West Coast to Lead Nation’s Economic Growth
Interview by Rachel Duran
Editor’s Note: This interview was conducted March 1, 2013, with Ken Goldstein, an economist with The Conference Board. For the latest economic news and the results of the Leading Economic Index, visit www.conference-board.org.
Global Corporate Xpansion: It’s a big day in regard to the federal budget and spending cuts. The sequestration, a general cut in government spending, is underway. While the U.S. Congress continues to duke things out rather than reaching a compromise, Wall Street seems not to be reacting to the cuts.
Ken Goldstein: The sequestration — it means a little and it means a lot.
We are talking about $85 billion in direct cuts in government spending this fiscal year; some of the cuts won’t go into effect until 2014.
A secondary round may be in the order of $40 billion. We are talking about $120 billion to $140 billion all total, spread over an 18 month to 24-month period. Out of a $17 trillion economy — the math shows this is a trivial amount, perhaps a quarter of 1 percent in terms of GDP.
If we think about it in those terms, this is much ado about nothing.
The real story is not the direct and immediate impact of cutting federal government spending. This is step two. Step one was the so-called fiscal cliff, which occurred late last year. Step three will be the debt ceiling, which will come up in two weeks to three weeks. So, we are going to go through this soap opera again.
And after that we arrive at the Continuing Resolution (CR), which is intended to keep the government functioning.
The debt ceiling is perhaps more important than the sequestration. Clearly, the CR is the most important of all. If Congress can’t agree on a CR, all government spending shuts down.
GCX: Ken, summarize what these initiatives mean to the economy moving forward.
Goldstein: What is underpinning all of this fundamental tension is the two schools of thought. One side says we are taxed enough, we spend too much, and therefore, we have to decrease spending. In terms of the federal government, we are borrowing nearly 40 cents on the dollar; we have to cut spending.
The other side disagrees with none of this, except to say that the solution can’t all focus on spending; some of it has to be on the revenue side.
The longer-term impact is on the full faith and credit of the government, as well as its triple-A rating. One of the consequences, not this round because remember we have at least two more to go through, could be an end to the triple-A government bond rating. If we lose the rating it means interest rates will go up across the board, which will hit everybody.
So, right now, we are looking at $85 billion in cuts, and again, it doesn’t all take place right away.
The second point is that with this austerity regime, if you like, at the federal level, we will luck out in some sense because it offsets the fact that austerity at the state and local levels is actually improving because economic activity is starting to pick up, which increases tax collections.
Part of the reason the sequestration is not having and probably is not going to have a big impact on the economy overall is: a) it is not that big; and b) in some sense it is offset by improvements in fiscal positions in states and cities. This increases state income taxes and state sales taxes, particularly in California.
GCX: What is happening in the economies of California and the western United States?
Goldstein: The official end of the recession was June 2009 — we are now in 2013 — and the last part of country to come out of the recession, in part because of austerity at the state and local levels, was the West Coast, in general California, and in particular Southern California.
The increase has been in the housing market. Those very hard hit areas, with a lot of foreclosures, have slowed somewhat, and demand for housing has picked up as the economy has picked up.
In fact, we see nationally that the supply of homes available for sale and occupancy is down to the equivalent of four months of sales. That is probably too low, and we are likely to see developers putting up more homes and apartments. At the depth of the national housing debacle, that number was 12 months to 13 months.
The improvement has been in four of the five hardest hit areas of the country: California, Arizona, the west coast of Florida, and the city of Las Vegas. The one that has not improved is Michigan.
The turnaround in the housing market has allowed for a turnaround of sorts in terms of the fiscal health in both cities and states.
We come back to sequestration because part of what will happen is a decline in government contracting, items used by the Department of Defense, for example, the Air Force. The planes that are designed in Southern California and built in the Pacific Northwest; that activity could take a hit. This will cause an interruption in some areas of the West Coast.
There is a chance that some parts of the West Coast could be hit harder by the sequestration than the rest of the country. It depends on who has what contracts and which contracts are suffering from cuts in defense spending.
But otherwise, we are talking about continued steady improvement, likely to continue through the summer, in both California as a whole and indeed the Northwest, especially the tech heavy parts of the Pacific Northwest.
The reason for this is four-fold. First is the overall growth in consumer spending, which is likely to continue to move up as we move into the rest of the year. Those West Coast based companies that benefit from consumer spending are likely to see a little bit of a bump. Business investment is going to take longer to see but it is coming.
Secondly, anyone related to housing, will start to increase activities. Third, capital expenditures are rising. That has to do with the high-tech industry, especially in the Silicon Valley around San Jose, Calif., and in the Pacific Northwest, not just in Redmond, Wash., but other parts as well.
The fourth factor is trade. There is stronger growth in the Asia Pacific region, and even in Latin America. Both exports and imports are going to be an economic spur.
GCX: What is the latest in regard to the resource rich states in the western United States? What impacts are lower prices for natural gas having on the region?
Goldstein: Generating electricity from natural gas as opposed to crude oil, where crude oil prices are rising, natural gas prices aren’t going anywhere. We think down the road in the next two years, and it might be as early as six months, we will be able to generate a kilowatt of electricity from solar power for less than 10 cents a kilowatt. That is still expensive relative to generating electricity from natural gas or from coal. But that gap has narrowed by about half from where we were two years ago.
The generation of a considerable amount of electricity from renewable sources could be a boom for the West Coast, and other parts of the United States. The two big challenges facing the West Coast overall is the lack of water, which they have been facing for 100 years, as well as the ability of the power grid, the smart grid, to absorb electricity from these renewable sources.
In order to have a utility grid that can fully take advantage of the changes that are coming, we need to invest a lot of money into that grid. Part of the problem is, yes, austerity is starting to let up, but there is not a lot of money in state coffers in order to put public money into the investment.
So for the West Coast, at least for now, with what is going in terms of the drivers of growth and the hindrances to growth, the West Coast is finally sitting pretty. The region is starting to grow a little bit faster than the overall economy for 2013 and 2014.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing email@example.com. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.
Illustration by twobee at Free Digital Photo.net