Economists say recovery is on the way, but it will take awhile

Economists say recovery is on the way, but it will take awhile
Sacramento Business Journal - by Mark Anderson Staff Writer
Friday, July 10, 2009

When will the recession end?

Well, it depends on who you ask.

Three local economists agree the recession could ease by the end of the year, or early next year. But don’t expect a booming economy soon.

A recovery will require some time — and more pain. Add in the state’s budget crisis, and you have the recipe for a stomach-churning soup.

We asked three economic experts, those who know the benefits and challenges of the Sacramento region, to share their economic outlook:

Jeffrey Michael, economist and director of the Business Forecasting Center at the Eberhardt School of Business at the University of the Pacific

“We are due for a bottoming out of the recession this fall,” Michael predicts.

That’s not to say the economy will suddenly get better; it’s just the time when “the arrow stops going down and starts going up,” he said. “It will still feel like a very difficult economy.”

There still will be a weak job market and difficulty in the housing market as it continues to deal with foreclosures. In addition, the state budget will inflict a disproportionate amount of pain in the Central Valley, not just in Sacramento, Michael said. The extensive cuts in education will have a huge impact on communities in the valley where education is a major employer.

The state budget cuts will hit the area hard, rippling through state and local governments, schools and vendors, eliminating jobs, Michael said.

“We know what it is going to do,” he said. “We just don’t yet know who it is going to do it to.”

The recovery will be very slow and long. The easy credit and home equity that overheated the economy are gone and not likely to return anytime soon, he said. Growth in the region — and the entire nation — will be constrained by a banking system that is still under tremendous pressure to absorb and correct its current problems. In that kind of environment, lenders will be “much more cautious,” he said.

Sanjay Varshney, dean of the college of business at California State University Sacramento

The economy will improve by the end of this year or early next year, but those improvements might not be visible until six months later, Varshney, said.

“By the time you realize the economy is doing better, it has been better for some time,” he said.

His prediction assumes that there is not some fundamental shock to the system between now and the end of the year, such as another terrorist attack, massive business scandal or a new threat to the collapse of the financial system.

The industry leading the way out of the downturn will be business services. Lagging industries will be construction, retail, banking and financial services, all of which take more time to get traction and gain revenue.

Employment likely won’t improve until 2011, so “it will be a long time before the consumer feels better,” Varshney said.

“The biggest wild card is the state. If the state finds some stability, that will help the region,” he said.

No matter what happens at the state or national level, the recovery is likely to be a very slow, tempered growth pattern in general and a very flat growth pattern for the housing valuations, he said.

“This will not be a V-shaped recovery. It will be L-shaped for some time. We went up very quickly and fell quickly. Growth will be slow,” he said.

Typically, the stock market precedes an improvement in the economy by about six months, Varshney said, adding that the current performance of the stock market points to a recovery beginning by the end of the year.

“Economic cycles are cycles. They are here to stay. You cannot force it to stay at the top of a cycle,” he said.

Ryan Sharp, director of the Center for Strategic Economic Research in Sacramento

It will likely be early 2010 before the region stops shedding jobs, Sharp said.

What economists call “negative job growth” should bottom out by early next year, but it won’t be replaced by positive job growth immediately.

“I doubt we will be adding jobs by that time, but we will be bottoming out in negative job growth,” he said.

The sectors that will start to show signs of life early are likely to be trade, transportation and utilities — the group that comprises the retail industry.

Another anticipated growth sector consists of professional and business services.

Construction, in contrast, isn’t expected to recover quickly.

And the government sector, which is this region’s largest employer, is expected to shed jobs, but specifics are unclear without a state budget.

“We made our forecast, and then because of the state, we had to put a big red flag on it,” Sharp said.

“The state budget could have a severe effect on the region depending on what they do,” he said. “It’s a big deal with the state government, and it is also going to be a big deal with what the cities and counties have to do.”

And while the slide might be over by early next year, that’s not what restores confidence.

“Positive growth is what makes people feel better,” he said.

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