News

Los Angeles County’s economy will experience a gradual economic improvement during 2011 and

2012. Even so, some of the County’s major industries will continue to be challenged. 

Positive Forces through 2011 and 2012 

The Los Angeles economy appears to be past the bottom of the recession and is starting up the

recovery path. Though activity is still at relatively low levels in some industries, others are primed

for growth. Thus, there are quite a few positives to report for the county’s economy in the coming

two years.

• International trade activity turned up strongly in 2010 after plunging the previous

   year. A healthy increase in activity is expected in 2011 with more coming in 2012.

   Job counts will rise accordingly.

• The entertainment industry experienced a rebound in activity during 2010, with more              motion pictures, television pilots and shows, and commercials being filmed. Industry                employment rebounded as well.

• Tourism also turned up in 2010 after sliding in 2009. New hotels downtown and in                 Hollywood drew more business visitors as well as leisure travelers to the county. The             improvement will continue in 2011 and 2012.

• The healthcare services sector should continue to hold its own. Good hospitals                 attract excellent physicians, and L.A. County has some of the best. Though healthcare          reform could be an issue in the future, right now this industry reliably generates jobs year      in and year out.

• Retail sales turned up in 2010 after being hit hard by the 2008‐2009 recession. Businesses and residents of Los Angeles County are feeling more confident about their prospects, and tourism is on the rise. All these will have a positive impact on retail sales.

Negative Forces through 2011 and 2012

• Local government finance will be a big concern, as the decline in home values, the           slump in retail sales, and the state’s chronic budget problems all have hurt municipal and        county budgets. More staff layoffs and service cuts are coming in 2011 and 2012.

The county’s aerospace/defense industry is operating in an unpredictable environment

caused by changing priorities at the Defense Department and NASA compounded by the federal government’s drive to reduce defense budgets. Several programs of interest to Los Angeles will be impacted. Some local firms will receive more orders while other operations are cut back or even eliminated. We expect to learn more during 2011 and 2012. 

Net Results 

Total nonfarm employment in the County should grow by +0.6% or +24,100 jobs in 2011, after a drop of ‐1.7% or ‐63,500 jobs in 2010. Numerically, the largest employment gains during 2011 will come in: leisure & hospitality, professional, scientific & technical services, administration & support services, health services and retail trade. Growing budget problems will force local government entities to continue shedding jobs. Employment in finance & insurance will decline. In 2012, total nonfarm employment in the County is expected to increase by +1.8% as the economic recovery takes hold.

Unemployment rates will continue at painfully high levels during the forecast period, though they will gradually decline. Business firms initially will be cautious in rehiring until they believe the recovery in their own sales and profits is well established. The County’s unemployment rate averaged 12.5% during 2010. In 2011, the jobless rate is expected to edge down to 12.4%. In 2012, the unemployment rate will fall to 11.7%. Income growth is expected to regain momentum in 2011 (+3.9%) and 2012 (+5.4%). Taxable retail sales turned up in 2010, growing by +5.8% following a horrific decline (‐12.7%) the previous year. Retail sales are expected to grow by 5.7% and +6.6% in 2012, making the latter the third best year ever (after 2006 and 2007). 

II. OUTLOOK FOR ORANGE COUNTY 

• In 2010, Orange County received $49.5 million in American Recovery and Reinvestment Act    funds earmarked for infrastructure projects.

• The Health Services industry was one of the few that added jobs through the recession.

• The county’s life science and medical instrument makers are also a source of growth. Several firms based in the county are moving ahead with new product trials or are awaiting FDA approval for new devices.

• The high tech industry is doing quite well. Both consumer electronics and business spending on technology products are expected to grow moderately this year. Businesses will spend more on software, data storage and computer hardware. A large percentage of the county’s high tech goods are exported and strong demand from emerging markets will provide a boost to the industry this year.

• Tourism is on the rebound. The county’s hotels will see a rise in occupancy rates and room rates as visitors return to the region – especially the area around the Disneyland Resort and the upscale coastal areas of Newport and Laguna Beach. Tourists will be a bit more free‐spending and business travelers will return.

• Manufacturing employment will inch up this year (the county ranks tenth in the nation in the number of factory jobs), and will see modest additional growth in 2012. Expansion will come from rising export demand in Asia and increased domestic demand for the county’s computer products, medical devices, industrial goods and apparel. Orange County’s high tech and clean‐tech industries will do especially well. Defense related industries are in a watch mode to see how much defense spending is cut next year and which programs will be targeted. Manufacturing growth could also be held in check by rising prices for energy and other commodities used in manufacturing.

Negative forces through 2011 and 2012

• Job losses in the financial services industry hit bottom in 2009, but problems remain. Banks and other lenders are facing new federal regulations such as more stringent capital requirements. Banks are also looking to cut costs after new regulations trimmed revenue sources and may do so by cutting employees. While the worst is over, more bank failures are possible and credit remains tight. Some community banks have reduced the number of problem commercial real estate loans on their books, but others are still struggling.

• Residential real estate will lag in 2011 with fewer home sales. Much will depend on improvement in the labor market and a return of consumer confidence. The number of distressed properties in Orange County is still near a historic high, and another wave of          foreclosures is possible this year.  

Net Results 

Nonfarm employment in the county is expected to increase by +1.1% or +15,600 jobs during 2011.

This follows a ‐0.8% job loss in 2010 and a ‐7.4% decline in 2009. Employment gains will be widespread with the exception of state and local government jobs. The industries that will create the largest numbers of jobs are: Leisure & Hospitality, Retail Trade, Professional Scientific & Technical services, Manufacturing and Administrative & Support Services. In 2012, employment in the county should climb by +2.1%, posting a more robust increase of +28,700 jobs. Orange County’s unemployment rate averaged 9.6% in 2010. In 2011 the rate should fall back to 9.2% as the economic recovery gains momentum. By 2012 stronger growth will drive the unemployment rate down to 8.6% ‐ still high, but a welcome improvement after three years above 9%. .7

III. OUTLOOK FOR THE RIVERSIDE‐SAN BERNARDINO AREA 

The outlook for the Riverside‐San Bernardino (Inland Empire) area remains partly cloudy in 2011, particularly with regards to the housing market and the construction industry. The Inland Empire has experienced a long and deep recession. A surge in the number of foreclosures along with plummeting home values in construction and soaring joblessness resulted in the worst ever economic crisis for the Inland Empire. 

However, the region began to recover along with the rest of Southern California in 2010. The recovery will be slower for the Inland Empire, as it has more ground to make up due to its exposure to the housing collapse and the dramatic decline in foreign trade volumes in 2009. The construction, manufacturing and trade related sectors are the key drivers of the Inland Empire economy. The good news is that they all began to pick up last year. The better news is that this year the area should begin to see job gains. 

The recovery in the Inland Empire will not progress strongly until the housing market recovers and that is not expected for at least a year or so. The Inland Empire registered more defaults and foreclosures per capita during the economic downturn than any other area of Southern California. However, median housing prices appreciated by +10% in 2010 compared with 2009. Note that the median price of an Inland Empire home is still significantly below where it was before the crisis. In fact, median home prices in the area have dropped to their 2001 price levels. 

The region’s construction industry has been hit the hardest and the results show in the employment figures. Construction employment in 2010 dropped by ‐14.8% from 2009, and was ‐ 57% below the peak levels of June 2006. New industrial and office construction permits declined dramatically during the recession but 2010 saw slightly better activity. Nonresidential construction should continue to improve in 2011, but will remain well below peak levels reached prior to the recession. 

 Total nonfarm employment dropped by ‐31,900 jobs in 2010. After construction, the sectors that suffered the biggest job losses in the Inland Empire were wholesale and retail trade, state & local government, and manufacturing. All were impacted by the severe decline in employment, consumer spending, and the housing market. The unemployment rate in the Inland Empire reached 14.5% in 2010 and is expected to drop to 14.1% by the end of this year. Persistently high

unemployment has been really difficult for the Inland Empire to overcome and the results can be clearly seen, as retail sales have suffered. However, retail sales are expected to improve throughout 2012 as unemployment declines and personal income increases.  

It is important to point out that the recovery in the Inland Empire will lag other parts of California and the U.S. as the area is attempting to come up out of a very deep hole. The good news is the dramatic declines seen in 2009 have ended and the area has begun the process of recovery. Still, the recovery in the Inland Empire will seem slow as unemployment and housing remain significant issues during the forecast period. Nonfarm employment is expected to remain stable in 2011 and then increase by +1.5% in 2012. The stellar recovery at the twin ports had positive results for the Inland Empire’s transportation and wholesale trade sectors in 2010, particularly in the latter half of the year. The area will begin to see even more positive results in the coming months. 

The Inland Empire plays a pivotal role as a distribution center for many of the goods flowing through the ports of Long Beach and Los Angeles. World trade volumes rose by +16% in 2010 and are projected to increase by +6% to +7% in 2011. In fact, imports from Asia to the U.S. are expected to rise by nearly +8% in 2011. It is important to remember that over 40% of the U.S.’s imported containers come through the ports of LA and Long Beach and roughly 50% of these imports are bound for Southern California.

All of this will translate into positive results for the transportation and logistics sector in the Inland Empire. 

The severe downturn of the Inland Empire economy brought migration into the area to a

halt. Again, what formerly was a part of the Inland Empire’s competitive advantage has become a detriment to recovery. Rapid population growth, particularly from 1998‐2008 was one of the key economic drivers for the area. However, the economic recovery in 2011 should end the declines in migration, leading demand for housing, retail and services to grow again albeit very slowly. Eventually, the region’s competitive advantages will lead to a resurgence in economic activity. The availability of abundant undeveloped land had been the major economic driver propelling the area’s economic growth. The recession reversed that advantage as the downturn negatively impacted the industries that most rely on cheap land. However, the Inland Empire will recover strongly when new home construction, manufacturing, industrial development and logistics make a comeback.  

In the short‐term, however, the only sector that will witness any real improvement is logistics and warehousing as Outlook for the Riverside‐San Bernardino Area trade volumes continue to make a robust comeback. Note also that the Inland Empire economy will undoubtedly perform well in the long run due to its position as the central hub for logistics related to international trade and as the area where the most significant population growth is expected. Then, the key advantages for the Inland Empire will once again be the affordability of housing, population growth and available low‐cost land for additional warehouse construction. For the Inland Empire it is just a matter of time and patience, as the region is not expected to see the pre‐recession glory days for at least three to four years. 

Positive Forces through 2011 and 2012

• Housing affordability: Although home prices have rebounded slightly, housing affordability is much greater than before the recession. Going forward, we expect housing in the area to remain extremely affordable relative to earlier years and to the rest of Southern California.

• Goods Movement: Trade volumes at the local ports have experienced an outstanding recovery. They are expected to grow again this year (albeit not as strongly) and into 2012. The projected levels will not match the records set in 2006 and 2007. However, the increase in activity will positively impact the Inland Empire warehouse and distribution system network.

• Transportation projects: Federal stimulus funds will boost infrastructure construction in the area and help create new jobs in the region’s long suffering construction industry.

• Healthcare and education sectors: These were the only two areas that grew in 2009 and they experienced growth in 2010 as well. Expectations are for this trend to continue in 2011.

• Tourism: The leisure & hospitality sector lost ‐3,300 jobs in 2010. Tourism should begin to see a comeback this year as consumer spending and personal income increase. 

Negative Forces through 2011 and 2012

• Housing: High rates of defaults and foreclosures will still pressure home values this year. However, foreclosures may finally begin to slow down. The housing recovery is expected to continue in 2011 and 2012.

• Unemployment: The Inland Empire still has one of the nation’s highest unemployment rates among urban areas. However, joblessness is expected to lessen somewhat in the coming months and in 2012.

• State and Local Government sector: Local governments will continue to face significant financial issues over the next few years as property and sales tax revenues decline.

LAEDC Kyser Center for Economic Research 58 Economic Forecast, February 2011