Sunday, January 06, 2008

Five experts on economic matters put Greater Sacramento under the microscope

Sacramento Business Journal - October 22, 2007

Friday, October 19, 2007
Talking Local with the Pros
Five experts on economic matters put Greater Sacramento under the microscope
Sacramento Business Journal - by Robert Celaschi Correspondent

The Sacramento economy is shaped by economic trends in the world and nation but has its own local flavor, too.

In conjunction with next week's Earlybird Economic Forecast event, the Business Journal asked five economy-watchers to talk about some of the economic aspects, traits and conditions that are specific to the Sacramento region.

What indicators should people watch that are especially relevant to Sacramento?

Scott Anderson: We're watching consumer spending trends, taxable retail sales. It gives a sense of how much the consumer is impacted. That's the real wild card.

We're already seeing a wave of foreclosures because of the ARM resets (interest rate changes for adjustable rate mortgages). If we see a significant weakness in employment data, that would probably quadruple the impact on the housing data. That's probably why the Fed was so aggressive last month with interest rate cuts.

Stephen Levy: They should be watching the jobs data -- the rate of job growth, rather than the unemployment rate.

The second thing they should look at as an indicator of how long the slower period might last is housing prices. My theory is the faster housing prices decline, the quicker the housing industry will return to being a plus in the region.

Steven Cochrane: You have to look at the labor market, which in regional economics is our primary indicator.

Look for turnaround, especially in housing-related industries -- construction, finance, retail. Watch state tax revenue.

Look at the housing market for when prices settle at a bottom and when home sales begin to pick up. What we should be looking for first is a pickup in sales. If buyers perceive there is a bottom, we should see an uptick in sales. Construction should follow, and then prices should improve.

Suzanne O'Keefe: State government is very important here. It is growing at a steady pace recently.

Nicole Woolsey Biggart: The big issue is what does Sacramento want to be. We continue to be concerned about our identity. That is something we are going to have to collectively decide. Are we the Big Tomato or the golden city or an extension of the Bay Area? Sacramento could use a little branding. In the next 10 to 20 years, we will be part of the Bay Area, part of a mega-region. We should start to plan for that.

If we knew then what we know now, what could we have changed to put the region in a better position?

Scott Anderson: Hindsight is 20-20, of course. There were a lot of excesses in the housing sector. I just wish mortgage borrowers were a little more careful in the kind of mortgages they were taking out. asked people what kind of mortgage do you hold, and 34 percent ... didn't know. Of those who did know they held an ARM, 34 percent didn't know what they were going to do when their ARM reset. That just gives you an idea of the level of the poor credit environment.

Suzanne O'Keefe: I'm reading that as, "How could we have made the housing bubble's bursting less severe?" If there would have been a way to discourage speculative lending in the housing sector, it would have made the effects today less severe. Allowing 100 percent financing with multiple loans helped fuel the bubble.

Stephen Levy: I think what happened was not the fault or the responsibility of anyone in Sacramento. Regions and states don't affect the federal funds rate or the mortgage industry. If we'd known then what we know now, we'd have known that this would be a difficult year.

Steven Cochrane: The Legislature could have been more on the ball. They could have seen that revenue was slowing and have been a little earlier in passing a realistic budget instead of being called into special session. That would have eased expectations more than anything else.

The other is more of a national thing, of lenders being a bit more cautious in their mortgage lending and keeping their standards high. Mortgage lending became a little too free with credit.

Nicole Woolsey Biggart: I think we've done pretty well. One thing I have seen over the last two decades is that the Sacramento region has diversified its economy. That doesn't set itself up for a big boom, but it sets it up for long-term endurance and viability. Moving away from government and the military as primary employers has been beneficial for the region.

What can you say about the Sacramento economy that might start an argument with other economy-watchers?

Suzanne O'Keefe: I think development decisions need to be made based on more than just corporate profits and tax revenue, or cities wanting to increase their tax base. Growth for growth's sake isn't really worthwhile. It might be wiser to follow some smart-growth strategies. Focus on creating high-paying jobs where people live.

Nicole Woolsey Biggart: I can say something from the point of view of a dean trying to put very qualified MBA students into the marketplace: A lot of students would like to stay in the Sacramento area, but there are not enough high-end jobs for them. When there are high-end jobs, the pay is a lot lower. If you are going to be a high-end region, you have to pay for talent.

Scott Anderson: There haven't been too many surprises in Sacramento. The strains on the government have been a surprise to some. But Sacramento has a history of being a resilient economy. The housing market declines have been a little more severe than we expected, given generally neutral mortgage rates. All this has been driven by overvalued housing and tighter lending restrictions. It's a significant adjustment for no real increase in mortgage rates.

Steven Cochrane: I don't know if I would start an argument with this, but often people say the quality of life in Sacramento goes against it, that it's not as great a place to live compared to the Bay Area. I would say the Sacramento area is a great place to live. It is something that comes up when I discuss Sacramento with other economists.

Stephen Levy: The Sacramento region needs to provide for housing that's affordable to a broad range of people. That's an economic issue, not just a housing issue. The threat to the Sacramento economy right now is in unaffordable housing.

What's the top misperception about Sacramento's economy -- to locals or outsiders?

Stephen Levy: That Sacramento is some kind of adjunct to the Bay Area economy. People forget that Sacramento is the capital of the world's eighth-largest economy, and that is an immense operation requiring all sorts of people. It's like you were the capital of the eighth-largest country. I don't think people think of Sacramento as the equivalent of Rome, Italy.

Nicole Woolsey Biggart: Outside the region I think the perception continues to be that we are a government town. At UCD a month ago we had a Going Green conference. We had 900 people from around the world come to talk about investing in green tech. They said, "I had no idea what was going on here." People are absolutely amazed at what the university is doing and offers, and what the region is doing.

There were deals happening as they walked off the stage. There was one fellow pitching his logistics software for saving money in routing your trucks. This conference was held online. As he walked off, he got an e-mail from the head of logistics at United Parcel Service in Atlanta.

Scott Anderson: People think of Sacramento as being a fairly affordable place to live, at least by California standards. I'm not sure that's anymore the case. From a national viewpoint, it's no longer a low-cost place of doing business.

Now that we have a global economy, Sacramento can't count on attracting all the tech companies from Silicon Valley. In that sense, Sacramento is competing with Bangalore, India, as much as the Bay Area.

Steven Cochrane: That it's Nowheresville -- the state capital and nothing more.

Suzanne O'Keefe: That we are only state government, but our regional economy is really diversified. The fall of one sector does not destroy the local economy.

We have this general misperception about the national economy: Because the housing market is in a slump, the whole economy is on a downward slide. I think people's perception of the economy is different than what the numbers indicate.

What aspects of the economy, if any, are really within our control locally?

Nicole Woolsey Biggart: The Sacramento region has decided collectively to bill itself as a clean-tech region, both as a place to live ... but also as an area for startups. I think that is going to be a great branding effort. It also is going to stake a claim in what will inevitably be a growth industry.

Scott Anderson: Long term, I think from the government policy perspective, the state has to set up the conditions necessary for business expansion. You have to be cognizant of where you rank in business costs.

Sacramento has some advantages in its climate and good quality of life, but when you are a business, you look at the hard, cold facts like "how much is my electric bill every month," and "can my employees afford the cost of living." We've done surveys of CEOs in California, and they are worried about labor costs, particularly healthcare costs. That just shows me there is this pressure, that California has kind of priced itself out of the marketplace for the time being.

Stephen Levy: The land use and transportation planning that Sacramento Area Council of Governments does, and the whole concept of the Blueprint. (SACOG is a client of Levy's center.)

Sacramento does control whether the region is a great place to live and work, whether people can get from here to there, whether they can afford a range of housing, whether downtown Sacramento and the other places are where people want to live.

That's the ultimate competitive factor. People want to live and work in great places, and all of that stuff is local.

Steven Cochrane: Sacramento is a bit of an oddball in that respect because it is driven so much by state government, and there is not much local control there at all.

What is in local control is to set up Sacramento so it has comparative advantage in attracting business. What is in control is a good education, having adequate housing so it is affordable. The market overshot, and it is painful to see the correction taking place, but it is necessary. Sacramento will regain some of that advantage versus the Bay Area. Going forward, the key is to keep Sacramento as an affordable place. And Sacramento competes against places like Reno and Salt Lake and elsewhere in the mountain region.

Suzanne O'Keefe: When you say "our," it depends who you are talking about.

Local governments have some control over local decisions: Which businesses they want to come to our region. The businesses have a huge say in this, but local governments can make their development decisions easier or more difficult.

There are a lot of factors that make Sacramento a special place to live. By educating our children to be productive workers and voters, Sacramento does really well.

Keeping crime low. Compared with other cities there is less disparity between the haves and the have-nots. Keeping that low makes this a nice place to live. Little things people can do. Improve air quality. All those things affect our quality of life.

What can business owners/managers do on a practical level with all these predictions? Do they become self-fulfilling?

Scott Anderson: There's some truth to that. This whole financial turmoil has thrown the fear of God into people. Right now I think a lot of business decision-makers are like the deer caught in the headlights. They are kind of frozen in place at the moment, waiting to see how things shake out. And nobody really knows.

There are concerns of rising inflation. Oil prices are around $80 a barrel. There is still potential for faster inflation as well. In 2008 we may see the worst of both worlds, slow growth and higher inflation.

The longer this financial turmoil continues, the more pressing it will be on the economy. Right now expansion plans are just being delayed, not canceled. But if things were to worsen from here, I think you would see it spill over into spending and payroll growth.

Suzanne O'Keefe: There is a little bit to that, irrational expectations. If everyone thinks things are going poorly, everyone makes decisions based on the assumption that things are going poorly. Then they invest less money and things do go poorly.

I'm sitting in an academic's office. I hope (businesses) can use them to help decide to best allocate their resources.

Nicole Woolsey Biggart: People sit in different places in the economy. What I should do isn't necessarily what you should do. Right now the economy is great for people who have cash and want to buy property. There are lots of choices. It is a great time for people who want to buy and hold. Every economy has winners. It depends on how much you have in your pocketbook.

Steven Cochrane: There is a little bit of risk of that, if everybody is saying the economy is bad. Business sentiment is very important. If businesspeople are fairly optimistic, they continue to hire and invest and so forth. But when they all retrench and say, "We can't hire anymore," and, "I can't buy that extra piece of machinery," that's when a recession hits. When confidence turns so badly that it magnifies other weaknesses in the economy. You always want to be as realistic as possible.

Stephen Levy: There is nothing, in the short term or the long term, different about the Sacramento region as a place to do business. There's no red flags. There's a little softening, and I don't know whether anybody can do anything about it.

I think the major message is for local governments. I'm telling them there's going to be no sharp change for next year.

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