Real Estate 2001
Noting that the Federal Reserve has already cut the interest rate by 50 base points and will likely to do it again the end of this month, Donald H. Straszheim, president of the Milken Institute, said, "There's nothing better for equity than a rate cut. When rates come down, equities do better; it's a good time to invest." He also predicts a tax cut under the new administration, but "it will be political, not an economic decision," he warns, noting that a tax cut will have little immediate effect on the economy.
"One thing about California that's astounding is at year end the economy was still booming," added Brad Williams, senior economist for the California Legislative Analyst's Office. "As we look ahead, one of the hallmarks is lack of real estate, so there's still pressure. We're still seeing prices increase due to excess demand, so prices will hold up better than during the last two economic turndowns," he said.
California will feel some pain from a slowdown in the technology, manufacturing and construction sectors, as well as from the state's energy crisis, however.
Williams noted that expansion of business services and construction led growth in the 90s. Technology companies like Cisco and Oracle propelled Internet development and created jobs. A pull back in the technology sector, along with the demise of the dot-coms, will take a heavy toll, because they both created well-paying jobs and a great deal of wealth in the economy through stock options, noted Williams. With Nasdaq falling off, so is the wealth created by stock options.
Straszheim noted that the manufacturing sector is already in recession due to a downturn in the Asian economies, which slowed exports and created excess inventories. The energy crisis, however, is worsening the situation by slowing production. "Here is a case of self-inflicted wounds turning a chronic condition into a crisis," he added.
On a local level, Jack Kyser, chief economist for the Los Angeles Economic Development Corp., predicts 1.5% growth for Los Angeles and 2.3% growth overall for SoCal's tri-county area (Los Angeles, Orange and San Diego counties). He foresees a softening in the housing and nonresidential real estate markets and in exports.
Increases in workman's comp and healthcare have created a dramatic shift in the business environment over the last few months, Kyser continued, and the energy crisis is creating a volatile situation, in which recruiters from other states will try to lure industry out of Southern California. The threat of a movie industry strike "blows hot and cold," he added, noting that whether or not there's a strike, the studios are likely to downsize staff.
Additionally, Kyser said, retail is overbuilt; a movie strike and dot-com problems will have an impact on the Westside; and the region continues to face problems associated with affordable housing, infrastructure and clean water.
All three economists agree, however, that the picture is not as dismal here as in the rest of the nation. While growth is slowing, the economy isn't stagnant. Additionally, they noted that the region's tourist industry will continue to be strong, especially with the opening of Disney's California Adventure next month. And the state will continue to be "bullish about the technology sector," said Straszheim, noting that technology giants like Intel, Oracle and Cisco aren't going away anytime soon.
"We're not officially in a recession," he said, "That takes two negative quarters in a row, so we won't know until he get those two negative quarters. All in all, Straszheim added, "California is still doing better than most states."
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