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Tuesday, Jan 31, 2023
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Tarnished Golden State Still Shines

From an economic standpoint, 2014 ended on a high note. U.S. growth in the third quarter came in at 5 percent and by Beacon Economics’ current estimate, the economy will continue to grow at an above-average pace in the fourth quarter. Job growth accelerated to the best rate we’ve seen in well over a decade, industrial production continued to expand at a healthy pace and the wobbly global economy has not harmed U.S. growth to date. Looking into 2015, housing has another bounce left, manufacturing continues to prosper and even public spending has stabilized after years of weakness. The credit markets are flowing, interest rates remain low and it looks as though worker pay is finally on the rise. Even losses from reduced demand for U.S. exports due to Euro-zone problems and slowing in China will likely more than be made up for by falling commodity prices. And to the consternation of doubters, California is one of the economies at the center of the nation’s newfound prosperity. By current estimates California is in the top 15 states for growth – and will likely end up in the top 10 once the employment revisions are released in late February. The gains are broad based – Silicon Valley continues to lead, but solid increases in employment stretch from Fresno to San Diego. While Los Angeles County lags the state in job growth, that is not much of a surprise given the size of the economy and relative density of the area. Key sectors such as professional services, motion pictures and a burgeoning tech industry are leading growth in the region. And L.A. County residents are clearly better off – unemployment fell 1.2 percentage points in the last year. The reason pundits were wrong about California being the “next Greece” wasn’t because California isn’t business unfriendly – it is. But being business unfriendly isn’t the main obstacle to growth. Many other factors including quality of life, having important job clusters and location play an equal if not larger role. California succeeds despite problems created by its business unfriendly atmosphere. Our biggest worry for the New Year has to do with political fundamentals. At the national level the Republican takeover of the Senate does little more than encourage the same partisanship that has made the last two years some of the least productive ever. Expect a whole lot of nothing to occur despite needed reforms on immigration, infrastructure and taxation. At the state level, instead of using the current prosperity to address serious problems in California, policymakers seem intent on making the business climate worse. There has been little discussion regarding revenue reform and reform of the California Environmental Quality Act (CEQA) seems completely stalled despite an increasing obviousness that the law is abused by special interests – abuses that have left us short of housing supply and make it difficult to impossible for businesses to invest in the state. Locally, despite noise about making the city of Los Angeles more competitive, moves by the mayor and City Council seem to be pushing us in the opposite direction. One strategy is an aggressive minimum wage hike within the city boundaries. A statewide increase is likely a good policy, but at the city level it will only drive job growth in the 87 other cities that Los Angeles shares the County with. What does it all mean for the San Fernando Valley? The area has traditionally been home to Los Angeles’s middle class and median incomes remain modestly higher than for Los Angeles or the County overall. According to the most recent data (first quarter 2014) there are currently 260,000 jobs in the Valley – representing roughly 20 percent of jobs in the city of Los Angeles overall. And growth is modestly faster than in the City – in the 2 percent range. At one level, the news is good locally. A growing economy combined with a lack of CEQA reform means that there will be little infill occurring in the hot coastal housing market. This will inevitably increase demand for housing in the Valley – look for gentrification to become a common word in the area over the next few years. This means new investment and rising home prices, but a loss of some of the historic character of the area. It also means more jobs in household servicing industries such as health and retail. Another important job source in the San Fernando Valley is manufacturing, an industry that houses over one quarter of the city of Los Angeles’ jobs. This is also one of the sectors most negatively affected by business climate issues, something that may well end up being a drag on the local economy unless needed reforms are considered. Still, despite these issues, all in all, 2015 will be a good year. There is enough momentum in the current recovery to power through the problems – and with that momentum, the Valley will continue to prosper. Christopher Thornberg is an economist and founding partner of Beacon Economics in Los Angeles, www.BeaconEcon.com.

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