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ECONOMIC NEWS
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Puri: We’re in a recovery of two halves

The economy is facing a long road to health, with a few bright spots and a lot of uncertainty.

By Tina BorgattaPublished: October 28, 2010 02:57 PM

Two words that best describe the road to economic recovery: “long” and “bumpy.”

That’s the common theme that lingered throughout the Economic Outlook and Forecasts presented today by Cal State Fullerton’s Mihaylo College of Business and Economics and the Orange County Business Council.

The event drew about 900 professionals from across the region to the Hyatt Regency Irvine and included presentations by Mihaylo Dean Anil Puri and Research Associate Mira Farka, as well as a keynote by Cal State Fullerton alum Richard K. Davis, the chairman, president and CEO of U.S. Bancorp, who presented a $500,000 grant to the college. (Click back to ocmetro.com on Friday for more on how the university will use the money.)

It was a bright spot in an otherwise gloomy forecast that predicted a weak “jobless recovery,” with continued high unemployment, growth slithering at a snail’s pace and consumers remaining über tight on spending.

“The pessimism we’re all feeling is real,” Puri said.

It’s a trend that bucks the trend.

Historically, recessions have been followed by rapid growth and expansion. An immediate growth of 5.6 percent gave a quick boost to the economy after the downturn of 1981-82, according to the report. But since the end of this recession, the economy has grown by a paltry 2.6 percent.

Puri characterizes this as “a recovery of two halves” – and we’re not even halfway through it. The first half has been fueled by cyclical forces, including short-term government intervention and robust inventories. The second half will depend on fundamental forces such as consumer spending, business investments and construction.

“The recovery will bear a closer resemblance to a mild recession than to an expansion,” according to the forecast. “Consumer spending, labor markets and housing will remain a drag over the next six quarters and may not return to their full potential for a few years, as households repair their damaged balance sheets – a process that takes years to complete.”

Puri expects the unemployment rate will remain above 9 percent well into 2011, and job growth will likely remain uneven over the next two years.

Locally, he predicts a gain of about 18,300 jobs next year, followed by 31,800 in 2012. But that’s only after losing 12,000 jobs by the end of this year.

“At one point, Orange County had a job rate of 135,000 a month,” Puri said. “Last year we lost 158,000 jobs.”

For Southern California as a whole, a total job loss of 102,600 is expected by the end of the year, though the region will gain 68,800 next year and 123,000 in 2012.

Unemployment is expected to decline by about 1 percent next year and by about 2 percent in 2012.

Job sectors expected to continue to drag: construction, retail and financial services. Those expected to experience modest gains include exports, capital goods, infrastructure, health care and education.

Consumer spending – a cornerstone of recovery – hit a historical low, with an overall gain of 2.2 percent between April 2009 and August of this year. The average post-recession rate typically lingers around 4.2 percent. However, when you consider that the recession wiped out $17.6 million in household net wealth, it shouldn’t come as too much of a surprise.

Going forward, consumer spending should grow – albeit slowly – at a rate of about 2 percent over the next 18 months. That will have much to do with the continued jobless rate.

Likewise, the housing market will continue to struggle, with weak demand and continued foreclosures due to high unemployment and more stringent lending guidelines. Still, a gradual pickup in housing starts is predicted, with it hitting the 1 million mark in early 2012.

As for home values, Puri warns they could fall another 5 percent from the current level.

Further weakening the recovery: dwindling government aid. The feds poured $4 trillion into recovery efforts – a move that, indeed, provided a jumpstart for the economy. But those funds have dwindled, and with the fiscal deficit expected to hit $1.3 trillion by the end of the year and only lowering to $1.2 trillion next year, further “interventions” aren’t anticipated.

Business investments and production, however, are expected to increase moderately after a sharp downturn that began in May and has continued into the third quarter.

On the corporate side, large firms are posting near-historic profits – the result of streamlining and budget slashing, said Farka. While that hasn’t helped to enhance the employment landscape, Farka said it’s still a bright spot in the economy. Another bright spot is the financial sector, which has regained a firm footing. And inflation remains well contained.

“The biggest problem is that we’re not sure what’s going to happen,” Puri said, adding that uncertainty is a plague across all ranks – from consumers on up to big business.

“There are things we can do, though,” he said. “Education and training is going to be effective in this new world – and it is a new world. There is a long-term solution – innovative research in clean tech, for example. China and Germany are way ahead of us in solar energy. That is the future, but that requires serious thinking by our government and some long-term efforts.”

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