Is Facebook Killing Silicon Valley?

In a brief interview on Yahoo Finance, Professor Steve Blank raises concerns that the Facebook IPO could intensify expectations for quick returns on venture capital investments.  He fears this could actually hurt long term innovation in the Silicon Valley.

“Serial tech entrepreneur and professor Steve Blank argues that Facebook and the “social media” craze are ruining Silicon Valley’s innovation machine.”

“VC’s have become so intoxicated by the lure of instant riches from the likes of Facebook and Instagram that they’re mostly funding companies that have a chance to be worth billions overnight”

He also discusses his concerns with The Atlantic here.

Watch the interview.

The Declinists are Wrong, Part 2

California is Wealthy

By Dennis Meyers (Twitter: @goldstateoutlok)

“The report of my death was an exaggeration.” Mark Twain 

“With your help, that’s what we’ll do … prove the declinists wrong once again.” Governor Jerry Brown

Part one of this series showed that California is a big state with a big diverse economy to match.  Part two demonstrates that compared to the rest of the nation, Californians generally are wealthy and well paid.

California is a land of contrasts, physically and socially.  It is home to bustling cosmopolitan coastal metropolises as well as quiet rural communities spread across mountains and deserts.   From an economic perspective, it is impossible to paint the state with a single brush.  In addition to possessing a diverse economy, California is a prosperous place.

California’s per capita personal income is 7 percent higher than the national average.  It ranked 14th among all states (including D.C.).

California is home to a disproportionate share of the nation’s wealthiest communities. Among communities with 75,000 or more residents, 16 of the richest 50 and 31 of the richest 100 are in California.

California generally outperforms the nation at creating high-paying jobs in leading industries—computer manufacturing and information.

Although the national job growth in Professional and Business Services in 2011 outpaced California, it was mainly due to stronger growth in employment services (temporary help).  Over the course of 2010 and 2011, California generally outpaced the nation’s job gains in the higher paid professional subsectors.

The one high-wage sector in which national job gains outpaced those in California was Mining, which includes oil and natural gas production.  There are several regions, such as Texas, that are blessed with generous deposits of these resources which California lacks.  This advantage also shows up in Engineering Services employment noted above.  The presence of healthy oil and natural gas resources typically generates demand for engineering consulting services related to exploration and extraction.

Since the year 2000, California has imposed a minimum wage requirement that is higher than the federal minimum wage.  This contributed to the achievement  that California has one of the lowest rates of workers earning at or below the federal minimum wage.  In 2010, only 2 percent of California workers earned at or below the federal minimum.  Texas and Mississippi were tied with the highest rate at 9.5 percent.

Changes in California Poverty Rates, 2007-2010

Slate.com and the New America Foundation provided a useful interactive map that depicts the change in poverty rates from 2007 to 2010 for each county in the nation.

The results for California clearly reflect the nature of how the state was affected by the Great Recession as well as its historic geographic disparities.

• The Central Valley suffered the worst increase in poverty.
• Fresno and Stanislaus counties suffered the largest increases in poverty rates, rising 6.8% and 6.1% respectively.
• San Bernardino was not far behind, rising 6.0%
• Surprisingly, Santa Barbara County also suffered a significant increase in its poverty rate, 5.5%

POVERTY RATES

  County                       2007                2010

Fresno                         20.0%              26.8%

Stanislaus                    13.6%              19.7%

San Bernardino           12.1%              18.1%

Santa Barbara             12.2%              17.7%

May Revision Forecast from the Department of Finance

The following is from the May Revision to the Governor’s 2012-13 Budget. The forecasts were prepared in April 2012 and are based on information available at that time.

Economic Outlook

The California and national economies are recovering at a modest pace.  The economic outlook has improved slightly since the Governor’s Budget.  Labor markets made higher gains in the latter half of 2011, but growth moderated in the early months of 2012.  Consumer attitudes and spending and business investment have been improving.  Gross Domestic Product (GDP) growth is projected at a higher level for 2012.  The risks to recovery are now projected to be much lower.  However, real estate conditions and unemployment rates continue to limit growth.

The biggest change in the California outlook stems from incorporating assumptions about the impact of the initial public offering of Facebook stock.  It may turn out to be one of the largest initial offerings in U.S. history and far larger than all of the recent offerings in the internet sector. Since the company, its founder, principal employees, and many of its initial investors reside in California, it is projected to have a significant positive impact on California personal income in the latter half of 2012, increasing it by 1.7 percent.

The Nation

The national economy is recovering at a slow, yet steady pace.  Labor market conditions are gradually improving.  Despite some volatility that was likely caused by an unusually warm winter in many areas of the country, payroll job growth has strengthened.

• Nonfarm employment expanded by 201,000 per month on average during the first four months of 2012, compared to growing 153,000 per month in 2011, and 86,000 per month in 2010.
• The national unemployment rate, while still high at 8.1 percent in April, has been gradually improving since August 2011.
• Initial and continuing claims for unemployment benefits continued a two-year decline during the early months of 2012.

Better employment conditions are translating into rising incomes, better consumer sentiment, and more consumption expenditures.

• Personal income in March 2012 was 3.2 percent above its level of one year ago, while wages and salaries grew 4.4 percent from a year earlier.
• During the first quarter of 2012, consumer sentiment had fully recovered from the mid-2011 slump.
• In February 2012, consumer spending saw its largest gain since July 2011, led by a 900,000-unit increase in vehicle sales.  Consumer spending contributed more than 2 percentage points to real GDP growth in the first quarter of 2012.

In addition to consumer spending, rising capital investment has been a significant driver of recent economic growth. Businesses are filling equipment upgrade and replacement needs postponed during the recession.  Business spending on equipment and software expanded over 10 percent in 2011—outpacing the growth of all other GDP spending categories.

Rising global demand for U.S. goods and services has been an important component of the recovery.  Exports slowed sharply during the recession before rebounding when the recovery began.  They grew by more than 11 percent in 2010 and 6.7 percent in 2011.  However, the appreciation of the dollar and spreading weakness in the Eurozone will dampen export growth going forward.

The absence of a recovery in real estate markets has been the main drag on the recovery.  However, tentative signs have emerged that housing markets may have stabilized.

• In February 2012, the S&P/Case-Shiller 20-City Home Price Index posted its first gain since March 2011.
• The volume of home sales has been on a modest rising trend since the middle of 2011, largely supported by investor purchases.
• The value of homebuilding activity in March was up over 7 percent from a year earlier, with nearly all of the gains coming from multifamily construction.

California

California regions that are home to high-technology, high-wage, and/or export-driven industries are doing relatively well.  The remaining areas of the state are still affected by weak housing markets and public sector financial troubles.

California is benefiting from its attractiveness to venture capitalists.  In 2011, California accounted for more than half of the entire nation’s venture-backed investment—for the fourth consecutive year—led by software and biotechnology.  A substantial portion of the state’s recent jobs gains stemmed from hiring in high-wage industries such as computer design, semiconductor manufacturing, information technologies, and scientific and technical research.  This focus on high-technology industries has boosted California incomes.  For example, the Facebook IPO could result in about $12 billion of additional income for California residents in the latter half of 2012.

California continued to benefit from strong export growth.  After a 19-percent gain in 2010, California exports rose 11 percent in 2011.  Computers, electronics, electronic machinery, and transportation equipment accounted for over 30 percent of this growth.  Among recipients, Mexico accounted for nearly 32 percent of the 2011 export gains.

In contrast, labor markets are making slower and less consistent progress.  After accelerating in the second half of 2011, nonfarm employment growth slowed at the beginning of 2012—from an average monthly gain of 37,000 jobs during the last five months of 2011 to 19,000 on average during the first three months of 2012.  The fastest growing industry sectors included information; professional, scientific, and technical services; and private educational services.

California’s housing markets appear to have reached their low points and are recovering slowly.

• Driven to a large extent by investors, home sales have increased from the 469,000-unit pace in the middle of 2011 to a 517,000-unit pace in the first quarter of 2012.
• Although still much higher than historic levels, notices of default have declined to 257,700 in 2011 from their peak of 456,300 in 2009.
• The $268,300 median sales price of existing single-family homes sold in January 2012 was up 8.4 percent from the lowest price recorded during the recession—$247,600 in February 2009.

The Forecast

The outlooks for the nation and California are slightly higher than the Governor’s Budget forecast.  Both economies are expected to continue to make slow but steady progress.  The recovery is on firmer ground, with a much smaller risk of slipping into another recession.  As shown below, California is forecast to recover the nonfarm jobs lost during the Great Recession in the fourth quarter of 2015, rather than in the second quarter of 2016 as was previously forecast.

Weak housing markets and job growth have made this the slowest recovery in the post-World War II era.  Barring serious disruptions, job and wage growth will lead to a balanced expansion.  The national economy is forecast for real GDP growth in 2012 and 2013 of 2.2 percent and 2.4 percent, respectively, while 3.4 percent is projected for 2014.  The risks to economic recovery are from instability in Europe and the Middle East, as well as potential changes to address the federal deficit.

See the following figures for highlights of the national and California forecasts.

The latest newsletter from the California Economic Forecast

 

By Dennis Meyers

The May 2012 newsletter by Mark Schniepp at The California Economic Forecast provides a great illustration of the importance of technology employment to the state’s economic recovery.

“Much of the job creation in California this year has been the result of large gains in hiring in computer design, semiconductor manufacturing, information technologies, and scientific and technical research.”

“Over the last 2 years, more than 13,000 tech jobs have been added in Santa Clara County.  Employment in the manufacture of semiconductors is currently at the highest level in ten years.”

Read the newsletter here for more illustrations and information.

New Forecast From the University of the Pacific

By Dennis Meyers

On April 30, a new California state and metro forecast was released by the Business Forecasting Center at the University of the Pacific.   It projects a continuing, but very slow recovery.   Real California GDP is projected to grow 2.5% on average during 2012 and 2013, and nonfarm employment will grow 1.4% and 1.5% in 2012 and 2013 respectively.

According to Dr. Jeff Michael, the Center’s Director, “The Stockton area was one of the hardest hit areas in the nation, but leads the state in job growth over the past 12 months”

Other significant projections  include:

“Payroll jobs continue to grow at a steady rate, but the state has still only recovered one of every four jobs lost in the recession. “

“Despite sluggish job creation, real personal income is expected to approach and exceed its 2008 peak in the second quarter of 2012 due to stronger recovery in non-wage income and higher wage industries such as technology. “

“295,000 new Construction jobs are expected to be created over the next five years”

Read the official news release here for more insights and details.  (Full forecast available with subscription)

Progress on Foreclosures

The weak state of the national and California real estate markets continues to be the principal reason that the recovery from the Great Recession has been so disappointing.  To underscore this fact, according to Standard & Poor’s Case-Shiller home-price index, U.S. home prices ended 2011 at the lowest levels since the housing crisis began in mid-2006. Despite historically low mortgage interest rates, housing markets have been beset by a weak job market, abundant foreclosures, and tighter mortgage requirements.

On the other hand, the news is not all bad.  In January, national pending home sales—a leading indicator of existing home sales—rose to their highest level since April 2010, according to the National Association of Realtors.  Completed home sales reached 4.57 million units in January, the highest level of sales since May 2010, when the housing market was lifted by federal tax credits.  The supply of homes available for sale in January fell to its lowest level since January 2006.

California roughly mirrors the nation.  Real estate conditions have improved substantially from the depths of the recession, with the exception of home values which remain depressed.   The $268,300 median sales price of existing single-family homes sold in January 2012 was only slightly higher than the lowest price recorded at the depths of the housing crisis—$247,600 in February 2009.

FORECLOSURES IMPROVING (?)

An important factor weighing on home prices is the still frustrating level of foreclosure activity.  Home foreclosure action began heating up in late 2005 when home sales slowed dramatically.  Foreclosures in California escalated rapidly in 2006 and then skyrocketed to unprecedented levels in 2007 and 2008, and then peaked in 2009.  Lenders sent out nearly a half million default notices to California homeowners in 2009—more than seven times the number sent in 2005.  Defaults declined significantly in 2010 and 2011.  However, with 258,000 notices issued in 2011—a 15 percent drop from 2010—the pace was still more than three times greater than in 2005.

Moreover, the drop in notices in 2011 may overstate how much housing conditions have actually improved.  The revelations, investigations and settlement negotiations surrounding the ‘robo-signing’ foreclosure scandal caused some lenders to institute foreclosure moratoriums and otherwise slow the foreclosure process.  Some mortgage servicers began letting delinquent borrowers fall a year or more behind on their payments before taking action.  More servicers began accepting short sales—selling a home for less than the value of the mortgage—rather than pursue foreclosure.   There may remain a larger stock of troubled mortgages than appears.  While the full impact of the recent ‘robo-signing’ settlement between the five largest mortgage servicers, 49 states’ attorneys general, and the federal government is still unclear, it will likely lead to an increase in distressed sales in the near future, which could result in further downward pressure on home prices.  It could, though, also accelerate the ultimate real estate market readjustment needed for a recovery of California’s housing markets.

REGIONAL DISPARITIES

Although no region of the state was left unscathed by the financial crisis and recession, the impacts were not evenly spread.  The most vulnerable areas were those whose growth had been most dependent on home building activity during the run-up from 2002 through 2005.  These were predominantly the inland regions that became the preferred destination for households moving from high-priced coastal communities in search of more affordable housing.  Unfortunately, the resulting job growth in these destinations was heavily tilted toward home building and related industries such as retail sales.  In the Riverside-San Bernardino-Ontario metropolitan area, retail trade employment at building materials and garden equipment stores expanded nearly 44 percent from 2001 to 2006—almost twice the pace of overall job growth.  Statewide, employment in this sector grew only 18 percent.  Thus, it was not surprising that these regions suffered the most from the housing market collapse.  These contrasts are clearly reflected in the regional pattern of foreclosures.

The Central Valley, which stretches from Colusa, Sutter, and Yuba counties in the north down to Kern County in the south, bore the brunt of the housing meltdown.  Based on notice of default actions taken on a per capita basis, the Central Valley suffered the greatest increase in foreclosure actions—rising from nearly two actions per 1,000 residents in 2005 to over 16 in 2009, the peak year for foreclosures.  Even though this area improved the most in absolute terms since 2009, it still suffered the second highest foreclosure rate in 2011, 9.1 actions per 1,000 persons.  This is also nearly three times the 2000-2005 pre-collapse rate of 3.3 actions per 1,000.

The Southern California region encompasses diverse areas from the coastal communities stretching from Ventura to San Diego to the Inland Empire.  The foreclosure rate for the region as a whole rose considerably from 2005 to 2009, but significantly less so than in the Central Valley.  The foreclosure rate rose from nearly 1.6 actions per 1,000 residents in 2005 to 12.4 in 2009.    These are aggregate figures, though.  This region includes Riverside and San Bernardino counties, both of whose foreclosure rates undoubtedly rivaled that of the Central Valley.  Be that as it may, this area’s rate improved almost as much the Central Valley—falling nearly in half between 2009 and 2011.

The Mountain Region lies predominantly along the California-Nevada border north of San Bernardino County.  Even though this region fared marginally better than the Central Valley during the housing meltdown in 2007-2009, it hasn’t recovered as quickly as most other areas.  Its foreclosure rate in 2011 was comparable to that of the Central Valley, 12 actions per 10,000 residents.

The San Francisco Bay area and the Central Coast regions fared much better.  Before the bust, these areas weren’t nearly as dependent on construction and housing activity as the inland regions.  The foreclosure rate didn’t rise as dramatically—peaking at just over 10 actions per 1,000 residents in 2009.  During the recovery, the San Francisco Bay area benefited from above-average economic growth driven by strong investment in high technology industries and healthy export growth.  Its foreclosure rate in 2011, only 6 actions per 1,000 residents, was the lowest amongst these major regions.

The Northern California region, which encompasses all of the northernmost counties above the Central Valley and the San Francisco Bay area, had the least tumultuous experience.  It suffered the smallest increase in its foreclosure rate—rising from 1.2 actions per 1,000 persons to only 7.4.  Things improved during the recovery, but its rate in 2011 was still comparable to the San Francisco Bay Area and the Central Coast.

WHO’S MAKING PROGRESS

These regional patterns indicate which areas have made the most progress and which still have a long way to go.   The San Francisco Bay area made the most progress towards bringing its foreclosure rate down to the pre-recession levels, 6 actions per 1,000 residents in 2011.  Southern California also improved significantly, with the rate falling to 6.6 actions per 1,000.  Not surprisingly, San Francisco and Southern California were the only regions that saw an overall increase in residential building activity in 2011.  The foreclosure rates in Northern California and the Central Coast also improved to comparable rates, 6.2 and 6.5 actions per 1,000 respectively.  The Mountain and Central Valley regions, on the other hand were still hamstrung by foreclosure activity significantly higher than the rest of California, 9.1 and 9.3 actions per 1,000 respectively.