Half-empty or half-full?


Economists, chief executives and Wall Street traders had their hands full last week as a variety of indicators from rising inflation to mixed earnings reports left them wondering whether the economy was veering closer to a recession than had been believed just a few weeks ago.


For L.A., which generally fared better than most cities during the last economic downturn, all of the above is complicated by higher-than-average gasoline prices and housing costs.


"There are a lot of different things that can derail the U.S. economy, but what we know for sure is that there will be a recession," said Joseph Magaddino, director of the Office of Economic Research at Cal State Long Beach. "We just don't know when."


Judging by the comments of Federal Reserve Chairman Alan Greenspan last week, it could be a while off. Testifying on Capitol Hill, Greenspan said that "activity appears to be expanding at a reasonably good pace" and he brushed off the likelihood of "stagflation," the combination of rising inflation and slower economic growth. "It certainly doesn't seem that way," Greenspan said.


Time Warner Inc.'s Richard Parsons told CNBC last week that "the economy is a lot stronger than it's being given credit for in the marketplace," pointing to the New York-based media company's "good start" this year. Time Warner's earnings will be reported next week.


But pricing pressures continue to nag the economy and Wall Street. Last month, consumer prices in the Los Angeles area covering L.A., Orange and Riverside counties rose by 0.9 percent, higher than the national level, following a 1 percent increase the previous month. March gasoline prices alone jumped 10.4 percent and stood 8.1 percent higher than for the year-ago period.


Higher gas prices prompted Wal-Mart Stores Inc., the world's largest retailer, to voice concerns that its customers are feeling the pinch cutting into its profits.


"We can't quantify it yet, but clearly the high fuel prices are making things more difficult for our customers, especially those who live paycheck to paycheck," Wal-Mart spokesman Marty Heires told Bloomberg News.


Exposed or not?
Those high energy costs go beyond pump prices at the neighborhood filling station. They inevitably impact most every area of the economy, including higher prices of raw materials, which have resulted in a doubling of construction costs locally over the past 18 months.


Those numbers raise the specter of further inflation, and with it, rising interest rates that could play havoc with the red-hot housing market. Some regional economists long have believed it is a "bubble" waiting to burst.


"We're very exposed," said Christopher Thornberg, senior economist at UCLA's Anderson School of Management, who has maintained since last year that Southern California is in the midst of a housing bubble a view not shared by others.


Last week, economists at Morgan Stanley lowered their estimates for U.S. first-quarter GDP growth to 3.1 percent a full percentage point lower than they estimated in early April. This came on the heels of the Commerce Department's report that the U.S. trade deficit climbed to a record monthly high of $61.04 billion in February.


For weeks now, investors have looked to first-quarter earnings as a sign that acceptable growth had been maintained, despite these inflation pressures.


But so far, the news is no better than mixed. Better-than-expected earnings from United Parcel Service Inc., Nokia Corp. and Motorola Inc. provided a much-needed balm to the earlier disappointments at IBM Corp. and General Motors Corp., where out-of-control health care costs were cited as a major factor behind that company's $1.1 billion loss.


As of last week, the general expectation was that stocks would stabilize as word of more positive first-quarter earnings begins filtering through Wall Street. There were signs of that happening last Thursday, when stocks rose sharply.


Oil shares soar
Local stocks in the LABJ 200 Index routinely outperform the Dow Jones Industrial Average and other broad market indices largely because there are so many growth-oriented public companies in the region. But this time around the margins are somewhat narrower.


For the year-to-date as of April 20, the LABJ 200 was off 4.8 percent, compared with the Dow being off 7.1 percent and the S & P; 500 off 6.1 percent.


Among local stocks, the oil sector is far outpacing the pack. Los Angeles-based Occidental Petroleum Corp. is forecast to report a 59 percent jump in first-quarter results this week and not surprisingly, its stock was up around 18 percent as of last week.


A host of Los Angeles-based companies with particular exposure to the regional economy have posted strong first-quarter results. They include FirstFed Financial Corp., a Santa Monica-based savings-and-loan, Cheesecake Factory Inc., the Calabasas Hills-based restaurant chain, and UTI Worldwide Inc., a logistics provider.


Still, many analysts believe that earnings season could mark the beginning of an economic cool-down.


"A slower economy is good news," said Magaddino. "Otherwise, higher-than-expected inflation could force the Fed to move much more aggressively. The troublesome factor continues to be an uneven monthly growth in employment. At this stage in the expansion, we would expect more robust growth."


The Los Angeles/Long Beach area has lost roughly 120,000 jobs since 2001, even though the March unemployment rate in Los Angeles County fell to 5.7 percent from 6 percent the previous month a drop attributed to the addition of 110,000 new jobs last month.


Income vs. housing
"So far this year, it's a very modest pace of job growth and right now the economy is good, but not great," said Jack Kyser, senior vice president and chief economist at the Los Angeles County Economic Development Corp. "The trends are positive but there are a lot of extraneous factors, like oil, that are causing volatility."


Even the continued rise in port activity is being shrugged off by some economists in terms of local impact. "I keep hearing that Southern California's next big driver of employment growth is going to be logistics, with so much activity from the ports," said UCLA's Thornberg. "But there's very little evidence to present a compelling case that ports are a huge economic driver. The ports clog our highways and create pollution, not jobs."


One problem that's exacerbated for Los Angeles and other Western states with strong housing markets is the rising disparity between personal income growth and housing prices a key indicator of a bubble.


In California, personal income rose 2.7 percent last year, while housing prices were up 23.4 percent, according to the Office of Federal Housing Enterprise Oversight. "In the long-term, personal incomes rise at about the same rate as housing prices, so we're obviously seeing bubble activity," said Dawn McLaren, an economist at the W.P. Carey School of Business at Arizona State University.


Another imponderable: total household debt increased by more than $900 billion last year, as consumers borrowed heavily against the increased wealth in their homes. U.S. consumers now hold $6.5 trillion in personal debt, including mortgages, according to the Mortgage Bankers Association. Still, the percentage of loans in foreclosure stood at just 1.12 percent at the end of the fourth quarter, the lowest level since 2000.

For reprint and licensing requests for this article, CLICK HERE.