UCLA Economist: State Unemployment to Remain High in 2010, 2011, But Bay Area Should Suffer Less

By Sharon Simonson

California’s unemployment rate likely will stay in the double digits for the next two years with no new net employment generated next year, UCLA Senior Economist Jerry Nickelsburg said.

The California unemployment rate could top 12.5 percent in 2010 and remain above 10 percent as far out as 2011. Including this year’s unemployment rate, now above 12 percent, this could be the longest period of double-digit unemployment in the Golden State since1978, when his statistics begin.

The numbers represent a somewhat more pessimistic view of the state’s future economic fortunes than that held by Nickelsburg and his colleagues at the UCLA Anderson School of Management earlier this year, he said.

San Francisco and Silicon Valley will fare somewhat better than the state at large, he said. But the East Bay, bogged down by reliance on public sector employers, which have more jobs to shed, won’t.

Nickelsburg spoke Dec. 2 at the Four Seasons Hotel in East Palo Alto before an intimate gathering of some 50 regional business people invited to attend. The event was sponsored by California business and real estate law firm Allen Matkins, which has offices in San Francisco and Walnut Creek. Allen Matkins and the Anderson school also partner to produce a twice-annual commercial real estate surveys covering major California markets.

The state’s economy will be hampered in the next several years by ongoing public-sector cost reductions, including job cuts, in state and local governments, the economist said. That means that even as the private sector adds jobs, net employment gains will be sluggish.

That said, there are signs of hope. For homebuilders, better times are a matter of when, not if, he said. The state is not currently producing enough housing to both replace the units lost to age and other factors and to satisfy increased demand driven by population growth. November inventories of for-sale homes in San Jose and San Francisco, measured as a ratio of existing households, are the third and fifth lowest, respectively, of 38 metropolitan areas nationwide. Those metro areas include other West Coast markets including Riverside and Sacramento as well as those in the Midwest, Texas and along the Eastern Seaboard. As a result, prices are stabilizing in the state’s most resilient markets along the coast including the Bay Area, he said.

“These are all of the conditions that can give you a rebound in [housing] construction,” he said.

He acknowledged issues in credit markets, not least of which are continuing borrower defaults and heightened lender resistance to financing real estate development. Some analysts believe lack of financing will curtail new-home development, he conceded. But, Nickelsburg said, companies like The Irvine Co., which doesn’t need lender financing, have already begun new home construction. If they do well, “that becomes actual evidence that demand is there and sets the stage” for lenders to step up, he said.

Meanwhile, the dollar’s decline “is very good for California,” he said. Though much manufacturing has left the state, “there is a lot of manufacturing for export still here,” he said. Moreover, the manufacturers that remain are “very competitive” because if they weren’t they would have been driven out already. “The weak dollar definitely helps us, particularly as we compete against Europe in the booming economies of Asia,” he said.

Exports through the Port of Oakland, including agricultural products from the Central Valley and machines made in the Bay Area, are back to their pre-recession levels, he said, and air cargo exported via the San Francisco International Airport is also up.

California typically grows much faster than the nation as a whole, he said. That wasn’t true in the 1970s and early 1990s, when federal defense spending fell following the end of the Vietnam War and the end of the Cold War, hitting the state disproportionately hard. It also wasn’t true in the early part of this decade, when the dot-com bust took an extraordinary toll on the Bay Area. This time around, the wrenching structural change in state government, including job cuts, will inhibit net employment growth. But those losses will be counterbalanced by expansion in sectors such as medical technology and alternative energy, he said.

Finally, he said, even as state unemployment rates rise, real personal income has begun to grow and is expected to continue to grow consistently throughout 2010 and 2011.

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