferences that have been drawn from the single observation of 1907 suggested that confidence should have been restored and hiring begun by now.

But the U.S., California, and the East Bay are very different in 2010 than they were 100 years ago. So the impact of a financial panic on business expectations and business hiring today is not well understood. What we are observing is business growth without jobs. During the recession firms were quick to cut labor costs, and now that they are experiencing an increase in demand, are not yet forming expectations of a rapid enough recovery to warrant hiring. Increased output is coming from extending hours and increasing productivity. But this cannot continue without limit and hiring will need to start perhaps very soon.

Consumer debt is also playing an important role in the underwhelming expansion. National consumer revolving credit grew by over 10% between 2005 and 2008. It has been falling since that time as households get their personal balance sheet in order and consumer debt is now nearly at 2005 levels. This is a good thing for the long run health of the economy, but not such good news for the East Bay. Ramping down the level of debt means consumers are not spending as much on consumption goods.

This affects the East Bay’s retail, wholesale, logistics, warehousing and distribution sectors. The March retail sales numbers for department stores suggest that households might be close to increasing consumption levels, but consumer debt is still quite high. With slow growth in the consumption and business being reluctant to jump in and hire additional employees, the lag between the recovery in economic activity and jobs is attenuated. Our data do not admit a good estimate of the amount of the attenuated and our forecast in this regard has some risk associated with it.

The key sectors to watch for as the recovery unfolds are international trade, domestic distribution, manufacturing, health care, government and technology. The recovery will be export and technology led, and as such, the East Bay will be well positioned to grow rapidly once the drag created by slack consumer demand, business expectations, and the reduction of government is behind us.

NEXT SECTION: PRIVATE SECTOR EMPLOYMENT

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CONTACT This report was prepared by: Simon Yee Economic Development Trainee (510) 272-6342 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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