Economic Forecast & Real Estate Outlook
Pepperdine University’s Graziadio Alumni Network Jack Kyser Sr. VP & Chief Economist, LAEDC Tuesday June 24, 2008
Recession or what?
WHAT IS A RECESSION?
A significant decline in economic activity Spread across the economy Lasting more than a few months Normally visible in
• • • • • Real GDP Real Income, Employment, Industrial Production Wholesale/ Retail Sales
Source: NBER Cycle Dating Committee
U.S. NONFARM EMPLOYMENT GROWTH
4,000 3,000 2,000 1,000 0 -1,000 -2,000 90-01 91-01 92-01 93-01 94-01 95-01 96-01 97-01 98-01 99-01 00-01 01-01 02-01 03-01 04-01 05-01 06-01 07-01 08-01 Chg. in Nonfarm Jobs Unemployment Rate
Annual Chg. in Nonfarm Jobs, SA, in thousands % May ’08: -49,000 jobs Jan-May ’08: -324,000 jobs
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Source: Bureau of Labor Statistics
U.S. RETAIL SALES
12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 97:1 98:3 00:1 01:3
Yr/Yr % Change, SA
Total Retail Sales Excl. Motor Vehicle and Parts
03:1
04:3
06:1
07:3
Year: Quarter
Source: U.S. Department of Commerce
CORPORATE PROFITS
0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 90:1 91:4 93:3 95:2 97:1 98:4 00:3 02:2 04:1 05:4 07:3 Year: Quarter *Corporate profits with inventory valuation and capital consumption adjustments Source: Bureau of Economic Analysis
Yr/Yr % Change, SA
Financial Firms
Non-Financial Firms
SPOT ENERGY PRICES
14 12 10 8 6 4 2 0 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
Sources: EIA, Natural Gas Weekly
$/Mcf
West TX Intermediate --> <-- Natural Gas (Henry Hub)
$/Barrel
140 120 100 80 60 40 20 0
Value of U.S. Dollar Since 2000
120 110 120
Japanese Yen
110 100
Index (2000 = 100)
100 90 80 70
Chin ese Y
Can adia nD
uan
90 80 70
olla r
Eur o
60 50
2000 2001 2002 2003 2004 2005 2006 2007 1Q '08
60 50
May '08
Source: Federal Reserve Board
INFLATION & INTEREST RATES
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004
% 30-Yr. Fixed Mortgage Rate Fed Funds Rate
%
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
Annual CPI Inflation Rate
2005 2006 2007 2008f
0.0
Sources: Federal Reserve, BLS, forecasts by LAEDC.
U.S. ECONOMIC GROWTH
4.0
% Change in Real GDP, Year-Over-Year 3.6
3.1 2.9 2.2 2.0 1.6 1.4 3.0
3.0
2.5
2.0
1.0
0.0 '02 '03 '04 '05 '06 '07 '08f '09f '10f
Sources: BEA, estimate and forecasts by LAEDC
SORTING IT OUT
• • • • • Housing & related activities Auto industry/domestic Financial services Retail Other sectors Depression Recession Major change in business environment A stealth recession Growing slowly
CALIFORNIA’S ECONOMIC ENVIRONMENT 2008-2009
Positives
• Growth in Agriculture, Technology, & Tourism • Some improvement in International Trade • Support from Public sector & Nonresidential Construction
Negatives
• Housing & related industries still struggling, especially in inland areas • Credit squeeze • State budget deficit • Port labor contracts • Water supply
Unemployment Rate
10% 12% 0% 90-01 90-10 91-07 92-04 93-01 93-10 94-07 95-04 96-01 96-10 97-07 98-04 99-01 99-10 00-07 01-04 02-01 02-10 03-07 04-04 05-01 05-10 06-07 07-04 08-01 0 100 200 300 400 500 600 700 -400 -300 -200 -100 2% 4% 6% 8%
Source: California Employment Development Dept.
CALIFORNIA FUNDAMENTALS
Change in Nonfarm Jobs Year/Year (000s)
Nonfarm Jobs: -16,900 Unemployment Rate: 6.5%
HOUSING/MORTGAGE RELATED FALLOUT
-- California
0 (20,000) (40,000) (60,000) (80,000) (100,000) (120,000)
All Distressed Industries "Real Side" Industries "Financial Side" Industries
# of Jobs Lost since June '06 Peak
Apr '08: -133,200
(140,000) Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08
A TALE OF TWO STATES
Redding San Francisco Oakland San Jose Sacramento Fresno Los Angeles Orange County Riverside/ San Berdo San Diego
-30
Source: CA EDD
0.2 17.9 -12.1 6.7 -5.0 2.0 -6.8 -21.0 -22.6 -3.2 -24 -18 -12 -6 0 6 12 18 24
Change in Number of Jobs in the Thousands from May ’07 to ’08
PERSONAL INCOME GROWTH
14.0% 12.0% California United States
Year/Year % Change
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 91:1
93:1
95:1
97:1
99:1
01:1
03:1
05:1
07:1
Sources: BEA, CA BOE
Year: Quarter
TAXABLE RETAIL SALES BY REGION
20% 15% 10% 5% 0% -5% -10% 00:1 01:1 02:1 03:1 04:1 Year: Quarter 05:1 06:1 07:1
California Southern California Bay Area Central Valley
Year/Year % Change Latest Quarter: 2Q '07
Source: CA BOE
GAS AND DIESEL PRICES IN CALIFORNIA
$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00
$ per gallon including all taxes
Gas (Regular Grade) Diesel
$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00
Source: Energy Information Administration
Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
CALIFORNIA HOUSING MARKET
700 600 500 400 300 200 100 0 90:1 92:1 94:1 96:1 98:1 00:1 02:1 Year: Quarter 04:1 06:1 08:1 000s of Units, Annual Rate
New Home Permits [--->] Existing Home Resales [<---]
000s of Units, Last 12 Mos
280 240 200 160 120 80 40 0
Sources: U.S. Census Bureau, California Association of Realtors
MEDIAN HOME PRICE IN CALIFORNIA
$600 $550 $500 $450 $400 $350 $300 $250 $200 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: California Association of REALTORS®
Thousands $
Apr ‘08 $403,870
Down -32.4% from Apr ’07 (peak)
Office Vacancy Rates in Southern California
18 17 16 15 14 13 12 11 10 9 8 7 6
Percent vacant, quarterly averages
1Q ‘08
LAC OC VC R-SBC
10.0% 14.9% 12.0% 14.6%
00:1 01:1 02:1 03:1 04:1 05:1 06:1 07:1 08:1 Year: Quarter
Source: Grubb & Ellis Research Services
Industrial Vacancy Rates in Southern California
12.0 10.5 9.0 7.5 6.0 4.5 3.0 1.5 0.0
00:1 01:1 02:1
Percent vacant, quarterly averages
1Q ‘08
LAC OC VC R-SBC
1.6% 4.3% 4.7% 6.5%
Tightest in the Nation
03:1 04:1 05:1 06:1 07:1 08:1 Year: Quarter
Source: Grubb & Ellis Research Services
CALIFORNIA ECONOMIC FORECAST
2005
Nonfarm Jobs Unemployment Rate Total Personal Income Taxable Retail Sales Housing Unit Permits 1.8 5.4 6.5 7.3 208,972
2006
1.7 4.9 6.5 3.5 164,280
2007
0.7 5.3 5.9 -0.5
2008f
-0.2 6.5 4.9 -1.6
112,300 84,500
Annual % change except housing permits, which are in units.
Forecast Source: LAEDC
HURDLES FOR THE LOS ANGELES COUNTY ECONOMY
Housing -- problems in some unexpected places Labor Issues -- SAG & ILWU Congestion Land Use Local government finance Immigration situation
LOS ANGELES COUNTY FUNDAMENTALS
12%
Unemployment Rate
200 100 0 -100
Change in Nonfarm Jobs: + 3,200 Unemployment Rate: 6.7%
9% 6% 3% 0% 90-01 91-01 92-01 93-01 94-01 95-01 96-01 97-01 98-01 99-01 00-01 01-01 02-01 03-01 04-01 05-01 06-01 07-01 08-01
-200
Source: California Employment Development Dept.
Change in Nonfarm Jobs Year/Year (000s)
AEROSPACE PRODUCTS AND PARTS MANUFACTURING IN LOS ANGELES COUNTY
140 Employment in Thousands 120 100 80 60 40 20 0 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 YTD
Source: California Employment Development Dept.
38.1
DoD PRIME CONTRACT AWARDS
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
$ Billions
L.A. 5-Co. San Diego Co. Bay Area 9-Co.
TOTAL CARGO HANDLED AT LA/ LB PORTS
1500 1200
May 2008 Total TEUs: 1,215,859 Annual % Change: - 5.9%
TEU in Thousands
900
600
300
Port of Long Beach Port of Los Angeles
0 Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Sources: Ports of Los Angeles & Long Beach
MOTION PICTURE/TV PRODUCTION EMPLOYMENT IN LA COUNTY(2006 – 2008)
180 165 150 135 120 105 90 75 60 45 30 15 0
Employment in Thousands
151.8
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08
Source: California Employment Development Dept.
LOS ANGELES COUNTY HOTEL OCCUPANCY RATES & AVERAGE DAILY ROOM RATES
100 90 80 70 60 50 40 30 20 10 0
% $
<-- Occupancy Rates
Avg. Daily Room Rates -->
180 160 140 120 100 80 60 40 20 0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: PKF Consulting
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Source: Construction Industry Research Board
LOS ANGELES COUNTY RESIDENTIAL BUILDING PERMITS
Single-family Multi-family
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08
Thousands $
$100
$200
$300
$400
$500
$600
$0
Source: California Association of REALTORS®
MEDIAN HOME PRICE IN LOS ANGELES COUNTY
Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08
Apr ‘08 $435,500
Down -28.1% from Aug ’07 (peak)
L.A. COUNTY APARTMENT VACANCY RATES & AVERAGE RENTAL RATES
1,800 Vacancy Rates <-1,700 6.0 Avg. Rental Rates --> 1,600 5.0 1,500 1,400 4.0 1,300 3.0 1,200 1,100 2.0 1,000 1.0 900 800 0.0 00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 7.0
Note: For apartments w/ more than 100 units Source: RealFacts
%
$
OFFICE VACANCY RATES LOS ANGELES COUNTY BY AREA
23 21 19 17 15 13 11 9 7 5
Percent vacant, quarterly averages L.A. County
1Q ‘08 10.1% 12.2% 8.4%
Central L.A. West L.A.
San Fernando Valley 10.2% South Bay San Gabriel Valley
99:1 00:1 01:1 02:1 03:1 04:1 05:1 06:1 7:1 8:1 Year: Quarter
12.5% 6.6%
Source: Grubb & Ellis Research Services
INDUSTRIALVACANCY RATES LOS ANGELES COUNTY BY AREA
10 9 8 7 6 5 4 3 2 1 0
Percent vacant, quarterly averages L.A. County
1Q ‘08 1.6% 1.2% 1.4%
Central L.A. Mid Cities
San Fernando Valley 2.8% South Bay San Gabriel Valley
99:1 00:1 01:1 02:1 03:1 04:1 05:1 06:1 7:1 8:1 Year: Quarter
1.7% 1.2%
Source: Grubb & Ellis Research Services
NONFARM EMPLOYMENT GROWTH IN SOUTHERN CALIFORNIA (2005-2008)
Yr/Yr Job Growth (Thousands)
80 60 40 20
27.7
68.3
62.0 49.2 34.3 23.3 2.3 29.1 1.1 -5.9 -12.6 -21.1
'05 '07
21.8 17.8
'06 '08f
6.6 2.7
0 -20 -40 Los Angeles Co. Orange Co. Riverside-San Bernardino San Diego Co.
Sources: CA EDD, LAEDC
A WRAP-UP…
Expect bad news on housing all year long Financial problems for local governments Some industries doing well Political news generate lots of scary headlines In turmoil, there is always opportunity
THANK YOU and STAY INFORMED
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