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Mid-Year Economic Outlook For 2012: Slow But Steady Growth

Forecast For Second Half Is Positive, But High Unemployment Rates Persist

By Sean Belk - Staff Writer

July 03, 2012 - Economic progress in Long Beach and surrounding areas will remain slow but steady for the remainder of 2012, according to economists, who said job growth has weakened amid uncertainties over the presidential election, financial troubles in Europe and a slowdown in emerging markets.

In the first quarter of the year, consecutive months of modest improvement in employment helped renew faith in the nation’s recovery. More recently, the local housing market started to turn a new corner, as median home prices in some areas, including Long Beach, increased slightly, while single-family home sales jumped by double-digit percentages and the apartment sector continued to firm up.

July 3, 2012 – Southeast Long Beach single family homes and condominium communities
pictured include Bay Harbour and Spinnaker Bay in the foreground, and Marina Pacifica
(left top by bridge), with parts of Belmont Shore, Naples and The Peninsula north of
the Marine Stadium waterway. At top left, the Seal Beach Pier is visible. The median
home price for homes in the 90803 zip code of Long Beach (including all those pictured
here) increased 21 percent in May compared with the same month last year, jumping from
$708,000 to $859,500, according to multi-listing service statistics provided by Phil
Jones, managing partner of Coldwell Banker Coastal Alliance. Home sales that closed
escrow in the zip code were up 45.5 percent in May over the same month last year,
while pending sales were up 86 percent during the same time period, he said.
(2011 photograph by the Business Journal’s Thomas McConville)

But economists interviewed by the Business Journal said job growth has diminished somewhat in the second quarter. They added that gains this year wouldn’t be enough to make any big dent in the relatively high unemployment rates, which will continue to weigh on consumer confidence in coming months.

“We’re growing . . . [But] we’re growing at a rate that’s much slower than what we need to fully recover from the Great Recession,” said Robert Kleinhenz, chief economist for the Los Angeles County Economic Development Corporation’s Kyser Center for Economic Research. “We’re heading in the right direction, but . . . these unemployment rates still remain painfully high for many people.”

Mid-year economic forecasts predict employment to grow by 1.9 percent in California this year, while job growth will be flat-to-barely-positive in Long Beach and Los Angeles County. The nation’s GDP is projected to grow this year by about 2 percent. But, Kleinhenz said GDP should be growing at 3 to 4 percent, the growth rate needed for unemployment rates to come down in a timely fashion.

Long Beach’s unemployment rate “dipped” to 12.2 percent in May, the lowest it’s been in more than two years. But the city’s jobless rate is still higher than both Los Angeles County (11.4 percent) and California (10.4 percent), and considerably higher than the national rate (8.2 percent). UCLA’s Anderson Forecast expects the state unemployment rate to fall below double digits by the end of the year, with the county and Long Beach rates trailing behind. Economists said unemployment rates, however, aren’t expected to reach pre-recession levels until 2014 or 2015.

Meanwhile, a looming “fiscal cliff” is set to take effect in January that would: unravel $220 billion in Bush-era tax breaks; conclude federal-stimulus-funding through changes in tax rates and spending provisions; and enact budget cuts left over from the unresolved debt crisis. Many firms are in “wait-and-see” mode, focusing more on curtailing expenses and consolidating rather than hiring employees and expanding operations, economists said.

Mark Vitner, senior economist for Wells Fargo Economics Group, said the pace of economic growth remains relatively slow by historical standards. He said it might take three to four years before unemployment rates bounce back to normal levels again. “Looking back at past economic recoveries, we’re not recovering nearly as fast as we did in the past,” Vitner said. “Businesses are still very much in cost-cutting mode and . . . there’s really been a lack of hiring.”

‘Modest’ Job Growth

Joseph Magaddino, founding director of the Office of Economic Research at California State University, Long Beach (CSULB), said job growth in Long Beach should be “modest” this year. “We’re moving forward, but at a really slow pace,” he said. “We’re not really looking for true robust job formation for actually a year or so.”

The state’s ongoing fiscal crisis continues to shrink the local government workforce and forthcoming job losses in the public sector may offset private sector job gains this year, Magaddino said. Cuts to public education statewide will mostly depend on if voters pass Gov. Jerry Brown’s proposed tax measure during the November election. Locally, public agencies impacted include city departments, the Long Beach Unified School District, Long Beach City College and CSULB, he said.

“The real drag on the local economy, which is going to make it a little bit worse, is that the Long Beach economy is heavily concentrated in government employment,” Magaddino said. “The net job growth is going to be pretty small because it has to compensate for the loss in the public sector.”

According to Kleinhenz, sectors in Los Angeles County that remain solid include: private education; motion picture production/sound recording; hospitality; professional and scientific services; logistics; and retail trade. He said jobs in manufacturing and local government however, are starting to further decline.

Eduardo Martinez, senior economist for Moody’s Analytics, said the county’s unemployment rate should “exceed the statewide average” at least until the middle of next year. He attributes the gap between the county and state employment figures to an overabundance of “housing speculation” in Los Angeles County that left a significant hole in real estate-related jobs.

The housing market, however, is either at or near the bottom and is no longer as much of a drag on the entire economy, Martinez said. “Subprime mortgage lenders – the ones that went out of business – they’re already out of business . . . So, you can’t go out of business again,” he said.

Some areas, such as Long Beach, are now experiencing a lack of inventory and would now be able to absorb distressed properties on the market. However, Vitner cautioned that the housing market recovery should be slow this year. “We still have a lot of homes in shadow inventory and we have a lot of folks who owe more on their homes than they’re currently worth,” he said. “The recovery in housing should remain relatively slow, but it should gain a little momentum as we clear more and more of the excess out.”

Additionally, Martinez said aerospace employment is “holding steady” this year, with a boost in production from private sector firms, such as SpaceX, and a shift away from domestic orders to more foreign aircraft sales. Also, he said the recession in Europe may eventually impact all markets in the U.S., but the areas most affected are on the East Coast. California will be more impacted by a potential slowdown in production in emerging Latin American and Asian countries.

Building Infrastructure

Jerry Nickelsburg, senior economist for UCLA’s Anderson Forecast, said a major plus for the Long Beach economy in 2012 is the sizeable infrastructure projects at the local ports, expected to boost business spending, increase local construction employment and bring new companies to the region.

Cargo growth through the twin ports is forecast to be flat to slightly up this year compared with 2011, according to international trade experts. But most jobs at the ports are likely to come from investments in port infrastructure, he said.

The Port of Long Beach is beginning a major $650 million design-build phase of the Gerald Desmond Bridge replacement project, considered the port’s largest, single public works contract in history. The port is also continuing the Middle Harbor redevelopment, a multi-year effort to build a mega-terminal, increasing capacity and capabilities; so far generating about 1,700 construction jobs.

Nickelsburg said the long-term push to invest in port facilities is being spurred by statewide environmental regulations and the widening of the Panama Canal, expected to be completed in 2014, an event which experts predict may cause some shippers to divert cargo away from West Coast ports. “That building is going on and is creating additional jobs at the ports,” he said. “That’s going to continue.”

Other major projects this year include: construction of a new $45 million passenger concourse at the Long Beach Airport, to be finished by year’s end, and the five-story, $490 million Governor George Deukmejian Courthouse in downtown to be completed by Fall 2013.

Also, Nickelsburg said apartment construction throughout the state will grow faster than the U.S. rate this year. In terms of the overall economic recovery, he said it remains uncertain whether the private sector will continue to recover on its own, even though many businesses rely on federal projects and programs that may face cutbacks in funding next year. It’s also uncertain whether employers, either private or public, can utilize the labor force’s maximum potential. “If government can do anything to hasten the recovery, what they ought to be focused on is training and workforce development that will move our workforce into a position to both create jobs and be employed in the 21st Century economy,” Nickelsburg said.