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Q4 2009 Quarterly Forecast
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Trade & Manufacturing
TRADE & MANUFACTURING: UP FROM THE BOTTOM
The most encouraging sign of the end of the recession in the Bay Area comes from international trade. Previously we reported that the IMF and other international agencies did not expect our trading partners to come out of recession before the U.S. It is California’s good fortune that the forecast was wrong. Japan emerged from recession in the 2nd quarter and grew at a 2.3% rate, and China, which had a slowdown in growth to near 6% during last year, has picked up and is growing in the 8% range once again. In Europe, the French and German economies are the first out of the recession registering 1.2% annual rate growth rates in the 2nd quarter. These turnarounds are due in no small part to huge domestic inventory adjustments. As firms around the globe confronted collapsing economies and “trash talk” of great depressions they postponed new investments and they liquidated inventories as fast as they could. Once inventories fell below optimal levels for the new, lower demands from the marketplace and a realization set in that the downturn was not bottomless, inventory orders began to be placed once again . Even though our largest trading partners, Canada, the U.K. and Mexico are not out of the woods yet, the surprising turnaround in Asia and Europe has been enough to get California’s exports growing once again.
Growth of exports through California’s seaports has been relatively steady since they hit a trough in the 1st quarter of 2009. The Port of Oakland, which is a conduit for exports of raw and processed food, raw materials, and forest products from the Central Valley and North Coast as well as machinery from Bay Area factories, has seen a steady rise of traffic and has returned to pre-recession levels of activity. Higher valued goods from Bay Area and Northern California factories and perishable and time sensitive exports typically travel by air cargo through SFO. At SFO exports climbed in the 2nd quarter and as of July, 2009 air cargo export tonnage was back to pre-recession levels. While the employment impact of this export growth has yet to be seen in the transportation, warehousing and durable goods manufacturing sectors, this increased activity bodes well for these sectors being the leaders in the early part of the recovery.
Manufacturing is particularly interesting in this context. Employment in manufacturing has been declining for some time. This is part of a transformation of the California economy from a final assembly manufacturing state to a knowledge based manufacturing state. The 2001 recession, the reduction of multi-lateral trade barriers and China’s 2001 admission to the WTO all sped the process of this transformation. The current recession will undoubtedly take this one step further. Graphic local evidence is seen in the planned closing of NUMMI, California’s last major auto assembly plant located in the East Bay city of Fremont. Though the loss of about 4,500 to 5,000 jobs in the East Bay is not welcomed, it is not unexpected either. The auto industry has been struggling for several years and GM, one of the two joint venture partners, was unlikely to be able to continue production, while Toyota, the other partner, with excess capacity of its own, would have been an unlikely savior. But the closing brings opportunities as well. California manufacturing is ready to grow again with the expansion of new technology manufacturing. This is illustrated in the East Bay by the examples of Tesla considering sites, including the NUMMI plant, for its new electric sedan factory, Solyndra expanding with a new plant in Fremont employing up to 2,000, and Mobius of Fremont developing cutting edge battery technology for hybrid and electric cars. While it is too early to tell how these and other new technologies will play out in terms of jobs, this kind of activity replicates the replacement of repetitive final assembly manufacturing with knowledge based design, development and manufacturing which has been occurring throughout California these past two decades. So the key issue with respect to the impact of the closure of NUMMI is the speed with which new job creation provides opportunities.
On the import side the picture is quite different. American consumers are not buying and the level of demand for imported manufactured goods from Asia’s factories remains flat. In our national forecast we have very sluggish growth in U.S. consumption. While that helps both the U.S. consumer’s personal balance sheet and the national balance of trade, it means that the jobs associated with the importation and distribution of goods are not going to be returning to the East Bay in the near term.
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