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Q4 2009 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. Exports continue to grow and employment in 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 the last quarter inventory correction in the U.S., but robust growth in these sectors will not return until and unless consumers start spending again.
Layered on top of growth in trade and manufacturing will be 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, and transmission technologies, and for primary research in to disease prevention and control. 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. But the process has begun. Venture capital is still struggling with existing investments but 2nd quarter investments in California were up. Venture Capital is now beginning to place resources more heavily into medical technology, medical software and alternative energy, all strengths of Bay Area firms.
Our optimism is tempered however by the recognition that until the East Bay adjusts to a smaller government sector, there will remain a drag on the economy. Now that we know the magnitude of the overall contraction in general fund expenditures, the impact on the East Bay during the balance of the fiscal year has the potential for aggregate growth to be in the negative range and cut off the recovery in housing before it begins. For decades it was an advantage to have a large government sector with well paying, stable jobs. The lesson of this decade is that it is now a disadvantage. Until California decides to deal with periodic massive shortfalls in state revenue, or to downsize government to such an extent that it can fund itself through existing taxes in a recession, these supersized swings in government expenditure will occur. The East Bay’s growth sectors, trade, technology, manufacturing, and health care are Henry J. Kaiser’s “opportunities.” The evolution of the East Bay economy to be less dependent on government will be painful, but will ultimately contribute to increased stability in employment, income, and the local tax base.
Our national forecast is for 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 more muted as the contraction in state expenditures through the middle of 2010 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 little to no growth in East Bay income and employment through the next few 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. |