For most of last year, economy watchers waited for the other shoe to drop. You know the one, the consumer shoe believed to be teetering on the heels of the housing slowdown. Well, that shoe has dropped, and if you hardly noticed, you are not alone. Consumer spending, the, shall we say, sole of the economy, has, to be sure, lost some of the vitality of last year, but it has remained vibrant. And chances are, it will continue to prop up the economy in 2007, albeit to a somewhat lesser extent than it did last year, economists say. “If Southern Californians liked 2006, they’ll probably like 2007,” said Mark Schniepp, an economist and principal of California Economic Forecast, a reporting and tracking company in Goleta. Economists in fact are unusually consistent in their predictions for 2007 a generally strong climate, showing some slowdown versus last year but not enough to significantly derail the economy. In other words, a soft landing. The reasons are many, including a modest rate of inflation, continued low unemployment and relatively strong outlook for hiring and a surprisingly stable interest rate environment. “We surveyed 400 Southern California businesses and we looked at those businesses against four dimensions, current demand, future demand expectations, future pricing trends and employment trends,” said Scott Anderson, senior economist at Wells Fargo, who recently completed the bank’s 2006 Economic Survey. “The survey results were quite surprising in their strength. It did appear the expansion in Southern California was still very much intact.” Last year at this time it was widely expected that interest rates would begin to climb rather steadily, dampening prospects for the housing market. That slowdown, it was believed, would trickle down to consumers pockets, curtailing spending, which accounts for about two-thirds of the economy, and putting into jeopardy the economic expansion that had characterized 2005. Then came a severe run-up in oil prices with corresponding increases in gas and energy costs and expectations that the high prices would take their toll on discretionary spending. For a while, there was some pullback in such things as dining out, but by and large, no such spending slowdown occurred. Retail sales this holiday season, while not as robust as first anticipated or as strong as last year, are still expected to rise by about 2.8 percent from last year’s levels. Pricing has remained relatively stable and there are no real signs that inflation will accelerate. Even the housing market, although frustrating sellers with a glut of resale homes, has not shown any real deterioration. “It looks like southern California construction companies do report relatively softer conditions than do manufacturers and service-based businesses, but overall they still anticipate modest expansion,” said Anderson. “Survey results suggest more of a flat environment in home prices rather than a lot of contraction. So bottom line, we see no real signs of significantly worsening housing conditions. We think the bulk of the housing downturn has already occurred and we might start to see marginal pickup in sales and building materials.” Several unexpected events occurred to balance the somewhat softer housing market. Energy prices moderated. The manufacturing sector showed surprising strength. And a flood of investments coming from China and some other countries helped to keep interest rates low. “Pundits anticipated a rise in interest rates, but the decline fooled many of the pundits,” said Daniel Blake, director of the San Fernando Valley Economic Research Center referring to an unexpected drop in mortgage rates to around 6 percent that occurred late last year. There are still some clouds on the horizon inflation, a lingering question about what will happen on the housing front and the auto sector, which has been particularly hard-hit by the rise in energy prices. Some say the warning signs are overrated. “Gasoline? I don’t think that’s an issue,” said Schniepp. “Here’s another area where consumers and everybody whines about it, but at the same time that they’re whining, they’re buying SUVs.” But even those for whom signs of concern still linger, there are plenty of reasons for optimism including the moderation in energy prices and mortgage rate decreases. The Wells survey showed continued optimism for manufacturers, earlier thought to be the weakest link in the chain. “Southern California manufacturers were the most optimistic of all the other sectors we talked to,” said Anderson. “I think the weaker dollar is playing a roll here. At least from a pricing standpoint, U.S. manufacturing is much more competitive than it has been over the last two or three years.” Employers overall, including those in the Valley area, are planning to continue hiring in 2007. “We got some good news with aerospace companies ramping up production, so all in all it just looks like more moderate growth going forward in 2007,” said Blake, who is forecasting that employment growth in the Valley will rise by 1 percent to 1.3 percent this year. Finally, consumer confidence remains strong. The perceived wealth created by rising home values that boosted consumer sentiments may not persist. But in its place, the stock market has risen dramatically. “What many economists missed is, yes, we’re probably going to see some softening of home prices nationally down 3 percent,” said Anderson. “But offsetting those losses are strong gains in equity wealth. A 3 percent decline in housing will wipe out $70 billion in household wealth, but stock gains are equivalent to $3.4 trillion. So on net, household wealth is at an all-time high.”
