"Economy showing signs of recovery," with the sub-headline, "Consumer spending, hiring are up in Bay Area," graced the front page of the business section one day this week.
Journalists increasingly write what I imagine their editors define as "balanced" stories. The pattern is to put a new piece
of "good" news in the headline and then bring up a couple "bad" counter-points.
If you only read the first paragraph or three, you won't even know there are counter-points. If do read the whole article,
you might believe the "new" positives roughly cancel out the "old" negatives and the Silicon Valley economy is moving forward
at an accelerating pace.
In between the touts for "good" news, things are not so good:
The headline was based primarily on 3Q04's +7.8% increase in taxable spending in Santa Clara County. Similar increases
were reported in several Bay Area counties.
This means Santa Clara County went from $6.7B taxable sales in 3Q03 to $7.2B in 3Q04. At 6%, this is a $31.5M revenue increase.
As non-noteworthy as a $31.5M revenue increase is during what seems like a millennium of multi-billion dollar budget deficits,
the news between the touts is even worse.
The "new" here is hidden in the "UCLA Anderson Forecast" predicting Silicon Valley will add 1% -2% new jobs in
2005 followed by, "(Silicon Valley) is an area that will regain its position as one of the fastest-growing economies in the
nation in relatively short order.''
Oh really? A rate of 1% to 2% new jobs in 2005 will make us among the fastest-growing economies?
The USA will see sub-2% job growth in 2005? Recognize we add 1.5% -2% new job seekers annually? With a 140M national
workforce, 1% growth is 116K per month, while 2% is 233K. Wasn't last month's 200K new-job estimate considered only marginal?
Wasn't the 112K actual considered "bad"? And now UCLA says the USA will, at best, see ~100K or 200K/month
job growth in 2005?
OK, 2% job growth in Santa Clara County is still 16K new jobs. This is actually slower than 2004 (through
October), which is already derided as anemic. Even if we get 16Ku new jobs, the county will still be short -78K jobs since
1998.
Also mentioned is by UCLA, "the slew of vacant offices are slowly filling up." Finally, there's something we can agree
with-- there certainly is a slew of vacant office buildings around here!
The county's reported 23% vacancy rate under-states reality. Commercial real estate agencies admit to 30%+. Even this number plays games with vacant-but-leased
and under-occupied space. During the day you routinely see plenty of empty parking spaces in front of occupied
buildings. With evening commutes now in the dark, you can plainly see rows of office buildings completely empty and dark at
5:30 -6:00pm. The true R&D vacancy number is probably closer to 40%. At 2% job growth, effectively zero progress will
be made here.
Back to the sales tax "news":
With BLS CPI at 3.2%, a 7.8% figure turns into only 4.6%.
In California budget parlance, gasoline is a taxable sale. With "energy" excluded from CPI but prices up 27% y-o-y (national average) this should also be deducted from y-o-y gains. Based on my gasoline spending (one car commuting, one not) inflation
hit another 1.2% lowering the y-o-y increase to only 3.4%.
Still, even 3.4% is not too bad. Particularly, if it's a harbinger of more gains to come. However, also impacting taxable
sales:
Santa Clara county lost nearly -20K jobs (-2.3%) YTD 2004. Total county workforce decreased by -45.4K (-5%) YTD 2004. People
without jobs tend not to increase spending.
Sacramento added ~$5B in new debt on top of $15B issued in new bonds. Some of this deficit spending went into salaries, which leaked into taxable purchases.
Is this growth repeatable?
Median house prices are up 15%+. New home purchases tend to produce incremental furniture and home-improvement
purchases. Real estate sales volume must maintain current levels, and even increase, to make a similar contribution to taxable
sales going forward.
As an aside, Santa Clara County real estate dollar volume is +32% YTD. (median price times unit volume) This +32% is despite
four(!) consecutive months of volume decline. (-28% June-to-October) With some high-end sales concealed from public
records, the true median is probably higher. (If someone can explain why its reasonable for the county to permit this practice,
drop me a line.) Even ignoring the impact of high-end omissions, median figures understate total-dollar calculations.
(Since the bottom of the price range is only ~$200K lower but the top is $4M+ higher.)
Conclusion: It's difficult to filter all the one-time pops from the underlying trend, but the sustainable sales tax increase
is on the order of 2% -2.5% rather than 3Q04's 7.8% increase. Consistent with, or slightly larger than, job growth.
The real "news" here is a job growth forecast for Silicon Valley at 2% --or less!
The UCLA report goes on to speculate, "the Bay Area would probably survive (the next recession) better than the last one,
which began March 2001 and lingered for eight months."
The appropriate remark here is, "Damning with faint praise."
