California and the R-word

A new report from Goldman Sachs via MarketWatch raises the R-word in a big way.

Because of a sharp increase in California's unemployment rate in September, the state seems to be sinking into recession.

Goldman Sachs economist Jan Hatzius suggests that even though at 5.6% the state's jobless rate is low, it nonetheless has risen 0.9 of a percentage point in the last year. To Hatzius, that's a bad thing. He believes that Florida and Nevada, two other states whose economies have been powered by housing in recent years, are already in recession.

"Together with the regional recessions already visible in Florida and Nevada, a California recession would mean that the housing bust has pushed an area responsible for 20% of U.S. gross domestic product into an outright downturn," Hatzius said.

So far, this view is an anomaly. Economists at the UCLA Anderson Forecast and elsewhere have stopped short of saying that the housing downturn will push California's economy into recession. They believe that a second pillar of the economy, such as manufacturing, needs to weaken considerably for that to  happen.

Then again, the other scenario for a recession is for the state's housing market to worsen more than expected.

Thoughts? Comments?

-- Posted by Annette Haddad

Illustration credit: Peter O. Zierlein For The Times

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Comments

[ScottQ]

Of course there is a recession, and it's going to get much, much worse. The building boom was providing a lot of jobs - especially for the less-qualified. It was also fueling a vast amount of purchases - not just of building materials such as wood and nails, but also furntiure, fixtures, appliances, and also services such as cleaning and landscaping. A lot of other peripheral economic activity went into community growth, such as new roads, schools, medical services, retail, and so on - especially in places where the suburbs have been expanding into new land. All that new development is freezing up as the land rush screeches to a halt . . . and those people who are invested in projects that are dependant on new houses that will not now be built are going to lose their money. The businesses that make the stuff that people put in brand new houses are going to see a huge fall off in business. The people who make and sell the toys - such as expensive new cars, ATVs, RVs and so forth that folks fund with home equity loans are going to see a huge downturn in business, too.

State, federal, and local government are going to have to cancel a lot of programs they were depending on rising property and sales taxes to fund. People are going to worry about losing jobs that are far removed from the building business as the knock-on effect of other job losses and stalled growth widens its impact. Meanwhile, the wars keep costing more and more, and the price of fuel keeps rising. If the democrats win the White House, they'll raise federal taxes for sure, and make everything much worse. Get ready for the pain now by reducing your debt as much as possible. We're falling into a deep, deep hole, and the rest of the world economy will fall right in after us.

[Susan]

California manufacturing can become stronger if there is a boost in exports.

http://news.bbc.co.uk/2/hi/business/7039758.stm BBC article

"The US trade deficit narrowed more substantially than expected in August as export levels rose to a monthly high while imports fell."

[Michael Snyder]

A second pillar? Somebody needs to take a break & catch the news. Construction’s down, unemployment’s up and within weeks most of the film and television production will have dried up. Only this time instead of crews coming back to work after the holidays they’ll be manning the picket lines. Credit’s tight and equity’s evaporating faster than Mono Lake. The stock market’s been waffling faster than Hillary Clinton and they both finished the week losers because of it. Just how many “ripples” is it going to take before somebody realizes we’re in some deep Bandini here?
Please don’t take this for whining, there are some bright spots and if nothing else, folks are resilient but this economy is receding faster than my hair-line.

[yourkillingmelarry]

"Then again, the other scenario for a recession is for the state's housing market to worsen more than expected."

Bingo!

The logic that it will worsen is due to the fact that the credit crisis is far worse than originally estimated. Many high level analyst are projecting credit losses in the neighborhood of $250bn to $500bn. The original estimates were $50bn to $100bn. Thats what has the markets so shaky right now. California is the most vulnerable to a tight credit market. IMO 2008 will be the year that reality returned to the markets. By this time next year we will should have a very good handle on the degree of the housing downturn, the actual losses of the credit crunch and its true impact on the economy. I think you are seeing the last vestiges of the "soft landing" scenario. A scenario that was nothing more than an exercise in "wishful thinking".

[Hula Girl]

"Recession, what recession?"

http://www.nytimes.com/2007/11/10/opinion/10herbert.html?em&ex=1194843600&en=
0829517035e69c54&ei=5087%0A

Check out the NY Times Op-Ed piece by Bob Herbert.

Among the highlights: "The housing meltdown is getting the attention, but there’s so much more. Bankruptcies and homelessness are on the rise. The job market has been weak for years. The auto industry is in trouble. The cost of food, gasoline and home heating oil are soaring at a time when millions of Americans are managing to make it from one month to another solely by the grace of their credit cards."

.."The elite honchos in Washington and their courtiers in the news media are all but completely out of touch with the daily struggle of working families. Thirty-seven million Americans live in poverty and close to 60 million others are just a notch above the official poverty line.

An illness, an auto accident, the loss of a job — almost anything can knock them off their rickety economic perch."

"We have an economy that is based on increased debt,” said Mr. Hinchey. “The national debt is now slightly above $9 trillion, and ordinary working people are finding that they have to borrow more and more to maintain their standard of living."

“The average now is that people are spending close to 10 percent more than they earn every month. Obviously, that can’t be sustained.”

Pay No Attention To That Bernanke Behind The Curtain -
Ding-Dong, The Economy's Dead.

[Ben Brown]

The Money Changers have turned back the banking system to 1907 so as to facilitate the stealing of homes and bankrupting families . As opposed to the "Panic" off 100 years ago, these Mud-caked Creatures have an enormous media, political and financial dynamic that can allow them to seamlessly accomplish their perpetual goal of social domination.

[Economic Crisis]

California has been in recession for several months, judging by the year-over-year decline in sales tax revenues. Just wait until Christmas. The selling season is going to be a big bust, and between those layoffs and the ones already happening in the financial sector, no one's going to be debating whether the state is in a recession in 2008.

[Tombstone Realty]

Last I heard, the American consumer powers 70% of the economy. Not the manufacturing industry. If the American consumer doesn't spend, the economy doesn't go.

Doesn't matter who is in Washington or what they say - the pocketbooks are what's going to determine what happens.

[BetterVillage]

"To gild refined gold, to paint the lily... is wasteful and ridiculous excess."

[Enlightenment]

Everyone in the housing building / finance / sales channel has caused this recession, so blame it on them! There is around $1Trillion worth of Risky House Loans, yes with a "T". See radar.planetizen.com/node/61522

According to Figure 1.7. "Monthly Mortgage Rate Resets" in the Global Financial Stability Report, it appears there are 2 massive credit tidal waves coming our way, so you better get prepared! See www.imf.org/external/pubs/ft/GFSR/2007/02/pdf/text.pdf (Published by International Monetary Fund)

[John T Watts]

Whether it is an anomaly depends on whether people think long term or short term about the future. Recessions come and go. If the population keeps increasing at the present rate of about 3 million a year, the population will increase by about 60 million during the next 20 years. Anyone out there vissionary enough to extrapolate what that will mean in terms of real estate? How many of those 60 million will live in California? How many in the L.A. area?

[Brian]

I believe the economy is already in recession, not just in California, but nationwide. The fact is masked by quirks in government statistics. For instance, the most recent job report showed a gain of 166,000. But if you go into the details, you find something called the birth/death adjustment. It is the government's way of estimating jobs gained or lost by the formation or closure of businesses. Fully 103,000 of the 166,000 jobs were from this birth/death adjustment. In fact, this adjustment showed GAINS in employment and financial services and construction. The adjustment is totally inaccurate, by the BLS own admission, at times of change in the economy (acceleration or deceleration), because it relies on recent historical patterns.

The recent reported increase in GDP of 3.9% is another case in point. Significant portions of that gain were in manufacturing, driven by automobile manufacturers. In fact, they were increasing inventory in anticipation of a strike by the UAW. Now they've got inventory to burn off, what do you think that's going to do to manufacturing output? In the same vein, overall inventories rose. While some see this as a good sign, with consumers and businesses likely to cut spending, the inventory overhang will loom over production in coming months, reducing GDP output.

Another factor in the increase in GDP (and CPI) was the anomaly of gasoline prices falling during the quarter, while crude oil prices were rising. Imports are stripped out of the output number when calculating GDP (Gross DOMESTIC Product), so the GDP number was artificially pushed up. With gasoline and home heating oil prices likely to rise in the coming quarters, what will that do to the CPI and GDP?

The most reliable indicator of future GDP is in the retail sales number. First, it's reliable, second its broad-based, and third it comes only a few days after each month ends. Watched same-store sales, which have been anemic last two months. With the exception of very high end retailers, management at all of these companies has been warning of a slowdown in consumer spending. I think that that will be even more pronounced when people get the credit card bills in January. Look for consumer spending to slam shut at that point.

Messrs. Paulson and Bernanke have been whistling past the graveyard. The evidence is mounting, and soon they won't be able to deny it. As both were late in recognizing the implications of the mortgage crisis (remember back in June and July when both were saying it was "contained"), they will be late in recognizing the recession we have been in for the last month.

Bernanke in particular faces a Hobson's choice, as stock market participants will call for cuts in the federal funds rate. Meanwhile, the rest of the world is rapidly abandoning the dollar, raising commodity prices, devaluing dollar-based assets, leaving us with a currency headed for parity with the peso.

Can you spell stagflation?

[producer 08]

WE NEED A CORRECTION !!!!!!!!

Not more rich foreigners coming in and buying up the forclosed real estate at bargain prices !!!!!!!!! because OUR DOLLAR WAS CUT IN HALF THANKS TO BUSH !!!!!!!!!

[Horizontal Translation]

Great article in NYT today... a broad look at Countrywide, its principals, and its role as the largest lender in the country:

http://www.nytimes.com/2007/11/11/business/
11angelo.html?pagewanted=1&_r=1&th&emc=th

It questions whether things would have been as bad if Loeb had remained on.

Reallly guilty, extremely guilty, a little guilty... whatever. Feels like we're just arranging deck chairs on a submerging submarine.

[Economic Crisis]

John T Watts, none of those numbers justifies the bubble, nor will those numbers prevent a real estate price crash. Time to wake up from that dream of yours.

[Enlightenment]

Why did LA Times remove "LA Land Blog" link from the front page? I checked the other blogs on the current front page, and none of them had as much traffic as the "LA Land Blog" did.

So were too many realtors and housing bankers not happy how the population is very ticked off about the housing mess, and so did they put pressure on the LA Times to quiet the blog?

[yourkillingmelarry]

"If the population keeps increasing at the present rate of about 3 million a year, the population will increase by about 60 million during the next 20 years. Anyone out there vissionary enough to extrapolate what that will mean in terms of real estate? How many of those 60 million will live in California? How many in the L.A. area?"

I'm not really buying into that argument, Right now California is experiencing an out-migration, with the exception of non-monied immigrants and babies. Many analyst are already punching holes in 60 million projection. But this does bring up a good debate about the future of California's housing. The California housing shortage is very misunderstood. This is an immigration problem. There is a shortage of multi-tenet dwellings (apartments). The people fueling California's population growth could not afford a home in Springfield MO much less Los Angeles CA. Yet the state refuses to plan housing for this population. Right now S. Cal has an overhang and growing of 600K to 2MM SFR's. Affordability....affordability....affordability!!

[Javier Ramirez]

There appears to be a consensus among all of us that are writing that we are simply in a "Recession", but not as the definition suggests, which is two consecutive quarters of negative growth. It reminds me, that for the better part of this year, I have spoken to business owners and these included, from donut shops to big businesses that their businesses were significantly slowing down, I then started to hear from friends that many of them were losing their jobs. Just this week, someone from another country who travels all over the world asked what was wrong with the United States as our dollars are not worth much around the world, he said to me "The Europeans, Asians, Latin Americans and others are taking advantage of the United States and if you as a country do not do something fast, the United States is in danger of becoming irrelevant". I just hope that politicians and the rest of us, that instead of fighting with each, simple begin to work together again for the benefit of this, our great nation.

[John T Watts]

Economic Crisis-Maybe you need to try to see beyond the bubble and beyond the real estate price crash. At some point your crisis may be nothing more than an historical blip.

[Veep]

How can you criticise my Government for this ? I just kept my stock in Halliburton and it has quadrupled in five years. I thought Countrywide was a dairy as did George.

[MyLessThanPrimeBeef]

Produce 08, I have no problem with rich foreigners buying our real estate because today's rich foreigners are tomorrow's rich Americans. Who knows, maybe they may even run for governor one day, huh?

What I have problem with is we don't know for sure if Homeland Security is screening the rich foreigners as some fronts for Bin Ladin's billion-strong war chest.

Also, in devaluing our currency by half, the government has just made Osama's billion into two billions. You heard right, that's billions with a 'b.' I don't know about you, but Uncle Bin Lackey al-Wallstreet has me terrorized with his weak Dollar policy. He's making our enemy stronger while making the middle class of America poorer!!!

[Aldo818]

Honestly, I don't get a lot of the hype that we get about Americans's being richer.
I think that our government is ignoring the fact that we have a lot of working poor in our ranks. Working poor are families with full time jobs but still can't afford to live without government assistance.

Think about it guys. How much does it cost to pay for rent, food, transportation and just throw a child into the mix and add day care?

How much do you need to make to afford that without government assistance? In LA, I'm guessing that you need to make at least $45,000.
I don't know about you guys but I see a lot of people working at lower paying jobs like McDonalds that have kids. I'm guessing that many households are not able to afford to live without assistance.
I guess I'm just looking around and wondering how much the gardener, cashier at 7-11, guy at starbucks and the guy at Carl's Jr. make.

Heck, back when it was originally implemented, the minimum wage was supposed to give one person the ability to raise two children and support his spouse. How much can minimum wage afford nowadays?