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Contra Costa Times, Sep. 03, 2006
The cooling housing market threatens to derail California's modest recovery from the recession and technology bust earlier this decade, UC Berkeley researchers warn in a sobering new assessment of the state's economy.
And the recovery has been much weaker than generally understood, the Berkeley researchers argue. They believe the white-hot real estate market has masked -- until now -- some underlying weaknesses in the state's economy.
And a separate study -- also timed for Labor Day -- highlights how the recovery has not spread to all wage groups, with low-income workers failing to keep ahead of inflation even as those in the higher-income brackets prospered.
The two doses of bad news come at a critical time for the state's economy, which has seen jobs rebound in the past few years, though the number of workers is still below the highs of 2000, even as rising gas prices take a bigger bite out of consumers' wallets.
"A year ago, we asked the question, whether there would be a slowdown in real estate and construction that would bring down jobs and wages," said Arindrajit Dube, an economist with Berkeley's Center for Labor Research. "Unfortunately, the answer was yes."
From 2003 through 2005, growth in real estate-related construction jobs grew an average per year of 4.5 percent in California -- well ahead of the average private sector pace of 2.1 percent over the same period, according to Dube. But in the first six months of this year, the growth rate for California real estate construction has slowed to roughly the same rate as private jobs statewide, Dube reported.
"Now that real estate is slowing down, weaker job growth is playing out in the state," said Ken Jacobs, chairman of the Berkeley-based Labor Center.
So could all of this hurt the strong economy in the East Bay? Probably not, two economists say.
"You continue to see robust growth in the East Bay, even in the face of the slowdown that is taking place in housing," said Sean Snaith, an economist who tracks the economies of California and its regions. "The strength of the economy in the East Bay is broad. It is not just a few horses pulling the rest of the lackeys."
Similarly, Christopher Thornberg, an economist who has been among the most vocal about the dangers of what he sees as a housing bubble, believes this region can withstand a downturn.
"The East Bay has a lot of resilience built in," said Thornberg, principal executive with Beacon Economics, a consulting firm. "Contra Costa County is a housing-oriented place, but it has other industries. Alameda County has a lot of things going on, and it has a lot of tech companies there."
Even during the recovery, California workers have struggled to keep up with inflation, according to both the Berkeley report as well as a separate study by the Sacramento-based California Budget Project. That's no surprise for workers such as Noel Salvador, a Dublin resident and information technology professional.
"Wages in I.T. have not kept up with inflation," Salvador said. "Gasoline, the price of food, entertainment, dining, even a casual lunch out, all of that is more expensive. Wages dropped after the tech downturn, and they have not really caught up."
The reports seem to confirm that view. Workers in California have not shared the wealth created by the rebound.
"During this economic recovery, the rising tide has lifted only a very few number of boats, those at the top of income distribution," said Jean Ross, executive director of the budget project, a liberal-leaning think tank.
Inflation has chewed up just about all of the wage gains for middle-income workers and more than erased gains for low-income employees.
Adjusted for inflation, the pay of low-wage workers, those in the bottom fifth of income earners, decreased by 0.9 percent between 2003 and 2005, the budget project reported. Over the same period, the inflation-adjusted wage of the typical California worker increased 0.1 percent. Wages of those in the top fifth of income earners rose 0.9 percent.
"Wage trends between 2003 and 2005 mark a reversal from the prior two-year period, when the wages of workers (across the board) gained considerable purchasing power," the budget project wrote in its report.
As wage growth stagnates in California, some workers have simply eliminated activities they cherish, while others look for more income.
"I used to drive to games in my softball league," said Victor Sample, a construction worker who lives in Richmond. "Now I don't go with gasoline costing so much."
"You cut back on things and you do a little side work," said Tom Bonnell, a Pleasanton resident who owns three East Bay companies, including a trucking operation. "I know one truck driver who embroiders shirts in his spare time."
The shifting dynamics of the real estate industry will also hurt consumer spending, the Berkeley researchers say.
"Rising home values have allowed consumers to spend more," Dube said. "If that slows down, that could threaten overall consumer demand for goods and services."
In 2005, U.S. residents extracted an estimated $700 million from home equity borrowing and cash-outs, on top of $600 million in 2004. Earlier this year, Moody's Economy.com estimated that housing, directly or indirectly, accounted for one-third of economic growth in 2005.
Much of the money that people siphoned out of their houses was used for long-lasting home improvements or necessary repairs. But many also used the funds to pay for short-term goodies such as new vehicles or vacations.
"Given the slowdown in real estate construction, there is concern that there could be ripple effects," Dube said. "California is more susceptible to this than any other state."
George Avalos covers the economy, financial markets, insurance and banks. Reach him at 925-977-8477 or gavalos@cctimes.com.
HIGHLIGHTS OF THE UC BERKELEY REPORT
• Although jobs have been added at a steady basis in the past three years in California, the annual rate of job creation has yet to return to the pace seen prior to the 2001 recession.
• From 2003 through 2006, the California industries whose workers experienced the strongest wage growth in California were arts-entertainment-recreation; telecommunications; finance; lodging; and durable goods manufacturing.
• From 2003 through 2006, the California industries whose workers suffered the worst wage declines were waste management-remediation services; transportation and warehousing; social services; real estate-rental-leasing services; and membership organizations.
• Wages for upper-income earners in California from 2003 through 2006 rose 0.6 percent, adjusted for inflation. During the same period, wages for middle-income earners slipped 1.1 percent, and wages for low-income earners fell 1.2 percent.
• That college degree may take people further in California than the United States overall. In California, workers with an undergraduate college degree saw real wages rise 3.2 percent over the past year. In the United States, workers with an undergraduate college degree saw real wages decline 0.9 percent.
Source: UC Berkeley Labor Center
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