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Economy will strengthen, experts say

By   /   Friday, January 2nd, 2015  /   Comments Off on Economy will strengthen, experts say

Despite the optimism from nostalgic gas prices and an encouraging unemployment rate, issues including lack of water, troubled global economy, and looming interest hikes still threaten the Tri-Counties’ 2015 economic outlook.

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After enduring positive trends in the economy during the fourth quarter of 2014, the Tri-Counties will look to ride that wave of momentum into the New Year. And despite the optimism from nostalgic gas prices and an encouraging unemployment rate, issues including lack of water, troubled global economy, and looming interest hikes still threaten the Tri-Counties’ 2015 economic outlook.

When evaluating the current and future state of the Tri-Counties’ economy, it’s hard to ignore the staggeringly low fuel prices. This year’s oil prices capped of at $114.77 a barrel for a 52-week high in 2014. As of Dec. 26, crude oil prices have dipped down to just $60.41 a barrel. The dramatic drop has, and will continue to act as a catalyst driving forth the Central Coast’s economy.

“The result from our forecast this year is one of the best we’ve had in several years,” said Dr. Bill Watkins of the Cal Lutheran University Center for Economic Research and Forecasting. “The big mover to watch over the next year is oil price decline. With oil prices down, it’s like a huge tax break for the economy.”

Watkins would go on to explain the benefits from lower gas prices, which opens up consumer spending, travel, as well as cutting down on business and manufacturing costs.

“Cutting the cost of gas in half gives people, especially commuters, and some businesses more to work with,” said Watkins. “It can also help businesses with production cost.”

But lower oil prices don’t always entail a more comfortable economic climate. A decrease in gas prices may seem stimulating at first, but Watkins warns that lower oil prices could spark new costs from potential new regulations could ultimately raise the cost of oil.

The mirage of good-oil-prices-equals-good-economy doesn’t just end there. Producers of share oil could also take a hit. Lower oil prices could cause layoffs in the oil sector, and eliminate more high-paying incomes the country desperately needs.

“Oil prices present a sort of double edge sword,” explained Jordan Levine, director of economic research for Beacon Economics. “On one side, [lower oil prices] frees up more dollars of consumer income, but it also discourages production companies from producing. However, I feel the net result [of lower oil prices] is a positive.”

The current unemployment rate is another economic element that should have the tri-county community excited for 2015. The country’s current unemployment rate stands at 5.5 percent, and the Tri-Counties are doing its best to keep pace. November’s unemployment rates have been promising across the Central Coast. With unemployment rates in San Luis Obispo County (5.4 percent), Santa Barbara County (5.7 percent) and Ventura County (6.7 percent) decreasing by almost a full percent from this time last year, the job market heading into 2015 seems to be in good shape.

Unemployment could see an incline during the first quarter of 2015, considering a lot of retail and temporary positions increased during the holiday season. But when you compare last year’s Tri-Counties’ unemployment average for the month of November (6.7 percent) to November of this year’s rate (5.9 percent), the trend looks promising.

Although job growth has been strong in the Tri-Counties, the growth is primarily in the low-paying sector, while jobs in the high-paying sector continue to move at a snail’s pace. Watkins explains how major employers are in a “fragile state,” and an anti-growth view in the Tri-Counties makes it difficult for the workforce to make a pre-recession recovery.

The Central Coast’s largest private employer, Amgen, will play a critical role in the region’s future unemployment rates. Amgen is looking to consolidate and reduce its facilities by 23 percent, as well as lay off between 12 and 15 percent of its employees by 2016. Economist Dr. Song Won Sohn of CSU Channel Islands explained the ramifications.

“The Amgen cut-backs will affect a lot of high-paying jobs, which will again keep wage growth at a slower pace than the current job growth.”

Although the Amgen cut-backs will hurt the economy primarily in Ventura County, it’s likely that all of the Tri-Counties will suffer from the company’s reduction.

“Amgen employees spend money in surrounding counties too,” Sohn said. “A lot of suppliers to Amgen will feel the effect, as well as other services, such as maintenance and repairs.”

Levine, however, is remaining optimistic for 2015, and believes that the slow wage growth is contributed to a wide range of jobs created.

“The lackluster wage growth is more due to the creation of a more diverse mix of jobs, such as retail and tourism jobs,” said Levine. “Added up, it doesn’t show wage growth. What is really helping the Central Coast is a strong tourism market. Tourism is one of the forces that have propelled our state economic growth.”

Another concern heading into 2015 is California’s water dilemma. Despite a handful of thunderstorms just before the New Year, the lack of water has drastically changed farming practices – which results in fewer crops at more of a premium.

“The drought has been and will continue to be a major problem for the Tri-Counties,” Sohn said. “Many farmers have already switched to dry farming, which reduces production and can lead to more problems.”

But not all believe that California’s lack of rain is an immediate detriment to the economy, and rather more of a future concern.

“Overall, the water issue is interesting. The Central Coast’s exports continue to move forward, especially in the beverage industry, but the current drought is an ongoing concern,” Levine said. “A lot of our agriculture exports, such as wine, aren’t affected as much by the drought as other crops are. The Central Coast isn’t impervious to the water issue; however, the drought seems to be more of a long-term problem.”

The Central Coast, like other parts of California and the U.S., are predicted by several sources to see economic growth hover around three percent for 2015. This marks a substantial improvement from the nation’s 2.4 percent growth rate in 2014. Still, a lot of variables are at play in achieving 3 percent growth.

An expected tax hike, courtesy of the Federal Reserve, could be on the horizon. The central bank has reiterated that the interest rate outlook will be based on the performance of the economy, so it’s likely that interest rates will go up mid-year. Uncertainties in the global economy, such as the Eurozone falling into another recession, also raise concerns for the U.S. economy.

The possibility of deflation is another factor to bring attention to. With the retail market surging, a “why-buy-now” mentality could form, resulting in consumers becoming comfortable and not spending on merchandise they assume will continue to drop in price — which can ultimately spiral into deflation.

As a whole, the housing market continues to struggle, as the decline in the home-ownership rate shows little to no sign of slowing down. Rentals will likely remain strong in California’s real estate market throughout 2015.

Despite potential pitfalls lurking in the shadows — low oil prices and an improving unemployment rate — economists are slightly optimistic about the Tri-Counties’ 2015 economy, even if some of their forecasts are predicated on reading the weather report.

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