The Slow-Growth California Economy – The View, One Economist at a Time



The Slow-Growth California Economy – The View, One Economist at a Time
Written by: Gary Wartik
Oct. 10, 2013

One of the interesting things about the study of economics outside the classroom is the differing interpretations of the economy’s performance offered by economists considering the same or similar data at the same time.  While economists may differ on key points, most agree, however that California’s economy is not where it should be five years after the deepest recession in our lifetime struck in 2008.

During the next three months we will review the thoughts of various economists as they reflect back on 2013 and offer their views of what the economy may look like during 2014. Our next review will follow a November 8 presentation in Camarillo by Dr. Bill Watkins, Director of the Center for Economic Research and Forecasting (CERF) at California Lutheran University in Thousand Oaks.

During a late September 2013 presentation in Westlake Village, CA, Dr. Mark Schniepp of the California Economic Forecast Project in Santa Barbara noted that he foresees more housing starts in California, along with retail growth and overall moderate job growth through 2014.  On housing, many business and political leaders agree that there is insufficient housing in California.  During the next decade needs of the workforce will likely be driven by organic growth and a predicted increase of in-migration. The challenge remains how to better match various housing needs with the varying growth components of the economy.

Dr. Schneipp and others have noted that the bulk of California’s current job growth outside coastal areas is occurring in agriculture, retail, unskilled manufacturing and tourism/hospitality, where wages collectively are low. This translates into the need for more apartments and semi and attached housing units, yet California is not seeing an expansion of workforce available housing construction where it is needed most, although housing starts generally are up.

We have witnessed a significant increase in California housing values during the last 12 months, due in part to an increase in demand driven by low interest rates and a partial recovery of the economy.  A good portion of the more affordable inventory of existing homes, those in the $400,000-$500,000 range and below has largely been absorbed by middle income couples, along with investment companies and speculators.  The latter have created a new dynamic in the rental housing market, driving up rental rates for condos and single family homes, and driving down the affordability rate for middle-class wage earners.  Unfortunately, affordable housing rates, according to Trulia.com, a housing industry tracking and placement firm, dropped during 2013 to 14 percent in San Francisco County, 23 percent in Orange County, 24 percent in Los Angeles County, 28 percent in San Diego County and 32 percent in Ventura County. The affordability rate is still a respectable 48 percent in Riverside County.

What will really drive an improved state economy is knowledge-based industries. Dr. Schneipp has noted that the job market is the result of what he describes, somewhat humorously as “demographics and microprocessors.”  He ascribes the persistent high unemployment rates to the fact that “Any job that is mundane, repetitive or codifable can be done by a robot or microprocessor,” and as such, they will be.  The result is that low wage assembly and manufacturing-related jobs, for example, are going to filled, where practical by a collection of automated robots.  These machines do not need employee benefits, work breaks, vacations, sick days or health insurance, all to the benefit of employers and at the expense of live workers.

As we assess California, Dr. Schneipp and others believe that the emerging economy will be led by the technology sector.  This sector includes investment, international trade, mobile and web development, cloud computing technology, ongoing software development, expansion of the fast-growing video gaming market; development of the next generations of software and, to some extent, biotechnology.  Largely these growth components will be found mainly in coastal California and Silicon Valley, with inland counties such as the Inland Empire and the Central Valley likely growing more lower-waged jobs.

With housing costs escalating in coastal California, only a limited number of workers will be able to afford to live close to their work.  For those without degrees or strong computer, science, math or other sought-after skills, the fight is on for a shrinking, inadequate, over-priced housing market.  Dealing with the issue is critical to the economic welfare of California in the coming years. Our colleague at Vision Economics, Russ Watson will have more to write on housing issues in the coming weeks.

In closing, if you are a community or business leader, mayor, city council member, city manager or finance director, and your community is not performing at a level to meet community expectations, please contact us about an analysis of your economic development goals.  Also consider refreshing or  writing a new economic development plan to lead you to success.  Vision Economics has the team ready to help.

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