The Los Angeles outlook: winter 2007.

The much heralded collapse of the housing sector in LA has thus far turned out to be a non-event. The faltering housing market is characterized by fewer home sales, but home prices continue to edge upward--not the freefall we see in some other parts of California or the US. In general, the LA economy continues its pattern of slow steady growth and the service sectors are more than making up for weaknesses elsewhere. Going forward we expect more of the same and our near term forecast is one of sluggish growth. Employment is forecast to grow at 0.7% per year for the next two years. This will be slower than the increase in the labor force, and unemployment in LA will edge up from 4.9% this year to 5.7% in 2008. Consumers continue to spend as incomes in LA rise with real taxable sales achieving an average growth rate of 1.15% through 2008. The absence of a dramatic fall in housing prices and continued income growth does not give consumers any evidence that a "rainy day" may be at hand and they are not seeing the need to increase savings rates.

The present economy is a continuation of the recovery from the 2001 recession in which LA County payroll job loss was approximately 125,000. The recovery began in 2003 and has continued through 2006. Personal income has increased from 2003 to 2006 at an average rate of 5.1% though inflation has cut into those gains and real personal income has grown only at a 1.2% rate. Employment growth since 2003 has averaged 0.6% but the rate of job gain has been accelerating in 2006 to an annual rate of over 1%. However, total non-farm payroll employment has been lagging and has not recovered all of the job losses of the previous recession. By way of contrast the Household Survey shows over 250,000 jobs added since the lowest point of the last recession with stronger growth in 2004 and 2005 and weaker growth in 2006. This suggests that the informal economy, self employed individuals and 1099 contract hires have been outpacing the rest of the LA economy. This is further evidenced by the fact that while the 125,000 lost payroll jobs have not been entirely recovered, the unemployment rate in Los Angeles County is as low as it has been in five years.

LA County's real estate market continues its contraction. Total home sales have fallen in the county and prices are increasing at single digit rates, a sharp drop from the heated markets of the last few years. Employment in Real Estate and related occupations through October has seen no significant fall off. However, the 15% lower sales volume has reduced the income earned by this sector and an employment contraction is expected. To the extent the EDD payroll employment data are correct, all of the contraction to date has come to self employed and independent contractors.

On the other side of the economic coin is the service sector. Professional and Business Services, Educational and Health Services, and Leisure and Hospitality all grew in 2006. These sectors along with some growth in the Information Sector had the effect of compensating for the slowdown in construction, real estate and manufacturing and added enough new jobs to make the first three quarters of 2006 similar to 2005. For October, the pattern continues. Much of this service sector is driven by the national economy. An expanding US economy and the lack of a collapse in the local housing market leads us to a "more of the same" forecast.

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Jerry Nickelsburg, Economist, UCLA Anderson Forecast