Published on Tuesday, January 07, 2014
by Professor Jay Prag
I’m frequently asked to predict the future of the economy at this time of year. While this is more guesswork than deep economic analysis, I know that if I do it often enough once in a while I’ll guess correctly and people will think I’m a genius. So with the same enthusiasm as a person buying a lottery ticket, here are my predictions:
For the Country
The economy showed signs of improving in the third quarter of 2013, giving many people hope that the long stalled recovery will finally begin to pick up steam. I don’t think so. I think overall economic growth as measured by Gross Domestic Product will be modest, probably about 2.5 percent for the year, and unemployment will oscillate around its current level, 7 percent, for most of the year.
The strong third quarter numbers are a little deceiving. Retailers and manufacturers were gearing up for a strong Christmas that did not happen. Earnings and sales for the holidays were disappointing, which says consumers are not yet confident in the stability of the economy.
In addition, growth in wealth — stock prices and to some extent home values — were fueled by the Federal Reserve’s unsustainable monetary policy. Add to that the slow growth in Europe and many of our trading partners, and the prospects for a breakout year aren’t great. Finally, many of the more onerous Obamacare mandates were postponed until 2015. As we get closer to the end of next year, companies will shift more employees to fewer hours. That will slow consumer spending at the end of next year meaning another sluggish Christmas in 2014.
The good news is technological innovation and wealth-generating start-ups will continue to be a growth engine for the Sunshine State. That together with our well-respected post-secondary education system will be California’s savior in 2014. Statewide unemployment fell to 8.5% at the end of 2013 and will probably fall to around 8 percent during 2014.
That decline in unemployment isn’t necessarily good news. California will continue to lose well-educated members of the labor force from every part of the state that isn’t called Silicon Valley. The rest of the state still suffers from California’s notoriously unfriendly reputation toward business. Once again in 2013 California was at or near the bottom of several rankings for business-friendliness.
In addition, some of the decline in unemployment will be due to the loss of unemployment benefits forcing people to find jobs. That’s a good thing in some ways but the jobs aren’t likely to be high-paying; presumably those who were receiving unemployment insurance for a long time were hoping to find high paying jobs to replace jobs that disappeared during the recession.
The Inland Empire
Again, the end of the year saw good news: unemployment in the Inland Empire fell to 9.4%. Given its suburban demographic, it’s not a surprise that the Inland Empire’s economic growth included a lot of jobs in retail. Here’s where the dicey Christmas season might become a real problem. Many large retailers and restaurants have been in the headlines lately because they are teetering on the edge of insolvency. If Sears, JC Penny’s or Red Lobster scale back or close down altogether, the Inland Empire would see a jump in unemployment.
Logistics and distribution industries are among the Inland Empire’s biggest success stories. Goods that arrive from China on their way to the rest of the US and goods that come from all over the country for sale in California often stop at a distribution center in the Inland Empire. Geography being the way it is, the Inland Empire will continue to have many jobs in these areas. But growth might not be what we saw over the past few years. China’s economic growth will slow and imported goods that come from countries in South and Central America do not have to pass through California.
Finally, mortgage and other interest rates are rising and we’ve probably seen the end of the historically low interest rates. Given that, home and apartment construction jobs will not return to their pre-recession levels any time soon. With no other obvious good economic news for the Inland Empire, my prediction, unfortunately, is for slow growth and unemployment that stays stubbornly above both the national and California levels.