Tuesday, March 15, 2005

Tepid growth seen as housing boom wanes

By Alex Veiga
Associated Press



Like many of its homeowners, California has benefited in recent years from a housing market boom that has created jobs and fueled the kind of consumer spending that helps grow the economy.

But California's economy will be hard pressed to generate more than tepid growth in the next few years as the real estate market begins an inevitable slowdown, according to the quarterly University of California, Los Angeles, Anderson Forecast to be released today.

"We're basing growth on the real estate bubble and that real estate bubble is going to end and so is that driver for growth," said Christopher Thornberg, a senior economist who authored the forecast.

While the state's economy saw solid gains in employment last year and sustained healthy increases in personal income, state government revenues and taxable sales, much of the growth was driven in construction, financial activities and other business sectors linked to real estate development.

Of the 243,000 net private payroll jobs added by the state's economy in the last two years, 122,000 of them were jobs directly related to the real estate market, which represents 10 percent of all private sector jobs but accounted for 70 percent of the jobs added by the economy in that period, Thornberg said.

Meanwhile, the industries that cater to demand from outside the state, such as aerospace, tourism and information services have only recently begun to show signs of picking up, partly because the weakening dollar has made U.S. exports more attractive.

Thornberg notes that when the state eventually recovered from the economic downturn of the early 1990s, it saw growth in business sectors catering to both export and internal markets. But the state's current recovery has been lopsided because of the real estate boom.

The median price of a home in California grew from $225,000 in 2001 to $400,000 in January. As a result, many homeowners have essentially been given a 30 percent boost to their annual income, Thornberg observes.

"The job gains over the past year reflect not an economy in the midst of a true recovery, but an economy still in the midst of a real estate-fueled spending binge," Thornberg argues in his report.

Thornberg suggests the real estate market "bubble" probably won't burst, or collapse, but will likely begin to slow gradually, with appreciation falling from double-digit percentages to single digits.

Other economists have also forecast some slowing in appreciation in the second half of this year if mortgage interest rates rise. Similar predictions were made early last year.

Whether the state can continue to sustain growth amid a weakening real estate market remains to be seen, Thornberg said.

While the counties of San Diego, Orange, Riverside and San Bernardino have benefited from much of the real estate-related growth, other areas of the state have struggled.

The Bay area, which has lost 400,000 jobs since the tech sector bubble burst in 2000, appears past the worst of the downturn and should fare better as demand for information technology grows, Thornberg said.

Los Angeles and Ventura counties saw net gains in jobs last year, the first time since 2000. But much of the areas' manufacturing, apparel and food processing industries face growing competition due to imports from overseas.

Nationally, UCLA Anderson Forecast director Edward Leamer reiterated warnings of a recession sometime before the end of the decade.

The recession of 2001 differed significantly from previous economic downturns in that consumer spending on homes, cars and other durable goods never declined. Therefore, Leamer argues, economic growth driven by a surge in consumer spending is unlikely in the next few years.

Also unlikely to drive the kind of spending that could sustain economic growth are tax cuts or a sizable boost in wartime military spending, both of which would further balloon the national debt, Leamer said.

Massive investment by the private sector is also unlikely, but the nation should see a rise in exports as long as foreign currencies retain their edge over the dollar, Leamer said.

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