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Thursday, Mar 28, 2024

Consumers, Housing Hold Keys to Economic Future

The economic outlook for 2006? Slow and steady — generally. The frenzied consumer spending of the past two years will slow and housing sales and construction will slow. Most pundits point out that just as consumer spending and the housing market positively affected a broader slice of the economy in 2005, a slowdown in those sectors will have a larger impact in 2006 as well. As Wells Fargo economists put it in an economic outlook report released late last month, “Next year the consumer will be coasting, the housing engine could be sputtering, and it may appear as if nobody is driving the car.” Not that all sectors of the economy will perform equally. Most are expecting that manufacturing, fueled by an uptick in demand, especially strong export markets and the growth in aerospace, will get an economic shot in the arm next year. Improvements in the technology sector are expected to continue. And the financial markets, venture capital and equity investment, should continue to be active. But what’s fueled the economy for the past two years has been the buying binge of consumers flush with cash from their home equity. And as housing values stabilize and interest rates increase, that consumer well will dry. “I think (the increases in manufacturing and other businesses) will be enough to sustain the economy, at least in 2006,” said Scott Anderson, senior economist at Wells Fargo. “There’s more of a risk in ’07, but for the next six to 12 months this inventory building and a slowing in the import growth that’s going to benefit GDP, should be enough to offset some of the slowing in the housing market.” What happens in the housing market impacts not just consumer spending, but also the construction, mortgage, real estate and banking industries. Home buying, refinancing and construction in particular, have been strong drivers in the local San Fernando Valley economy affecting large and small businesses alike. “The housing bubble is a big question mark,” said Roberto Barragan, president of the Valley Economic Development Center. “I don’t think we’ll see a disastrous downturn, but I think we could see a flattening. A lot of the small business growth has been in building supplies, contractors and support services.” Add to the construction sector, the growth over the past several years in mortgage brokers and lenders, and the local economy could soften. “There are a couple dozen new mortgage brokers operating in the Valley,” Barragan said. “I think you’ll see those guys get hurt.” Economists say that the housing market has been the single-most important contributor to job growth about 1.4 million net new jobs have been created in housing-related industries since late 2001, according to the Wells Fargo report. “Theoretically, if no other sectors helped take up the slack, a housing downturn that left construction and real estate finance payrolls flat could cut the U.S.’s already meager payroll growth in half,” the Wells outlook suggested. Employment locally has remained quite strong, but there is evidence that job growth in the services sector is declining significantly. “California job growth in services industries is trending well below the U.S. average,” said Anderson, noting that the decline began last summer. For several years now accounting and law firms as well as public companies have been on a hiring spree to add personnel to handle the increased requirements of Sarbanes-Oxley legislation. “That was sort of a one-time benefit,” Anderson said, “and now we’re getting back to more normal rates of job creation.” There’s also some evidence that the cost of living in Southern California is affecting migration to the region and could lead to a slowdown in many of the service industries that have been thriving on the increased population trends of recent years. The brightest spot on the horizon appears to be manufacturing, where, economists say, there is now a push on to replenish surprisingly bare inventories. “Businesses have underestimated the demand over the past couple of quarters,” Anderson said. “As a result, they let their shelves go bare. Businesses are ramping up production so we do expect the manufacturing outlook to improve in ’06, and we’ll see improved GDP growth as a result.” Especially strong export markets in Asia have been a big boon to domestic manufacturers. The dollar, which has regained some of its strength in recent months, is still 23 percent weaker than it was at its peak early in 2002, making U.S. companies more competitive in global markets. And with China’s growth and demand for goods expected to continue through the next year, the manufacturing sector could well offset some of the weaker markets. But just as they did last year, companies, even those that see strong sales increases, are not expected to be spending much more of what they earn. Through 2005, many companies stockpiled their earnings, holding tight on expenses and hiring, and most say there will be little change in that strategy in 2006. A survey conducted by Robert Half International Inc. found that less than one third of chief financial officers planned to boost salary increases and just 20 percent said they would increase bonuses from their 2005 levels. The survey respondents, more than 1,400 CFOs from a random sample of companies, planned to give salary increases averaging 5 percent and bonuses averaging 7 percent in the coming year. “Health care and across the board costs have gone up,” said Donna Farrugia, regional vice president for Robert Half in Westlake Village. “Raises and bonuses are just another line item on a financial statement, so you have to manage all those increased costs, and that’s what CFOs are having to manage right now.” The one common thread in the economic outlook for 2006 is likely to be rising interest rates, which most believe will help to keep inflation in check but could also curtail growth.

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