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The Kyser Center for Economic Research

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v.13 n. 01 - Released January 5, 2009    [Printer-friendly version]

THIS WEEK'S HEADLINES:

Some Reflections on 2009

Happy New Year!!!  At LAEDC, that phrase means it’s time to update our economic forecast.  We’ll release the final results on February 18th.  In the meantime, here are some “big picture” thoughts about the economy today and going forward.

The economy today is in the throes of a severe downturn, which has been under way since December, 2007.  Recessions are characterized by declining employment and rising unemployment; falling home sales and construction activity; reduced retail sales, especially automotive and furniture; lower business investment; and slowing imports.  Government spending, however, is still increasing.

How do we get out of this situation?  Recessions end when the economy stabilizes or reaches a bottom.  Several interrelated issues need to be resolved before the bottom is reached and recovery can begin.  Prominent among them are the following:

• The economic landscape is positively littered with unwanted stocks of goods and services.  Homebuilders have homes they’ve built that haven’t been purchased yet; they won’t build any more until they sell the currently available homes.  Banks need to sell the homes they now own due to mortgage foreclosures.  Automotive dealers have too many cars and trucks on their lots and won’t place more orders at the factory until the current vehicles are sold.  Cautious retailers reduced their orders for the holidays and still didn’t sell enough; post-holiday sales are going on everywhere.
• Ultimately, consumers and businesses will be the purchasers of these products.  But they won’t buy unless they’re confident of their own financial situation, the price is right, and financing is available.
• That means the credit crunch has to loosen up, so banks and other lenders will finance the purchases.  Toward this end, the Federal Reserve Board has poured literally hundreds of billions of dollars into the financial system.  However, most banks are focused on their current loan delinquency problems; they only want to make “good” loans.  A good loan can be hard to find in the throes of a severe recession and, ironically, most bank regulators are counseling banks to be more cautious in their lending.
• Fiscal policy has an important role to play in ending the recession and starting a recovery.  Whether the coming fiscal stimulus package involves lower taxes or higher government spending doesn’t matter much.  The important point is that either—or both—will boost aggregate spending and supplement flagging demand in the private sector.

How long will the recession last?  The longest post-World War II recessions lasted 16 months from peak to trough.  This downturn is already in its 13th month.  Still, a 16 month recession would place the bottom in April, 2009.  That’s possible but doesn’t “feel” right.  The current rate of descent is too steep at the moment to pull out by April; summer 2009 is more likely. 

It’s too soon to discern the shape of the economy’s recovery.  We’ll provide our initial thoughts at the February 18th forecast event.  Remember to sign up!   (Nancy D. Sidhu)

U.S. Service Industry Revenues Increased in 3rd Quarter

The Census Bureau recently released third quarter 2008 information on revenues of four large groups of service sector industries.  Collectively, the four industries took in $982.0 billion during that quarter, up by 4.5% over 3q2007.  [The data are not seasonally adjusted.]  The sector-by-sector details follow.

Third-quarter revenues of the professional, scientific & technical services sector were $322.0 billion, up by +7.1% versus 3q2007.  All seven industries in this sector saw higher revenues in 3q2008.  In order of size,

• The largest industry in this sector is architecture, engineering & related services, with $70.7 billion in 3rd quarter revenues, up by +12.4% over the year.  [Engineering services saw an increase of +13.2%, while architects’ receipts were up by 10.0%.]
• Next largest was legal services, reporting $62.0 billion in quarterly revenues, up by +5.5% over the year. 
• Third largest in size was computer systems design, with $58.4 billion in receipts, up by +7.6%. 
•  Management, scientific & technical consulting followed, with $41.2 billion (+2.8%). 
• Revenues of accountants, tax preparers, bookkeepers and payroll services were $22.4 billion, up by 2.6% compared to 3rd quarter 2007. 
• Scientific research & development firms’ receipts were $27.6 billion, up by 9.8% over the year. 
• Finally, revenues of advertising and related services firms were $19.8 billion, up by 8.3% compared with 3q2007.

Revenues of the information sector totaled $283.8 billion during the third quarter, up by 2.0% versus 3q2007.  This sector contains a number of industries important to the Southern California region.  Four of the six industries in the information sector reported higher revenues in 3q2008.  However, several are undergoing considerable structural change, holding down industry growth rates. 

• With $127.7 billion in third-quarter revenues—up by +2.2% over the year—telecommunications is the largest industry in this sector.  However, wireless telecom revenues (at $49.1 billion) grew by +6.8% over the year, while wired carriers’ revenues (at $45.9 billion) declined by -4.6%.  Also in this industry, cable distribution revenues were $27.4 billion and grew at a healthy +8.3% pace.
• Publishing industry revenues were $72.0 billion last quarter, up by just +0.7% compared to 3q2007.  Within this industry, revenues of software publishers (at $36.2 billion) were up by 8.1% over the year.  Meanwhile, other publishers’ receipts ($35.8 billion in 3q2008) fell by -5.8%, dragged down by a decline of -12.1% in newspaper publishing revenues (to $10.0 billion). 
• Third-quarter revenues of the motion picture & sound recording industry were $24.3 billion, down by -1.1% over the year. 
• The broadcasting sector took in $25.1 billion, up by +6.2% compared to 3q2007.  Receipts of radio & television broadcasters were up by +2.3% over the year (to $13.4 billion), while cable & other subscription programming revenues increased by +11.0% (to $11.7 billion).
• Data processing, hosting & related services garnered $17.4 billion, down by -3.9% over the year. 
• However, the Internet related industries (including Internet publishing, ISPs and web search portals) took in $17.3 billion that quarter, for an increase of +12.1% over 3q2007.

The third sector covered in this report is “selected” health care services industries.  Sector revenues totaled $227.7 billion during the 3rd quarter, up by 5.6% versus 3q2007. 

• Of this amount, hospitals took in $185.9 billion, up by 5.6% over the year.
• Meanwhile, nursing & residential care facilities brought in $41.8 billion (+5.7%).  

Fourth and finally, the Census Bureau reported revenues of the administration & support and waste management & remediation services sector, which recorded $148.5 billion in 3q2008 revenues, up by +2.2% compared with 3q2007. 

• The largest industry in this sector was employment services (including temporary help), taking in $46.2 billion during the 3rd quarter (+4.9% over the year). 
• Waste management & remediation industry revenues were $20.9 billion in the third quarter, up by +7.6% over the year.
• Other administration & support industries recorded revenues of $81.3 billion, down by -0.6% compared with 3q2007. 

The industries above are all important, and this report is the only decent, timely source of information about them (beyond the employment report).  Structural change is clearly under way in the information sector, and the economic downturn will affect some of the others.  With all the attention being paid to troubles in other industries, this report reminds us that some parts of the economy are in pretty good shape.   (Nancy D. Sidhu)

PR: http://www.census.gov/indicator/qss/qss-current.pdf

At Last!  4th Quarter 2007 Taxable Retail Sales

The State Board of Equalization has just released the 4th quarter 2007 taxable retail sales, and the news wasn’t very good even back then.  Total sales in California were down by -0.9% over the year.  The numbers for most of Southern California were even worse, with San Bernardino County recording a -3.7% decline, while Riverside County was down by -2.3%.  Orange County saw taxable sales drop by -2.1%, Ventura County declined by -1.3%, while San Diego County eased down by -0.9%.  Only Los Angeles County managed an increase over the year, and it was quite a modest 0.3%.

Preliminary results for all of 2007 were also discouraging.   California recorded a decline in taxable retail sales of -0.5% to $387.0 billion.  San Bernardino County saw its 2007 taxable sales tumble by -3.6% to $21.3 billion.  Riverside County recorded a decline of -2.7% to $21.2 billion.  San Diego and Ventura counties each saw a -0.9% drop in taxable retail sales, with the former at $34.0 billion and the latter at $8.8 billion.  Orange County’s preliminary 2007 taxable retail sales eased down by -0.2% to $39.0 billion.  However, Los Angeles County managed a 0.6% gain to $96.1 billion.

The 2008 taxable retail sales numbers are also expected to decline.  (Jack Kyser)

PR: http://www.boe.ca.gov/news/2008/109-08-C.pdf

California Nonresidential Construction Activity Slipped Further in November

California total nonresidential construction activity slid further in November with permit values declining by -42.0% to $1.0 billion (year-over-year), according to the Construction Industry Research Board.  During the eleven-month period of 2008, nonresidential permit values totaled close to $18.0 billion, a decline of -12.7% from the comparable period in 2007. 

Total nonresidential construction activity in Southern California was mixed.  In Los Angeles County through November, total permit values were $4.2 billion, down by only -0.1% from the comparable period in 2007.  Industrial buildings were up by +26.6%, while parking garages were +96.0% ahead.  Also, permits valued at $255.7 million were issued for hotels in the County, compared with $249.1 million last year.  However, office and retail building permit values in the County declined over the year, falling by -34.9% and by -1.1%, respectively.

In Orange County through November, total nonresidential building construction permits fell by -28.4% from the same period in 2007.  All of the major sectors were down significantly: industrial (-70.5%); office (-54.7%); retail (-60.0%); and hotels (-77.9%).  San Bernardino County also took a hard hit, with total nonresidential building permit values off by -44.9%: industrial (-71.0%); office (-65.5%); retail (-31.8%); and hotel (-76.0%).  Riverside County’s results were downbeat as well, with total nonresidential building permit values down by -28.8% over the year. By type, significant declines were registered in: industrial (-68.7%); office (-44.8%); and retail (-16.4%).  On the other hand, permit values for hotels/motels increased, rising by +63.7% over the year.

The results for San Diego County through November were mostly negative.  Total nonresidential building permit values declined by -24.1% from the comparable period in 2007.  Permit values for industrial were down by -48.7%, office was off by -46.1%, while retail fell by -12.5%.  On the upside, hotels were up by +58.5% over the same period in 2007.  Ventura County’s numbers were mixed.  Total nonresidential building permit values rose by +2.7%.  By type, industrial and office permits declined considerably, falling by -35.3% and by -47.7% respectively.  However, retail did better, with permit values up by +25.1% over the 2007 period.  Permits valued at $7.3 million were issued for hotels in Ventura County, compared to $0 last year.

In the nine-county Bay Area through November, activity was mixed.  Total nonresidential building permit values were down by -8.1% from the same period in 2007.  By type, industrial buildings were up by +23.4% (strength in Contra Costa and Solano counties).  On the downside, office buildings were off by -26.4% (despite gains in Sonoma, San Francisco, and Alameda counties); retail building permits declined by -16.0%; and hotels were off by -53.1%.   (Candice Flor Hynek)

Thank You

It has been a pleasure working at LAEDC for 8 1/2 years, working side by side with an amazing team of economists in the region.  I will be moving on as a member of the research team at the Milken Institute. 

Thank you to all my colleagues who have helped me grow in this profession and allowed me to be creative, especially Jack Kyser. 

Thank you to all of you subscribers for your continued support, comments, and good wishes.    

Warmest regards - Candice Flor Hynek

Events of Interest

Thursday, January 15: 2009 Economic Outlook and the Future of Banking
The National Association for Business Economics, Los Angeles Chapter presents “2009 Economic Outlook and the Future of Banking.”  The guest speakers are Dr. Tom Higgins, Chief Economist of Payden and Rygel, and Dr. Wesley Phoa, Senior Vice President of the Capital Group Companies.  Both are responsible for developing views on the U.S. and global economy.  They also are frequently quoted in the national and local papers, and appeared as guests on CNBC, Fox Business News, and Bloomberg.  The luncheon will be held on Thursday, January 15, 2009 at the Downtown Marriott Los Angeles.  Space is limited so register early.

Monday, January 26:  VerdeXchange Green Marketmakers Conference
Engage with leading technology, energy, and regulatory "green marketmakers" who are proactively responding to California's market-defining initiatives for addressing climate change and reducing greenhouse gas (GHG) emissions. As outlined in Assembly Bill 32 (signed into law 2006), California's 2005 Executive Order and a 2004 CARB regulation to reduce passenger car GHG emissions, California's efforts aim to reduce GHG emissions to 1990 levels by 2020 and below 1990 levels by 2050 - reductions of 25 percent and 80 percent respectively. These initiatives will undoubtedly shape the national and international markets.

Tuesday, February 10:  The Beverly Hills Chamber of Commerce and Milken Institute: Annual Economic Summit
Economic Summit is a candid and informative discussion on the economy’s current status, latest trends and future projections given the state of housing, energy, consumer uncertainty and a new national administration in 2009. Panelist includes: David W. Berson, Senior Vice President, Chief Economist and Strategist, The PMI Group, Inc.; William J. Curtis, Chief Executive Officer, Robb Report/CurtCo Media;Christopher Edmonds, Managing Principal, Energy Research & Capital Partners, affiliate of FIG Partners; Dagen McDowell, Anchor, Fox Business Network; Jeffrey Saut, Managing Director and Chief Investment Strategist, Raymond James Financial. Donald Straszheim, Vice Chairman, Roth Capital Partners, LLC, will serve as moderator.

Save the Date: Wednesday, February 18:  2009-2010 Economic Forecast & Industry Outlook

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