The National Economy: sunny now, but clouds on the horizon

The last few months brought a variety of good and not-so-good news for the US economy. The final GDP numbers recorded a 3.9% growth rate (SAAR)[i] for the first quarter of this year showing that the economic growth surge that started in the second half of 2003 continued into this year. Remember that the 2001 downturn was caused by the investment-profit imbalance that began in the late nineties in the midst of the Internet rush. During this period the nation saw a rapid increase in business spending that drove the economy forward at a breakneck speed, but this spending was not matched by growing business profits, an imbalance that could not last. The resultant collapse in business spending was what drove the economy into the recession. The first quarter numbers also indicated that business spending remained strong and corporate profits continued to rise; this imbalance is firmly removed from the system.

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Bay Area Business Activity: Dr.—we have a pulse!

By almost any measure business activity has finally begun to pick up the pace in the East Bay and the Bay region overall in 2004. Preliminary estimates for first quarter taxable sales in Alameda and Contra Costa counties show them to be 8% above last year’s first quarter, building on gains already registered in the last quarter of ’03. They are also up by over 8% year over year in both San Francisco and San Jose—very strong given the fact that they are down by over a quarter from what they were 4 years ago. Airport traffic around the region is up. This is particularly true in Oakland, where traffic is 12% greater than last year at this same period.

The Budget Situation

What is important to keep in mind is that the budget situation the State is in right now is structural, not cyclical...

Real Estate: Now that’s a fire!

There is another area reflecting the peculiar economic circumstance the US currently finds itself in — the real estate markets. Prices across the Country, along with overall market activity, continue their extremely strong pace even as new homes are being put up at a record pace. California, of course, has been on the forefront of this rapid appreciation. The brief slowdown in price appreciation in the Bay Area that occurred at the beginning of the year has quickly reversed itself and Contra Costa and Alameda both saw amazingly rapid double digit increases in prices over the past quarter. Prices are up across the Bay Area, and even economically hard hit Santa Clara has seen prices rise by 13% since last year after prices had remained relatively flat over the previous two years. Total sales in the region are up over 10,000 units per month, greater even than during the Internet rush period. Building also continues its surge, as permits everywhere in the State continue to grow...

Looking forward…

Recent months have brought some evidence that the consumer run that has been driving the economy over the past few years may be starting to slow. The June employment figures failed to live up to the growth seen in previous months. New housing permits slowed sharply in June, even though new housing sales remained at a record high level. Nominal retail sales in the US have actually declined in 2 of the last 3 months despite record prices being paid at the pump. Despite the continued frenetic pace of home sales, anecdotal evidence points to a rise in housing inventories and time on the market, particularly at the high end of the market. On top of this, there have been quite a few disappointing profit reports and predictions coming from corporate America, and as a result the major indexes have been in a bit of a slump recently—it seems as if they had indeed gotten ahead of themselves in recent months...