A Time for Thanksgiving

By: Dr. Lynn Reaser

This time of year reminds us all of the many things we have to be thankful for. Although it is
common to bemoan our economic fate, even there, we have much to be grateful for.
This is exemplified by one of the issues that has concerned us perhaps the most—jobs.
Job growth has picked up significantly across the nation, in California, and in San Diego. While
some of these jobs are part-time, fewer than 5.0% of Americans employed today are working
part-time because they cannot find full-time positions. In San Diego County, almost every
industry is adding workers, led in percentage terms by construction. The addition of more jobs is
a sign of business confidence and will be a driver of consumer confidence.
Special thanks goes to the innovators who are creating new products, services, and markets
that will create even more jobs going forward even as they disrupt others. California and San
Diego lead the world in technological creativity and for that we should be particularly grateful.

Tax Reform in 2015?

By: Dr. Lynn Reaser

The Republicans have now won majorities in both Houses of Congress. Now what?6848823919_c3857ccdfc_o

Tax reform might be a difficult topic to tackle in 2015, but Congress should start the process. Corporate tax reform should be the primary focus as companies are the principal drivers of jobs and economic growth.

If the U.S. is going to be globally competitive, we need to have a tax system that is consistent with other major countries. This means that our system should be changed so that companies only pay taxes in the country where they are earned (called a “territorial” system of taxation). Today, U.S. companies must pay a high 35% tax rate on all profits regardless of where they are earned, encouraging firms to move their operations abroad and keep their cash overseas.

If we want to boost our long-term growth potential and standards of living, it is critical to put the right incentives in place.

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The Fed’s Next Act

By: Dr. Lynn Reaser

interest rates

Last week the Federal Reserve ended its third wave of Quantitative Easing, which saw it take its balance sheet up to $4.5 trillion through the purchase of Treasury and mortgage securities. It has indicated that the next step will be a rise in interest rates.  How soon and how much is that likely to be?

With inflation subdued and ongoing volatility in the economic data, the Fed is in no hurry to raise interest rates.  Slowing in Europe, Japan, China, and other nations remains a significant risk.  Monetary policymakers will continue to monitor a wide range of indicators to gauge whether inflation is moving towards their 2.0% objective and whether we are approaching full employment.  The first interest rate hike will probably not be before June 2015 and further increases will be gradual.  Long-term interest rates can be expected to rise more quickly.

On balance, the near-term may be quiet, but interest rates are likely to be substantially higher over the next two to three years.

The Election and the Economy

By: Dr. Lynn Reaser

Although the election is onlyvote-ballot-b-w.jpg.728x520_q85 about a week away, no one is talking about the economic impact and the stock market does not seem to be overly interested in the latest poll results. Could the implications be more significant than what are generally now thought?

The answer is probably “no.” Even if Republicans gain a majority in the Senate, they will lack the two-thirds count necessary to override a presidential veto or the 60 votes to block a filibuster against bringing key legislative items to the floor. The year ahead is likely to be another period of gridlock, preventing key legislation on tax reform, immigration, and long-term efforts to reduce the growth of entitlement spending and the growth of the nation’s debt. Congress will be pressed to even pass a budget for fiscal year 2014-15 (which started on October 1) by early spring. Political capital will likely be primarily focused on the 2016 presidential election in the year ahead.

This analysis should by no means be construed as reducing the importance of voting next Tuesday. One should just not expect to see any large effects, at least in the short term.

Ebola and the Economy: The Downside Risk

By: Dr. Lynn Reaser

Ebola has killed over 4,500 people since March, primarily in Guinea, Liberia, and Sierra Leone. Although only a few cases have been reported in the U.S. and Europe and contagion is relatively difficult, fears of a global epidemic have climbed.

A pandemic would weigh heavily on the economy. Escalating fear about the spread of the virus could stifle international travel. It could curtail spending by dissuading consumers from public places, such as shopping malls and restaurants. Productivity would be adversely affected if employees fear going to work and organizations devote major time and expense to mitigating risks. Locally, hospitals and government agencies are already diverting resources to this task.

There have been some hopeful signs recently that the virus can be contained. The risk of widespread contagion is still significant and the ensuing economic losses would be large.

Plunging Oil Prices—The Irony and the Ecstasy

By: Dr. Lynn Reaser 

Oil prices have sank from around $112 a barrel in June to less than $87 a barrel in mid-October in terms of the Brent benchmark for crude petroleum. This sharp decline has come despite rising hostilities in the Middle East. Continued increases in oil production have combined with projections of slower global economic growth to send prices lower.

The drop represents a significawill-peak-oil-save-planet_44nt windfall for the U.S. economy. Despite the dramatic climb in domestic energy output, we still consume much more than we produce. This year, we are likely to consume about 19 million barrels a day of gasoline, distillates, and jet fuel, while we produce about 12.5 million barrels per day of crude oil, natural gas liquids, ethanol, and biodiesel.

Lower gasoline prices will boost consumer spending by raising household buying power. Lower energy expenses will also help company profits outside of the oil sector. The downside is that our march to energy independence could be stalled as more expensive exploration and drilling activities for oil and natural gas are curtailed. Alternative energy projects could also be put on hold.

Overall, however, this is a welcome gift as the U.S. essentially receives a wealth transfer from the net energy producers of the world.

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Not All California Jobs Are Going to Texas

By: Dr. Lynn Reaser

News reports of companies being lured to Texas would suggest that California’s economy is under direct attack and must surely be shrinking.  The latest jobs report for August might come as a big surprise.

According to data from the Bureau of Labor Statistics, California last month created more jobs than any other state with an increase of 44,200 positions.  This gain was about twice that of number two, Florida (+22,700), or number three, Texas (+21,100).

California’s job gain was its seventh consecutive monthly rise.  In contrast to a slowing in job growth experienced in the nation as a whole last month, California’s growth accelerated.  The state also outperformed the rest of the country as a whole for the 30th consecutive month in terms of year-over-year job gains.  California’s job increase relative to August 2013 was 2.1% versus the national average of 1.8%.

The state’s unemployment rate held steady at 7.4%.  Both the labor force and employment expanded, which represented some good news as both more people were encouraged to look for work and more people found jobs.  The jobless rate in California has also now dropped five full percentage points from its peak of 12.4% reached in October 2010.  We now need even faster growth to drive the jobless rate further downward.

The gain in payrolls of companies outside of agriculture was also widespread in August.  The largest gain, abstracting from seasonal factors, was posted in construction (nearly 14,000 additional jobs).  This speaks to the rebound in the housing market.  Other sectors also contributed to the overall rise in jobs.  These included manufacturing, health care, professional services (ranging from engineers to scientists to accountants), tourism, education, and government.  Retail trade was the largest negative during the month (a loss of nearly 5,000 jobs), a sector which continues to face the disruptions from the shift to e-commerce.

On balance, although future risks remain, California’s August jobs report represented another positive sign that the state remains on a firm track of economic recovery.

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