Experts see improved 2011 for investment; 3.5 percent GDP growth

NORTH BAY – While some dark clouds remain on the economic horizon, North Bay economists and business climate watchers are increasingly bullish about the 2011 regional forecast.

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“We are seeing real change.  Things are turning around and the worst appears to be over,” said Ben Stone, executive director of the Sonoma County Economic Development Board (EDB). “While some firms are still cutting payrolls, others are hiring – not huge numbers yet and it’s not a roaring recovery – but there are fewer layoffs and rising incomes. At the same time, costs of doing business are dropping and some firms are doing better than they have in years despite Sonoma County’s 10 percent unemployment rate.”

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Christopher F. Thornberg, principal and founder of Beacon Economics, with offices in Marin County and Southern California, also foresees better times ahead as the economy starts to warm at the national level.

He sees several factors that could impact recovery: Increasing exports of technology products, cheap dollars fueling tourism, a rise in business spending, and gains in home sales – albeit at low levels. Home prices are still rising after the expiration of Federal homebuyer tax credits.

“There are a lot of green shoots springing up after a long drought and prospects for 3.5 percent GDP growth in the fourth quarter are good. Government is scaling back on spending and, if interest rates remain flat, we should see continued growth. This will drive tourism demand, a great sign for the hotel industry.”

Meanwhile, Mr. Stone sees more firms making strategic business investments and placing capital equipment orders that will position them for renewed growth.

Consumer confidence is also at a six month high, especially among those making $100,000 or more per year – the 20 percent of the population that is responsible for 40 percent of purchases and consumption.

Holiday sales this year are up approximately 5 percent and online sales increased over 15 percent.

“If the upper end of the income bracket has confidence and buys products, that will stimulate other levels that have pent up demand,” Mr. Stone said. “There is also a gradual shift downward in the amount of consumer debt, but the fact that mortgage delinquencies and foreclosures are still occurring (less than at the previous rate) says we are still not totally out of the woods. As people buy more, businesses hire more. Yet we don’t expect to see a return to full employment until 2013-‘14.”

According to Mr. Stone, companies are becoming frugal and efficient. “We are producing about as much as a nation as we did three years ago, but with eight million fewer workers. Firms are using more temporary help and part time employees while becoming more productive and innovative.”

He said in some ways, the great recession has been a “revitalizing, but harsh, tonic enabling us to become more alive, resourceful and creative.”

For example, wineries are adding second labels and tourism is up 7 to 8 percent.

He said every state in the nation has overspent and has to take a hard look at pensions, priorities and policies. What Sonoma County businesses did during the recession the public sector will have to do for the long term.

“The states have collectively spent nearly a half a trillion dollars more than they collected in taxes, and there is also a trillion dollar hole in their public pension funds,” according to Meredith Whitney, a highly respected Wall Street financial analyst.

California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions that it does on the state university system, which has had to increase its tuition by 32 percent, she said.

“It’s a lot like Weight Watchers, those who are 50 pounds overweight do something about it, while those who are below that level typically don’t,” Stone added.

The technology sector is the major driver for the county’s recovery, according to the EDB’s Fall 2010 Local Economic Report. Demand is strong from Asia for networking and electronic equipment. Similar strength is seen for medical devices in overseas markets.

Medtronic CardioVascular received European Union approval for its newest heart stent designed locally, boosting the potential for future sales. It reported   15 percent revenue growth in June over last year for its Santa Rosa-based vascular equipment operations.

Agilent Technologies reported 16 percent revenue growth in June 2010 over the prior year for its test and measurement equipment.  Agilent is also a player in the rebounding videoconferencing market and provides testing equipment for smart phones that represent 21 percent of all cell phone users.

Telecom equipment provider Calix launched an IPO in March, the first by a Sonoma County firm in three years.

JSDU has a foothold in the development of 3-D technology and is poised to benefit from Federal stimulus spending on broadband infrastructure projects to satisfy demand for Internet access growing by 20 percent per year.

Solar will provide another driver for the North Bay economy. Solar power production and consumption has increased 60 percent since 2000 and several local companies (Enphase Energy, Xandex and Solmetric) are involved in making solar energy more efficient.

The recent influx of venture capital into the North Bay is a good sign for tech, including clean energy. Investment nearly doubled in the second quarter form a year earlier, according to Dow Jones VentureSource.

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For Robert Eyler, chair of the Economics Department and Director of Regional Economic Analysis at Sonoma State University’s School of Business and Economics, a modest recovery is in view for 2011, but he says the real question is whether fiscal policies will only produce a temporary stay to hold off a catastrophic recession or provide a permanent solution. He says certain things must happen to get us back on track.

“While private sector jobs have increased incrementally, public sector jobs have declined. So the issue is can the private sector absorb these workers? Furthermore, will we have a future work force that will stay here?” Dr. Eyler asks.

“We still haven’t seen resurgence in the number of bank loans and bankers willing to take risks. Second, there has not been much of a labor market recovery. Even with a lower labor costs, we have not witnessed a return to full- time hiring on a mass scale,” said Dr. Eyler, who also has lead the formation of the Marin Economic Forum focused on the county’s future.

The forum is conducting a search for a CEO and has plans for multiple initiatives in 2011.

Dr. Eyler said that with the uptick in medtech, “we have to find ways to attract medical professionals. We also have to do a better job of keeping businesses here. The North Bay is seen by many as a great place to live, but not to work.”

He believes there are a number of hard ball choices that must be made at the government level, such as how the public sector views pensions and whether we should eliminate tenure before sacrificing public safety.

“The reality is that promises made by public officials and legislators may not be realized and we will have to cut spending.”

On the upside, he says stock market globalization has not resulted in plummeting share prices domestically.

“If this is truly a consumer-led recession, consumers are using it as an opportunity to deleverage, not to acquire more debt, which has also contributed to the business slowdown.”

Looking ahead, Dr. Eyler predicts that we should start seeing evidence of positive movement in the economy by mid-2011, but that some industries must still undergo real change.

“Technology-based companies are deploying computing efficiencies and, consequently, the business software industry is moving up. The medtech and biotech sectors are also innovating, but the greentech world is sputtering.”

“Infrastructure repair is another key concern.  Right now the squeaky wheel is getting the grease and there is a lack of long-term investment. Sufficient funding is not available to pay for infrastructure upgrades today. With prices for some items moving north, another question is how long can we stave off inflation?” Dr. Eyler said.

Tourism is definitely on the increase in the North Bay.  In Napa County, the hotel occupancy rates through October 2010 were up by low double digit percentages and there was an increase in the daily average rate measured in the high single digits.

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“Both indicators are very positive. Activity in the wine country is starting to accelerate among hotels and restaurants,” said Clay Gregory, Executive Director of the Napa Valley Destination Council.

Developers of a new Ritz Carlton Hotel are hoping to break ground in 2011, given new financing, and 164 rooms (coupled with expanded conference space) are being added to the Meritage Hotel.

The Marriott Silverado and the Westin Hotel are seeing a revival as is the Oxbow Public Market. The Riverfront’s trio of fine restaurants, including Morimoto Napa, Fish Story and Tyler Florence, are also doing well.

Since the recession officially ended in August of 2009, the U.S. has strung together three straight quarters of real gross domestic product advances with the largest percentage gain coming in the fourth quarter of last year.

In a recent Bloomberg news report, Senior Economist Russell Price with Ameriprise Financial Inc. summarized the current state of the economy.

“We really have started to see improvement in momentum and more broad-based improvements. We’re on the brink of getting to an economy that’s sustainable without federal stimulus.”