Nationwide employment figures released the day this article is being written are a basis for optimism in terms of significantly improved economic trends. There are at least two reasons to defer a major party based on this news. One of these is that optimistic numbers are frequently revised. Another is that even if true, the numbers still imply considerable wait for our economy to get into full swing. As the Wall Street Journal pointed out recently, employment recovery from the recent recession is substantially slower than recovery from other recent recessions, many of which were fully recovered within three years of their onset, while we are still wallowing near the depths of the current dislocation.
Even at the local level, employment statistics are considerably more optimistic than they have been recently. Throughout Southern California (Ventura County, Los Angeles County, the Inland Empire, Orange County, and San Diego County), total nonagricultural wage and salary employment increased by 73,500 jobs in the twelve months ended February 2011. This is the first twelve-month period ending in February that has shown an increase since the comparable figures for February 2007-just prior to the onset of the recession. These numbers, however, are somewhat ambiguous. Nonagricultural wage and salary employment numbers generated on the basis of a survey of employers provide a sample which is then expanded to the entire economy of the Southern California region to generate an estimate of increased nonagricultural wage and salary jobs in Southern California. Another source of employment information is the Household Survey in which analysts contact households and inquire about how many household members are employed and how many are unemployed and seeking work. The Household Survey is the source of unemployment data in addition to providing an alternative estimate of total employment including self-employed, etc. The most recent Household Survey for Southern California, however, shows that despite and estimated increase of 73,500 nonagricultural wage and salary jobs reported by employers, households report a decline of 68,00 employed persons over the same interval. One survey indicates an increase of 73,500 jobs overall, while the other suggests a decrease of 68,000 jobs overall. Biographies of economists show a surprising proportion of them with a fondness for strong drink. Statistics of this type may have some bearing on economists’ behavior in this regard.
The most recent graphic information for the nonagricultural wage and salary employment (based on the Establishment Survey) is shown in Exhibit 1, indicating the recession continues to be in relatively full force. By this time in the prior recession (beginning in 1990), employment in southern California had begun to show stronger signs of improvement.
A weaker local economy is reflected in building permit data for the High Desert. In 2010, 544 new units were authorized by permit in the High Desert area- basically north of Cajon Pass. This was a slight increase over the comparable figure for 2009 when 389 new units were authorized by permit. Neither is impressive in relationship to the 8,300 new units authorized by permit in the High Desert in 2005. In both 2010 and 2011, the total number of new units authorized was considerably less than the previous low water mark associated with the 1990 recession-908 new units were authorized by permit in 1997.
Exhibit 2 illustrates the pattern of building permit activity for a single-family detached housing in Southern California and the High Desert are between 1980 and 2010, highlighting the increased volatility of new single-family housing production on the High desert as compared with Southern California in its entirety.
The positive employment figures, despite the ambiguity between the results of the Establishment Survey and the Household Survey, can be further broken down by area. Strength of the nascent economic recovery in Southern California is most significant in Los Angeles County, followed by Orange County and San Diego County. The Inland Empire’s employment data ranked last in terms of being indicative of economic recovery. The relationship between the Inland Empire’s economic base and the rest of Southern California as it impacts real estate development is not a matter of great concern, however. The housing market in the Inland Empire has historically been driven by shortages of affordable housing in Los Angeles, Orange, San Diego, and Ventura Counties-and not necessarily by indigenous economic circumstances within the two-county Inland Empire area itself.
As would be expected, nonresidential development activity on the High Desert is fairly meager. The ±75,000 new jobs from February 2010 to February 2011 tend to be concentrated in industries that create demand for real estate products that are in relatively ample supply. The largest job growth from February 2010 to February 2011 in Southern California was in professional and business services. These growth categories create demand for real estate products that are currently in ample supply.
The second most significant category of growth in jobs over this interval was in educational and health services, some of which may eventually require new facilities and, therefore, real estate development. The third greatest increase in employment over this twelve-month interval was in leisure and hospitality, which is not likely to stimulate major new development on the High Desert in the near term.
Development of retail space should not be a major contributor too the real estate sector on the High Desert in the near term because existing facilities have substantial capacity to accommodate increasing sales activity levels, especially in light of the increased sales efficiency of high volume per square foot merchants such as Walmart, Costco, Sam’s Club, Home Depot, etc., that characterize the evolving retail sector. In addition, some technologically-obsolete retailers are closing stores, making space available for other uses. Recent months have seen bookstore closures as well as closure of DVD rentals, etc. The retail sector has been involved in a substantial technological revolution for about the past 15 years as new retailers demonstrate the capacity to generate much higher than typical sales volumes per square foot, implying the need for fewer square feet per capita of consumer population as more retail activity is focused in high volume-type stores.
Recent employment data show a decline in retail employment in food and beverage stores and in clothing and accessory stores. This probably represents shift of purchasing from these types of specialty stores into general merchandise stores as Walmart and others broaden their range of product offerings to include more typical supermarket merchandise and/or the availability of broader lines of apparel.
Although the statistics showing net increase in nonagricultural wage and salary employment based on the Establishment Survey during the twelve months ended February 2011 are cause for some optimism that a str0nger recovery is on its way, especially in light of three years of strongly negative employment trends since February 2007, the ambiguity of these data in relation to information from the Household Survey is a matter of some concern. Overall, this is probably not a basis for a major three-keg party right away.
I’m frequently asked about the slow economic recovery this time, especially in light of the huge fiscal and monetary stimulus unleashed since 2008. I’m not sure the academic elites who shape policy are as smart as we’d hope. For example, I doubt the perspicacity of economic experts who brag about the “gazillion” jobs that were saved by the bailout of General Motors.Saving GM doesn’t mean the saving of auto employment. The source of jobs for auto workers is not a specific company; it is demand for automobiles exerted by consumers. No one has convinced me that if GM did not exist or existed under another name, it would constitute a positive or negative long-term impact on consumers’ desire to buy cars. Since I think that auto workers are employed because people want to buy cars and not specifically because they want to buy GM cars, I have a hard time understanding how the taxpayer support devoted to saving GM saved any jobs at all on a net basis unless the failure of GM would discourage future consumers from ever buying any type of car. Bankruptcy does not destroy automobile manufacturing facilities. Even if bankruptcy did result in the scrapping of large factories instead of their sale to some other entity that knew better how to operate an automobile company, there is probably enough worldwide capacity to produce cars to meet demand and, in the process, represent a source of employment for auto workers. Saving GM saved a particular group of jobs, but on an overall basis, really can’t be construed to have saved jobs in a general sense. As the performance of Ford illustrates, all saving GM did was perpetuate an institution that had proven itself to be incompetent in the first place.
Similarly, there seems to be a good deal of enthusiasm about taxing the “evil” corporations so that we don’t have to tax the rest of us as much. Every analysis I’ve ever seen shows that most corporations pass taxes along through higher prices for their product, lower wages and salaries to their employee, etc. Ultimately, financially-ineffective corporations will disappear (stockholders will receive no profit and bankers will be reluctant to lend to entities which have a high probability of being unable to pay back the loan). Bailing out incompetent institutions is not a path to economic progress, yet we choose to believe that two and two can be made to total five.
Historically, economists have believed that a potent tool to counter the effects of recession is stimulating the housing market. As a result of lower prices (derivative of a recession) and lower interest rates supported by the Federal Reserve Bank during recessions, it has historically been fairly easy to stimulate economic recovery through increased activity in the housing market. In this particular case, however, we have already shot those arrows from our quiver by several years of overstimulating the housing market through the Community Reinvestment Act, historically low interest rates prescribed by Greenspan and Bernanke, and irresponsible relaxation of loan qualifications to cause many marginal or latent first-time homebuyers to become owners of housing-in many cases, housing considerably more expensive than they would likely to have afforded in a free market environment.
Greenspan, et al., used the stimulus tool of the housing market at a time when it really wasn’t necessary. As a result, pent-up demand for homeownership is not a factor. We continue to see a good deal of consumer uncertainty as housing tries to find true market value in an environment that has been badly abused by the political or professional aspirations of policy-makers who took advantage of this tool at a time when it was not needed. It is somewhat analogous to taking antibiotics to cure minor ailments allowing toxic elements to develop resistance and, therefore, obviating the future value of specific antibiotics in relationship to their ability to control various diseases. We’ve already used the medicine of housing market stimulation and it’s no longer available to us to bail us out of this recession. We, therefore, need some other stimulus. It’s hard to figure out what it is in light of expansionary policies that have been tried and failed over the last two or three years-TARP, the stimulus, Easy Money, QE1, QE2 zero real interest rates, etc. What these policies have done is to scare the daylights out of investors and planners. This fright is likely to be magnified significantly soon as interest rates inevitably rise, causing the value of bond portfolios to decline sharply and destroying the “safe harbor” that many thought they had entered by buying Treasury Bonds. Some fairly knowledgeable people think that Treasury Bonds are significantly more risky than corporate common stocks in light of potential declines in sovereign bond prices as interest rates rise. I tend to agree with them.
Increasing intrusion of politics into business decision-making has created policy dilemmas as CEOs attempt to please stockholders, Sarbanes-Oxley, the IRS, appropriate regulatory agencies, the general public, and the press. Since these various audiences do not all have the same objectives, the probability that a significant proportion of the audience spectrum could be satisfied by a particular policy decision becomes increasingly remote. The general press then wonders why the private sector has accumulated trillions of dollars in cash and does appear to be enthusiastic about hiring permanent employees as distinct from”1099 contract” workers in an uncertain regulatory and political environment. This uncertainty spills over into hiring decisions in which it is less risky for some employers to “contract out” specific duties than to hire permanent staff. Contract employees often have a lower overhead component than would a permanent staff employee hired to achieve the same objective. Contract employees don’t join unions. Contract employees generally don’t mind working overtime. Contract employees don’t have to have medical insurance. Contract employees don’t file unlawful termination sits. There is a good argument that fear is a significant inhibitor to the economic expansion that will be the basis for creating a new generation of High Desert real estate millionaires. Maybe this time the winners will be those who are especially fearless.
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