Droning On

20130428-073735.jpg

Can the emerging unmanned aerial vehicle (UAV or “drone”) industry lead to a turnaround for California’s aerospace industry that was decimated by the DoD budget cuts and industry consolidation that took place following the end of the Cold War.

Torey Van Oot in the Sacramento Bee’s article
California lawmakers look to regulate, attract drone industry to state” contemplates the implications of potential nonmilitary applications of Drones including its economic impact.

“An expected boom in the use of nonmilitary “unmanned aerial vehicles,” commonly known as drones, has California looking to regain some of the aviation industry swagger it enjoyed for decades”

“At stake for California and other states is a piece of $82 billion in economic activity the drone industry estimates it will generate between 2015 and 2025.”

California is home to many leading industries, such as such as computer and communication technologies, that are integral components of UAVs. Thus these developments offer the prospect of a resurgent California aerospace industry. However it’s seems unlikely that the Golden State can come close to restoring this sector of the economy to its past glory.

See The Man Who Invented the Predator for a brief history of the birth of this dynamic technology and its garage-based origins in Hacienda Heights in Los Angeles.

20130428-074152.jpg

Leave a comment

Filed under Uncategorized

The Real Problem

20130404-214305.jpg

The long-awaited recovery of California’s housing markets is welcome news. But it’s also time to reconsider that exorbitant housing costs are arguably the Golden State’s principal economic shortcoming.

Out of Reach by the National Low Income Housing Coalition compares and contrasts on a state-by-state basis “the gap between wages and rents across the country.” Unfortunately, California compares quite unfavorably with most states (and Texas in particular).

The collapse of the housing market in the wake of the Great Recession drove up the demand for rental units. According to the U.S. Census, in 2011, over one third of American households were renters. The nation’s rental vacancy rate dropped from 8% directly at the beginning of the recession to 4.5% by the third quarter of 2012. The, so far, inadequate investment in new affordable housing units coupled with the fact that nearly a third of renter households live in poverty has created a severe affordability problem.

The map above indicates the number of hours of minimum wage work would be needed to pay rent for a typical two-bedroom apartment. As you can see, California ranks as nearly the least affordable state, behind only Hawaii, Maryland/D.C., New York, and New Jersey. California is also notably less affordable than Texas, which largely explains the migration of middle and low-income households to the Longhorn State.

The map below estimates the full-time hourly wage that a household must earn to afford a decent apartment at the HUD estimated Fair Market Rent (FMR), while spending no more than 30% of income on housing costs.

20130404-214539.jpg

3 Comments

Filed under Uncategorized

CALIFORNIA’S PERSONAL INCOME

YP Chart

Following the first post-World War 2 year-over-year decline in 2009—falling 5.8 percent—California personal income grew 3.1 percent in 2010 and 5.2 percent in 2011.  However, the details behind these trends point to a change in the nature of California’s economic recovery.

Personal Income Defined

Personal income is the earnings received by all persons from:

  • Employment (wages and benefits net of Social Security payroll taxes).
  • Property income (dividends, interest and rent).
  • Proprietors’ income (individual and partnership business income).
  • Public and private transfer payments, (Social Security, welfare, Medicare, MediCal, etc. from the public sector, and household credit losses from the private sector).

Personal income differs from “cash” income in that it:

  • Includes several non-monetary income items such as employee health insurance benefits and employer contributions to pension funds (Other Labor Income).
  • Excludes capital gains (because gains do not represent current production).
  • Excludes payouts from all pension plans, including IRA, 401k and traditional pension plans.

Income Grows in 2010 and 2011

Compensation paid to employees, or wages and salaries, is the dominant component of total personal income, accounting for 52 percent in 2010 and 2011.  In addition to the large share it represents, trends in wage growth have varied over time.  Historically, non-wage forms of income, such as proprietors’ income, dividends, interest, and rent, have grown faster than wages and salaries.  From 1970 through 1995 non-wage income in California rose an average of 9.9 percent each year while wages grew only 7.9 percent.  During the late 1990s, performance-based and stock market-linked compensation, such as bonuses and stock options, grew in importance, especially in emerging internet-connected industries.  This development, coupled with stock market activity, led to greater wage volatility and, for a time, faster wage growth.  From 1996 through 2000, wages grew 9.0 percent annually on average while non-wage income rose only 6.6 percent each year.  Following the collapse of the ‘dot.com’ bubble, wage growth slowed dramatically and once again non-wage income led the way.  From 2001 through 2011, wages grew 2.7 percent annually on average while non-wage income rose 4.4 percent on average.

Personal income growth in 2011 followed this trend.  California’s total personal income grew 5.2 percent led by 6.2 percent growth of non-wage components and 4.3 percent growth in wage and salary disbursements.  Property income—dividends, interest, and rent—was the leading income component, growing over 8 percent from 2010.  This was nearly twice the growth rate of wages and salaries (4.3 percent) and accounted for almost 27 percent of total income growth in 2011.  After wage and property income, nonfarm proprietor’s income and employer contributions for employee pension and insurance made the next largest contributions, accounting for over 13 percent of total personal income growth in 2011.

Wage growth surges at the end of 2010, then moderates

After declining in 2009, wage and salary disbursements increased in 2010 with a modest 2-percent increase followed by    4.3-percent growth in 2011.  These annual patterns, however, belie a gradual slowing in wage growth since the beginning of 2011.  Wage compensation surged during the final quarter of 2010 and the first quarter of 2011.  This surge was concentrated in four high-wage industries, including Mining, Durable Goods Manufacturing (including Computer and Electronic Manufacturing), Professional, Scientific and Technical Services, and Management of Companies, which accounted for a very disproportionate shares of these gains.  Two other high-wage industry sectors—Information and Financial Activities—also recorded unusually strong wage growth.  It appeared that as much as 30 percent of this surge came in the form of bonuses and stock options, which are often subject to significant fluctuations.

For the most part, subsequent wage growth in these sectors moderated dramatically. Only the Finance and Insurance sector posted higher wage growth at the end of 2011 compared to the end of 2010, and only just slightly better.  Wage compensation in the Mining and Durable Goods Manufacturing sectors actually declined in the fourth quarter of 2011 compared to a year earlier.

In 2011, wages grew 4.3 percent based largely on faster wage growth across a broad range of lower-paying sectors.  The strongest gains in 2011 were made in Professional and Business Services (7.7 percent) and Information (6.6 percent).  Construction saw the most dramatic turnaround.  Construction wages declined for three consecutive years starting in 2008 when a sharp drop-off in nonresidential construction put further downward pressure on a construction industry that had already experienced a dramatic slowdown in new home construction starting in the middle of 2005.  Wages paid in the construction industry fell over 19 percent in 2009, followed by a 10-percent drop in 2010.   Construction wages changed direction and expanded 3.5 percent in 2011 when home building started recovering.  In addition, Nondurable Manufacturing and Other Services, two sectors that pay below-average wages, saw big improvements.

 Changing trends in wage rates

Wage Table

Three high-paying industries, including two that are considered important California specialties, stand out.  In 2010, Mining, Durable Goods Manufacturing, and Information were the wage rate growth leaders, with average wages rising 12.9 percent, 10.1 percent, and 10.6 percent, respectively. Average annual wages paid in these sectors ranged from $89,000 to $120,000 in 2011 and they accounted for an exceptionally large share of total state wage growth in 2010.  However, this phenomenal growth was not sustained.  The pace of average wage growth in these sectors slowed to single-digits in 2011.  The average wage paid in Mining rose 1.3 percent; Durable Goods Manufacturing, 3.7 percent; and Information, 5.5 percent.

At the same time, wage rate growth accelerated notably in four other industries.  Average wage escalation in 2011 was led by the Management of Companies and Enterprises subsector of Professional and Business Services, which rose 7.8 percent in 2011 after rising 5.6 percent in 2010.  Average wages in the Arts, Entertainment, and Recreation subsector of Leisure and Hospitality rose 5.5 percent in 2011, a substantial acceleration from its 3.1-percent growth in 2010. After stagnating in 2010, wage rates paid in Construction rose 4.4 percent in 2011—the strongest acceleration among major industry sectors.  Finally, wage rates paid in the Real Estate and Rental and Leasing subsector of Financial Activities grew 5.2 percent in 2011 after rising 2.1 percent in 2010.

High, but volatile wages

These trends are clearly reflected in 4th quarter average wage payments, which indicate the importance and volatility of income earned in high-wage industries, particularly when it is paid in the form of performance-based instruments like bonuses and stock options.  These payments are fairly sensitive to national and global economic trends.  Average wages paid in the 4th quarter of 2010 rose 4.1 percent on a year-over-year basis—the strongest growth since the end of 2007.  At the end of 2011, average wages grew only 1.1 percent over the year.  Trends in the high-wage sectors noted above accounted for a large part of this slowdown.

  • Average wages earned in Mining increased substantially (over 30 percent) in the 4th quarter of 2010 from a year earlier following a period of rising oil prices and record-setting petroleum industry profits.  At the end of 2011, though, this sector’s average wage had dropped nearly 19 percent, most likely due to weaker global petroleum demand and rising energy production.
  • The wage rate paid in Durable Goods Manufacturing (computers and electronics) grew 11.6 percent in the final quarter of 2010, then dropped almost 5 percent by the close of 2011.   Information wage rates which were up almost 9 percent in the last quarter of 2010, nearly stagnated in 2011, rising less than 1 percent at the end of the year.  After rising 6.6 percent at the end of 2010, average wages in Professional and Business Services rose just over 2 percent by the end of 2011.
  • These trends reflect the strong resurgence of global demand for high technology goods and services that resulted from the initially strong recovery from the recession in 2010, particularly by China.  In 2011, however, global economic growth was slowed by the European economy and by China’s attempts to moderate its rapid expansion in 2010.

Conversely, as noted above, between 2010 and 2011 wage rate growth improved in Construction; Arts, Entertainment, and Recreation; Real Estate Rental and Leasing; and in Other Services—the only industries in which the pace of year-end      wage rate growth in 2011 improved from 2010.  This is generally a reflection of the broadening of California’s economic recovery.  Real estate markets stabilized in 2011, beginning with increased demand for rental properties.  General economic improvements also reinvigorated California’s travel and tourism industries.

Personal income data for 2011 demonstrates that California is still home to many dynamic high-paying industries.  This income, though, is more volatile than earnings in other industries.  Although income growth among California’s specialties was tempered in 2011, other industries picked up the pace, indicating that the recovery became more broad-based and sustainable.

Leave a comment

Filed under Uncategorized

New Dept. of Finance Economic Forecast- A Slow Steady Recovery

Real GDP

The following is from the Governor’s 2013-14 Budget. The forecasts were prepared in November 2012 and are based on information available at that time.

 [Spreadsheet with forecast details]

While the current economic recovery is slower than previous recoveries, many sectors of the economy are improving.  Home values are rising, credit conditions are improving, and household spending—typically the principal driver of economic recovery—is strengthening.  Job creation, while still modest, also continues to improve.

However, as 2012 came to a close, uncertainty was building over domestic fiscal policies and global economic developments that tempered business investment.  The effects of Hurricane Sandy also softened economic growth at the end of 2012.

This outlook assumes the economy will not incur sharp across-the-board federal tax increases or spending cuts in 2013 and that income tax rates rise only for higher income households.

The Nation— Improving Amid Considerable Uncertainty

The nation continues to recover at a slow but steady pace.  In addition to real estate, improvements are evident in such sectors as business services, leisure and hospitality, and natural resource extraction.  Household formation is recovering in spite of modest employment growth.  The demand for housing has spread from rental housing to owner-occupied homes.   Home prices have improved in nearly all of the nation’s major metropolitan areas.  This improvement has improved consumer attitudes.

Job growth accelerated after a mid-year slowdown.  The nation added nearly 158,000 jobs each month on average from July through November of 2012, compared to adding 153,000 jobs per month on average during 2011.  In light of this modest improvement, the nation’s unemployment rate fell toward the end of the year.

Consumer confidence improved steadily in the latter months of 2012.  In November, consumer confidence was lifted to its highest level since February 2008.  This improvement translated into stronger consumer spending.  In the third quarter of 2012, consumer spending rose by 1.6 percent and contributed 1.1 percentage points to overall Gross Domestic Product growth In November, retail sales were 3.7 percent above the level a year ago.

In contrast to these positive developments, the outlook of many businesses became more cautious in the latter half of the year due to a weaker global economy and rising uncertainty about federal fiscal policy changes.  Capital equipment spending is expected to remain an important driver of economic growth, but its momentum weakened toward the end of 2012.  For example, spending on equipment and software fell slightly in the third quarter.  The growth of industrial output slowed throughout 2012 and by the year’s end was only growing modestly.  After rebounding from the effects of Hurricane Sandy, industrial production in November rose 2.5 percent from a year earlier—a much weaker gain than occurred in 2011.  Facing a slowing global economy and a strengthening dollar, export growth slowed in 2012.  Near the end of the year, there were declines in exports of industrial supplies and materials, computers, motor vehicles and parts, and consumer durable goods.

California— A Recovery for Housing

Similar to the nation, California is also in the midst of an economic recovery that is modest by historical standards.  However, the state’s recovery has also gathered momentum because of better real estate conditions, faster job growth, and improved consumer attitudes.  The state’s housing market recovery effectively began early in 2012.  The median sales price of existing single-family homes sold during the first 10 months of 2012 rose nearly 9 percent from the same months of 2011.  The pace of existing home sales also trended up during 2012.  These gains were supported by significant reductions in foreclosure activity and limited inventories of homes available for sale.  During the third quarter of 2012, the number of Notices of Default recorded on residential properties in California was down over 31 percent from a year earlier and was at the lowest level since the first quarter of 2007.

Employment gains improved in 2012.  During the first 11 months of the year, the state gained an average of 21,200 jobs per month, which is the strongest pace of job growth since 2005.  Job growth came entirely from the private sector as government employment continued to decline throughout the year.  Even though job gains included high-wage, high-technology industries such as computer systems design and scientific research and consulting, income growth moderated beginning with the last quarter of 2011.  Total California personal income is projected to grow from $1,645 billion in 2011 to $1,728 billion in 2012.  The growth in personal income included approximately $7 billion in additional wages from the Facebook Initial Public Offering, which accounts for more than 8 percent of personal income growth in 2012.

Calif Nonfarm Emplooyment

California personal income has historically grown slightly faster than the nation’s as a whole.  From 1980 to 2011, California’s total personal income grew 6.1 percent per year on average, while the national income grew 6 percent.  Over that time, California’s personal income has become more concentrated.  In 2010, the wealthiest 1 percent of income earners accounted for 21 percent of adjusted gross income compared to 10 percent in 1980.

Consumer spending in California also improved in 2012.  Taxable retail sales during the first half of 2012 grew 8.8 percent from the same period in 2011.  New motor vehicle registrations issued during the first 10 months of 2012 increased over 25 percent from the same months of 2011.

Since the recovery began in 2009, California’s economic growth has been dominated by high-technology and export-oriented industries located predominantly in major coastal metropolitan areas. However, in 2012, growth spread to other sectors and regions, thus improving economic conditions throughout the state.  During the first 10 months of 2012, 23 of the state’s 28 metropolitan areas added jobs.  By contrast, only one area posted a job gain in 2010 and only 19 did in 2011.  Home prices are recovering in most regions, including many of those that were hardest hit by the housing collapse, such as the Inland Empire and the Central Valley.

California’s recovery was initially driven by growing business activity and investment.  This trend slowed in 2012 due to China’s economic slowdown, concerns about European economic troubles, and rising uncertainty about federal fiscal policies.  This has been counterbalanced, however, by better consumer spending and attitudes that resulted from improvements in real estate conditions and modest but consistent job growth.

The Forecast

Both the national and state economies will continue to grow at moderate paces.  This forecast assumes that a recession potentially caused by federal fiscal policies is avoided, economic growth in Europe stabilizes, and China and other emerging market economies improve.

According to the Index of Leading Indicators, the economy should continue to expand at a moderate pace in the near future.  The Index is a widely followed economic indicator based on the average of ten economic statistics used to predict the direction of the economy over the next six to nine months.  It is generally considered to be a good predictor of recessions and recoveries.

The turnaround of the nation’s housing markets coupled with accelerating job growth has strengthened the recovery.  As uncertainty over fiscal policy lessens, national economic growth is expected to reaccelerate in the latter half of 2013.  Real Gross Domestic Product is forecast to grow 1.8 percent in 2013, 2.8 percent in 2014, and 3.4 percent in 2015.

California’s recovery is also expected to improve, with home building and job growth.  Nonfarm employment is projected to grow 2.1 percent in 2013, 2.4 percent in 2014, and 2.5 percent in 2015.  California should recover the jobs lost during the recession in the second quarter of 2015, which is two quarters earlier than projected in the prior forecast.  Total California personal income is projected to grow by $83 billion or 5.1 percent in 2012.

Jobs Lost

The principal risk to this outlook is the potential impact of a series of automatic federal tax increases and spending cuts that were set to take effect early in 2013 and the effect of federal actions regarding the debt limit.  The forecast, developed in early December, assumed that the federal income tax rate for households earning more than $250,000 per year would return to pre-tax cut levels in 2013 and that payroll tax rates would not be raised at the beginning of 2013.  Any effects of federal actions in early 2013 will be incorporated in the May Revision.

IMAGE ECO-04

Select Econ Data

Leave a comment

Filed under Uncategorized

Experts Discuss Southern California Housing Markets in 2013

Sold sign

According to several leading experts, after more than a few disappointing years, we may be looking at a more normal housing market in 2013.  The response of housing supply to rising home prices will be crucial.  Higher home prices will free up homes that were underwater and could also spark more building.

Los Angeles Time correspondent Alejandro Lazo hosted a Google LA times Hangout to discuss the Southern California housing market with DataQuick analyst Andrew LePage, Zillow.com chief economist Stan Humphries and USC’s Richard Green, director of the Lusk Center for Real Estate.

Stan Humphries: “understanding what is going to happen with negative equity is pretty important because I think it is negative equity that is constraining a lot of for-sale inventory. So with these types of price gains…half of that increase in median sales price is just a mix-shift…enormously robust home price appreciation…is going to free a lot of people from negative equity which is then going to change the supply dynamics and will lead to some moderation in home value moderation. What’s happening with new construction is going to be a big factor.”

Andrew LePage: “less of what’s selling today ….is foreclosured properties and a lot more is the mid to high end property in the move up market in the coastal markets…we’ve had higher demand meet very  restricted inventory for sale…”

Richard Green  “…the fundamentals are pretty strong here for the housing market for the next year at least.”

Watch the whole discussion here.

1 Comment

Filed under Uncategorized

Don’t Abandon the Children

4KLrW.Xl.4

Our leaders …can start by recognizing that childhood poverty is just as important to our state’s economic growth as creating new jobs,…”

Ann O’Leary challenges California to face up to the problem of childhood poverty in a  Sacramento Bee opinion piece, We can’t abandon the next generation.  She marshals sobering statistics about the Great Recession’s legacy of impoverishment and suggests some approaches to deal with it.

The Great Recession led to record setting levels and rates of poverty in California;

  • According to the Census Bureau’s official estimates, “more Californians are living in poverty – 6.3 million – more than at any point since the U.S. census started tracking state poverty”
  • If that weren’t bad enough, the Census Bureau’s new Supplementary Poverty Measure (see description and county poverty rates below) “puts the number of Californians in poverty at 8.7 million” which means that California has “the highest poverty rate in the country.”
  • Almost half of all California children live in or very nearly in poverty.
  • “more than twice as many California children live in poverty as seniors”, 21 percent of children versus 8.5 percent of seniors.

Not surprisingly, childhood poverty is greatest in areas of high unemployment, low rates of medical insurance coverage, high percentages of single-parent households, and low educational attainment rates.  According to Prosperity Threatened: Perspectives on Childhood Poverty in California, by The Center for the Next Generation childhood poverty in by the Supplemental measure in 2011 was highest in Lake County at 37.9 percent, followed by Merced County, 36.0 percent, and Fresno County at 35.0 percent.

To address this, O’Leary recommends increasing school funding in high child poverty areas and making it easier for poor families to access healthcare and to the existing range of income security programs.

Note: according to the Governor’s 2013-14 Budget Proposal: “School districts serving those students who have the greatest challenges will receive more generous increases so that all students in California have the opportunity to succeed.”

County Poverty

Source: Prosperity Threatened: Perspectives on Childhood Poverty in California

Supplementary Poverty Measure

According to the Census Bureau’s Supplementary Poverty Measure, the poverty rate in California is the highest in the nation, 23.5 percent.  Only Hawaii and the District of Columbia come close.

The Supplemental Poverty Measure differs from the official measure in that it (1) accounts for government benefits and taxes, work expenses (including childcare), and medical expenses on households’ standards of living and (2) uses a more accurate measure of the poverty line.  The official poverty measure’s poverty lines are based on surveys of family expenditures from the 1950s, whereas the supplemental measure’s poverty lines are based on actual expenditures on food, clothing, shelter, and utilities. Also, the Supplemental poverty line takes into geographic differences in housing prices.

2 Comments

Filed under Uncategorized

California Economic Update, January 2013

Job Gains

The Department of Finance released its January 2013 Finance Bulletin which includes the following review of the latest economic indicators for California.

California’s labor markets continued to improve in October with accelerating job growth and a drop in the unemployment rate. There was also improvement in real estate conditions.

Labor Market Conditions

  • California nonfarm payrolls grew by 45,800 jobs in October, and September’s initially reported gain of 8,500 jobs was revised up substantially—to 32,000. This was the sixth consecutive month-over-month job gain.
  • California’s private sector added 54,400 jobs in October—the highest monthly job growth in this sector since October 2004. This increase more than offset the loss of 8,600 government jobs.
  • Industry job gains in October were led by trade, transportation and utilities (24,700), followed by educational and health services (11,400), professional and business services (9,000), construction (4,100), leisure and hospitality (3,600), and manufacturing (1,400).
  • Four industry sectors lost jobs in October, led by government employment which fell by 8,600. Information employment dropped 1,700; financial activities, 1.600; and mining and logging, 500.
  • Total nonfarm payroll employment rose by 295,300, or 2.1 percent, from October 2011 to October 2012.
  • On a year-over-year basis, employment rose 86,000 in professional and business services; 65,200 in leisure and hospitality; 64,900 in educational and health services; 61,500 in trade, transportation, and utilities; 27,700 in construction; 23,100 in information; and 17,700 in financial activities.
  • Over the year, employment fell by 37,800 in government; 9,500 in manufacturing; 3,200 in other services; and 300 in mining and logging.
  • During the first 10 months of 2012, California gained 244,300 nonfarm jobs, or an average of 24,400 jobs per month, which was the strongest pace of job growth since 2005. This acceleration was broad-based—six of eleven major industry sectors have grown faster in 2012 than in 2011. The acceleration was led by leisure and hospitality and by professional and business services.
  • The unemployment rate improved in October, falling 0.1 percentage point to 10.1 percent, which is 1.4 percentage points lower than a year earlier. The number of unemployed Californians fell 29,000 in October while the number employed rose 56,000. Most importantly, this drop was achieved amid a strong increase in the labor force and an uptick in the labor force participation rate.

Real Estate

  • After slowing in the preceding two months, home sales rebounded in October. Sales of existing, single-family detached homes totaled 544,380 units at a seasonally adjusted annualized rate, which was up over 10 percent from October 2011.
  • Even though home prices slipped in October, they were still up substantially from a year earlier. The median price of existing, single-family homes sold in October was $341,370, up 23 percent from 12 months earlier.
  • The California Association of Realtors’ unsold inventory index fell to 3.1 months in October, which was the lowest inventory reading since August 2005.

2 Comments

Filed under Uncategorized