Countervailing Forces Drive Economic Forecast
By Jorge Casuso
Dec. 2 -- The national economy in on "a razor's edge" after the dot.com boom and bust defied common wisdom, and it could be headed for another downturn in 2005-06, according to a leading local economist.
Christopher Thornberg, a senior economist at the UCLA Anderson Forecast, looked into the crystal ball at the monthly Chamber of Commerce luncheon Tuesday and saw what many businesses fear -- a need for consumers to stop spending.
In addition to a consumer market driven by low interest rates that may be too heated for the economy's good, the UCLA forecaster also saw non-payroll positions driving job growth and higher interest rates driving down home prices.
"You normally get a sharp increase (in consumption) at the end of downturns because consumers weren't purchasing," Thornberg said. "Not this time. Consumers have been buy, buy, buying all along, though income is down and there's unemployment.
"These sales are occurring at the expense of future sales," he said. "Consumer debt is at an all-time high… The big worry is we're setting up for another downturn in 2005-06.
"The economy looks good," concluded Thornberg, who authors the Los Angeles forecast. "But there are some fundamental problems underneath. We need to see consumers start slowing down."
The future, for now, may not in cities like Santa Monica -- which reaped some of the benefits and fallout of the internet boom -- but in Fresno, in Riverside, San Bernardino and San Diego, which boasted four of the top ten fastest-growing economies in the nation, Thornberg said.
"It all comes down to industry mix," he said. Government centers and bedroom communities are booming, while manufacturing and commercial centers are waning.
"LA is average as far as the U.S. goes," Thornberg said, adding that it lost 3,700 jobs in a state that added 33,000 payroll positions, thanks in large part to San Diego and the Inland Empire, which accounted for half of the job growth.
LA's slump is due to a drop of about one million passengers who arrive at LAX each month, Thornberg said. But the fundamentals for a healthy economy are still there, though they aren't easy to spot.
The big growth industry is "informal jobs," which are not reflected in employment statistics. If payroll jobs are on the decline, contracted positions are booming -- from one million in 2000 to 1.35 million now, according to a monthly U.S. census.
"There are a lot of jobs forming here, they're just not showing up," said Thornberg, who has contributed to a number of studies measuring the impact of important events on the California economy, including the NAFTA agreement and the recent power crisis. "Firms are dodging the stats or contracting… Things aren't as bad as they might look."
There will likely be a 1 percent increase in job growth next year, Thornbeg said, followed by a 2 percent hike. While jobs in finance, information, education and health related fields are on the rise, "manufacturing will continue to lose jobs," he said.
The forecast is also mixed when it comes to the housing. While the housing market is in the midst of the "perfect storm" due to a huge demand (there are 11 new Californians for every house built since 1999), now is not the time to buy, Thornberg warned.
That's because mortgage rates below 5 percent have "driven the market into a frenzy," with many buyers acting on "this idea that I have to lock in now or I will lose out," Thornberg said.
As a result, housing prices are overvalued by 10 to 15 percent, a bubble that could soon burst.
"If interest rates go up, prices have to go down again." Thornberg said. "Interest rates have bottomed out, and the market should cool off and see prices drop… Is it a good time to buy? No way."
Rental prices in he LA area, however, should remain high, he said.
"Rental prices across the U.S. are starting to soften" except in Southern California and a few other areas, Thornberg said. "I don't think rental prices are going to collapse. There's too much population."
However, vacancy rates on the Westside are rising, while they are dropping in Downtown LA, Thornberg said.
That, he said, is "mostly because of traffic problems. It's harder and harder to get the Westside," a problem that could be alleviated if a light rail is ever built, he said.
Sacramento, Thornberg said, is going to have to make some hard choices in the midst of a historic budget shortfall. But "the budget situation" is bad due to "irrational expectations for the future."
It took the State government longer than businesses to realize it had to cut back spending. "It was committed to spending today and tomorrow and the next day and the next," Thornberg said.
By mid-2001, the private sector had stopped hiring, something the State failed to do until 2003.
"The budget gap is not going to be fixed" by itself, Thornberg said. "Tough choices are going to have to be made."
Many of the countervailing signs -- such as consumer spending in the midst of hard times -- are the result of the dot.com boom and bust that spurred a number of trends that seem to defy economic logic.
"For the last two years, we've been suffering from Internet rush hangover," Thornberg said. Corporations, he said, were investing without profits until mid-2000, and investors in the industry had stopped saving.
Still, despite the bust, consumers continued to spend due to low interest rates and kept the economy afloat, Thornberg said. As a result, he said, the economic downturn was "very, very mild."
The reason: While consumers normally lead a downturn by cutting back on large ticket items, "for the first time businesses led the downturn and consumers didn't respond. They continued to buy. They carried the economy."
Of the recent 8.2 percent growth rate, personal consumption accounted for 4.5 percent of the growth. That, Thornberg said, is "bad news."While most people assume 9/11 sent the economy into a tailspin, in truth the attacks only delayed, not cancelled, retail sales, which "spiked up like mad in October (2001)," Thornberg said.
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