LAEDC Chief Economist Jack Kyser Predicts Painfully Slow Growth For State Economies

What is the central message of LAEDC's 2008-2009 Economic Forecast?

The theme of the day is that, yes, business has slowed down very dramatically. A lot of people are saying we're in a recession. We don't buy that. The best way to characterize it is a two-track economy. You have the financial services sector and anything related to homebuilding and the housing market struggling. They are going to continue to struggle into 2009, possibly 2010. Then you have industries that are growing-slowly, but still growing. It's a pretty diverse portfolio: you have tourism, you have our professional business services, technology, and we're even looking for an uptick in international trade this year.

So, the L.A. area has a diverse portfolio, but you do have areas around Southern California that are struggling, like Orange County, Riverside, and San Bernardino. We think that people are going to find that it's much tougher out there than anybody imagined. And Ventura County is tiptoeing around a recession, so it's a very mixed picture.

What should federal, state, and local government do to mitigate the housing crisis, whether that includes an interest rate policy or a stimulus package?

It's going to be tough for any government's stimulus package to solve the problem in the housing market. You've had way too much construction, a lot of speculators in the market. When the story is written on this downturn a couple years from now, this is what people will say: "There were way too many speculators in the market and very loose lending practices." Look at the devastation wrought by the wizards on Wall Street, and before it's all over, you're probably going to see more intense regulation of Wall Street, a very, very sharp focus on risk. A lot of people say, "When will a housing recovery begin?" I think they're looking back to the way it was: double-digit increases in home sales, double-digit price increases. When the recovery comes, it will be very, very modest.

Do you foresee the same sort of appreciation in the real estate market that we had before the downturn, with speculation driving the economy?

No. I think everybody has learned that "risk" is a four-letter word, and with any new product that Wall Street comes up with, people are going to look at it skeptically, and not just in the United States, but all around the world. There are a lot of people that have been burned by some of the products that have come out of Wall Street. You're going to have a lot of skepticism and people not willing to play that game.

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LAEDC's 2008-2009 Economic Forecast for California and Southern California

There has been a lot of discussion about what's going on out there. We agree that we may not technically be in a recession, but it's going to be a very, very tough time out there. We like to characterize it as a two-track economy. You have one track, the housing and finance, struggling. The second track has growth out there.

Looking at state outlook for California, you have growth in agriculture (thanks to the low dollar), technology, and tourism (again thanks to the low dollar). You have some improvement in international trade, and then you have support from a lot of public and private sector construction projects. You see a lot of money being invested in Downtown Los Angeles, and a lot of money being invested up in Downtown San Francisco, as well.

But there are negatives. You've got the housing situation and related industries still struggling, mainly in the inland area of the state. Stockton has been identified as the center of the subprime problem. The Inland Empire is also in a very tough time.

With the credit squeeze, a lot of projects that have been planned won't go forward because they just won't pencil out. Risk is a four-letter word.

With the state budget deficit, they're struggling up in Sacramento. My new nickname for Sacramento is "Sacrademento." But they are trying to take on the deficit head on.

The port labor contracts are very important. In June, the ILWU port workers contract expires. Hopefully, they will start negotiations soon. And then water supply: even though it rained today, and we've had above-average rainfall so far this year, after a period of drought, it could have been a rough year.

What are we looking toward in housing? Obviously we can see pain in housing with the slow down in new housing permits, which is at one of the lowest levels of all time. People are trying to pare down what is in the pipeline, and it is going to be very, very tough.

So what does that mean for California jobs? There will be revised employment numbers at the end of this month, and some of these revisions are going to be very, very significant. What you're going to find is that as you go around California, you're going to have spot recessions by industry and spot recessions by areas. What you're seeing is very slow employment growth. Last year, 0.7 percent-that's low. Employment growth this year is 0.5. And then picking up in 2009.

Who are the industry winners and losers in California in 2009? Leisure and hospitality services, health services (you're all growing older, unfortunately), government, professional and scientific services, and wholesale trade.

Then you look at the job losers: retail trade. There are a lot of things going on in retail trade. A lot of retailers are paring back. Detroit has been saying that we have too many auto dealerships that are going to have to be slimming down there. And of course we have manufacturing and construction also lagging.

What positives are we looking for in Southern California? Growth in professional and business services, and this includes the legal profession. By the time the subprime mess is all sorted out, it is going to generate a tsunami of lawsuits. A lady down in San Diego is suing her residential broker because he did not tell her that the price of her home could go down. And then you have appraisals. They're over-appraising and you're going to see a lot of lawsuits there.

Tourism this year is going to lead to growth. You have a decline in the value of the dollar, change in travel policy between the U.S. and China, and exciting things happening like AEG's Grammy Museum and the opening of the Simpsons ride at Universal Studios Hollywood. This is the first time that they've opened a ride simultaneously in Los Angeles and in Florida. A lot of other things are happening, like the Broad Contemporary Art Museum. So tourism is going to be a very, very strong sector for us. One piece of advice: brush up on your Chinese. When you see the number of Chinese visitors, you will be very pleasantly surprised.

Finally, technology. We're waiting to see what happens. You have a lot of investment in intelligence gathering, but we're waiting to see the C17 built by Boeing in Long Beach. The Bush Administration presented their defense budget, and there's no money in it for additional C17s, but it also has no money in it for a shutdown of the production line, so we've got our fingers crossed that Congress will come in and buy ten more planes, and hopefully keep that assembly line going.

There will be some improvement in international trade, continued improvement in exports, a little uptick in imports, thanks at the end of the year to the government stimulus package. And then support for public- and private-sector projects. AEG has done a lot, and, of course, The Grand.

The negatives include housing and related industries. The credit squeeze: remember we have a small- and medium-sized business base that really depends on the banks. Local government finance, housing slowdown, sluggish retail sales, pressure on local government finance, labor contracts, and then the impact of water on development. In the Riverside and San Bernardino areas, some projects have been delayed because they cannot be guaranteed water.

So, what is my grand forecast for around Southern California? What you see is that Los Angeles County is sort of rolling along very, very slowly, and then you go down to Orange County. Right now, Orange County is in a recession, especially if it's measured by the employment. They've gotten a double-whammy of the slowdown in homebuilding, and also all the layoffs in the subprime industry. Their unemployment rate this year is going to hit five percent, which doesn't seem bad, but for them, that is a high number. Then you go to the Riverside/San Bernardino area, and you're going to see problems there. When we look at the employment numbers, Riverside and San Bernardino could very well be in a recession and then Ventura County tip-toeing around it.

Who are the industry winners and losers for jobs in Southern California? Health services, leisure and hospitality services, and professional business services. And then the suspects for job loss are durable goods, finance, and construction.

International trade: We've seen a decline in the number of units handled at the ports. We've seen a decline in imports, a boom in exports, but units handled, for some reason, was down. This year should see a modest recovery.

The region's hotel occupancy rate. Can AEG please speed up construction of the hotel? We need that hotel. Occupancy rates are holding over 70 percent, which means in the hotel business that often rooms will be sold out. So that looks really good.

Professional, scientific, and technical services are doing a lot to maintain growth. You have engineering and you also have specialized research activity. Focusing in this sector, there's a lot of activity that comes to us by traditional manufacturers, so it's going very nicely.

And then finally, the motion picture and TV production industry. A lot of news media around the nation was predicting that the Writers Guild strike was going to decimate the economy, and we had, oh my God, we had the cancellation of the Golden Globes...We estimate right now, it had about a $2.5 billion in impact on production expenditures, and even now, it's not back to business as usual. A lot of things have changed.

And then what about the Screen Actors Guild? This is a big question. They haven't even been pushed by very high-profile actors to get into negotiations as soon as possible, but they've been a little bit quiet. So we have to see what happens to SAG. But the good news is that box office last year was up; box office this year will be up. There is still a demand for the entertainment content that comes out of Los Angeles.

So, what are some things to watch as we move forward into 2008? Work stoppages and strikes-SAG and ILWU. ILWU is talking about opening contract negotiations early, so this is good news. Immigration rates-immigration is somewhat of an issue in the presidential race right now, so we've got to be very cautious about what this might mean for us. Turmoil in retail, the "Big 3" automakers and some retail chain stores are pairing back. Traffic congestion-when are we going to get relief from this ongoing issue? And finally, water supply impact on future development.

So, to sum it all up, 2008 isn't going to be the most fun year, but there is some good news out there. At a time like this, there are so many opportunities to take advantage of something that happens very unexpectedly. We think there's a lot of opportunity out there, and probably the best place in the whole United States in which to do business is Southern California, the Los Angeles five-county metropolitan area. It's an amazing place.

Don't worry about the bad-old days of the early 1990s-international trade didn't come onto the stage until about 1994. We have a diverse economic portfolio that will get us through this tough time.