The rally we have experienced in the stock market over the past two years has been impressive, and has underscored the rebound in not only the U.S. economy, but the entire global economy that has positively impacted nearly every major market worldwide. While there are some signs that the economic recovery is taking root nationally, Santa Barbara appears to be lagging the nation as a whole.
Depending on which economic indicator we choose, several scenarios, in terms of our economic future here in Santa Barbara, are possible. Some indicators look to be improving, while others are deteriorating, at least on a month-by-month basis. This not only makes it extremely difficult to get a sense of what to expect, but also provides economists and market forecasters with plenty of ammunition to take either side of the recovery story – a robust, sustained recovery, or an anemic, painful stagnation. Taken as a whole however, the indictors look to me to be showing that Santa Barbara is lagging the country overall, and lagging by a year or more.
According to S&P/Case-Shiller, U.S. median home prices peaked at around $272,000 during the second quarter of 2006. The current median home price is around $160,000. With the exception of a few minor bounces, prices have been declining steadily from the 2006 peak and have not bottomed yet. This decline represents a 41% decline from the peak (and counting).
Median prices in Santa Barbara County peaked much later—in July of 2007—according to the California Association of Realtors, (although the median price was as high as $859,000 in June of 2006). The current median home price in Santa Barbara County is $366,000 (as of January 2011), which represents a 57% decline—yes you read that right! For the city of Santa Barbara, we peaked in October of 2007 at $1,275,000. The median price as of January 2011 was $820,000, which represents a 36% decline. This discrepancy between the county and city declines would suggest that the north county has experienced some very dramatic price drops from the peak.
Prices for the city of Santa Barbara do appear to be starting to rebound a bit, at least on the median price level, although it seems that houses priced in the sub-$1 million range are selling much more briskly than those above $1 million. It is too early to tell if prices are nearing a bottom yet, and as I wrote last week, if interest rates start to rise, (which they will), housing prices still have a good ways to fall before reaching bottom.
Unemployment peaked for the U.S. at 10.1% in October of 2009, according to the Bureau of Labor Statistics, and has now fallen to 8.8%--the lowest rate we have seen since March of 2009 (before the peak).
As of March of 2011, we had 21,000 people officially unemployed in Santa Barbara County, which represents an unemployment rate of 9.6% (Employment Development Depart of the State of California). We did not reach our peak unemployment rate of 10.4% until January of 2010, three months after unemployment peaked in the country as a whole. We currently have an unemployment rate that is 0.8% higher than the country. Since both rates appear to be declining, we can’t know if we will continue to lag behind the nation through the bottoming of unemployment, but we have a good ways to go to make-up the current difference, and an even longer road to a reasonable unemployment rate.
National GDP (Gross Domestic Product) was just reported this week for the first quarter of 2011, at an annualized rate of 1.8%. This compares somewhat unfavorably to the 3.1% annualized GDP growth we achieved in the fourth quarter. (The fourth quarter is typically strong, due to the holidays.) Quarterly GDP growth peaked in the first quarter of 2006 at 5.4% annualized growth, although growth slowed to only 1.4% in the second quarter of 2006.
The U.S. economy grew at around 1.9% through 2007, with the first signs of trouble coming in the first quarter of 2008 with our first quarter of negative growth -0.7%). Not surprisingly, the worst quarter was the fourth quarter of 2008, just after the financial market implosion, with GDP growth of -6.8% (annualized). Negative GDP growth continued through the first half of 2009, before turning positive in the third quarter. In both 2009 and 2010 we have had strong fourth quarters (+5% in 2009, and +3.1% in 2010). Although I believe we will only see about 2% to 2.5% GDP growth for 2011, we are definitely growing (although slowly), and have turned the corner from recession to recovery. The U.S. economy was flat in 2008, contracted by 2.6% in 2009, and rebounded in 2010 to expand by 2.9%.
The Santa Barbara-Goleta-Santa Maria Metropolitan Statistical Area grew by almost 4% (3.92%) in 2007, compared with less than 2% for the country as a whole that year. Our area grew by about 1.5% in 2008, but lost ground in 2009, with negative growth (-0.66%). The Bureau of Economic Analysis has not released the 2010 GDP numbers for Santa Barbara-Goleta-Santa Maria, so it is difficult to draw any conclusions on the comparison between U.S. GDP and local GDP trends. Also, GDP bounces around so much that defining a trend is problematic at best. Still, it does appear that the U.S. economy experienced a decline in GDP growth first, with our local economy following about one year behind.
On balance, it seems that our local economy is lagging the country as a whole; at least it has been through the recession and recovery to this point. This begs the question: Will our economy play a bit of catch-up, or are we destined to continue lagging? A continuing lag would mean that it will be another year or longer before we see local unemployment come down significantly and local GDP growth improve.
The bigger question is: Can the local economy stand another year or more of weak economic activity? The answer to this may lie in the ability and willingness of local commercial property owners to negotiate more acceptable/reasonable/affordable rental rates with local business tenants. As it stands, we are seeing far too many locally-owned businesses fail and close their doors for good, only to be replaced by national chains. In some cases, businesses are leaving because they cannot afford their rent; leaving vacancies that are not being filled by any new businesses. One need only drive down the streets of Santa Barbara and Goleta, in the business districts, including State Street, to see the large number of empty commercial/retail spaces.
Some property managers in town have stated recently that many new businesses are coming into town and are willingly signing up at “good” rental rates. I have heard about several national chains that were scheduled to open locations in town, but have not moved forward with these plans to-date. Not only is having a lot of empty space along our major business thoroughfares depressing and bad for the remaining businesses, but it’s also a lose/lose for landlords as well—they have empty spaces, which are always tougher to rent than occupied spaces; and they are not receiving any rents as long as those spaces remain unoccupied. Often only a relatively small discount in rent would be required to keep tenants in a space.
It does appear that the national economy is improving, although not at a pace that would seem necessary to justify the strong performance of the stock and commodities markets over the past two years. On a local basis, it does seem that we are still lagging pretty far behind the country in terms of economic activity. With the threat of already very high commodity prices, including gasoline (which definitely affects the local economy due to our heavy focus on tourism), rising interest rates, rising inflation, the continuing global debt crisis and unrest in the Middle East, there is still a lot to worry about.
Prudence demands that we plan for a long, drawn-out recovery with continuing slow growth well into 2012 for our local economy. I tend to be overly optimistic, but given the current economic environment, local business owners should hope for the best, but be realistic about the time it will take to drive revenues back to good, or even acceptable, levels.