The 2010 Recovery: Is It Real?

LOS ANGELES-The 2010 recovery: Is it real? That was the burning question at the second annual L.A. Economic Forecast Conference Wednesday, and according to opening speaker Christopher Thornberg, a founding principal of Beacon Economics, the answer is no, it’s not. "If you look at the big picture and the numbers today, the trends look good," he said, "but unfortunately it is not due to fundamentals, it is due to government intervention."

Thornberg pointed out that the intervention will allow 2010 to likely be stronger than consensus forecast, however, "The fundamentals are still bad, and are creating a new set of imbalances," he said. The forecast event, held at the L.A. Airport Marriott, brought together hundreds of attendees hoping to gain some further insight on the US and California forecast.

"We are in interesting times and are in the midst of obvious recovery," Thornberg said, "but how we got into this mess was that we had trends that made no fundamental sense." He pointed out that consumer spending is on the rise in the US, but he questioned whether it is sustainable. Where have the record levels of liquidity that the Fed has injected into the economy gone? And if such actions are inflationary, why are the bond markets so placid? Those are just a few more burning questions Thornberg pointed out.

Thornberg noted that not only have consumers not wrenched their spending back in line with their incomes, but the banking sector is still neck-deep in bad debt, and there are 12 million homeowners underwater on their mortgages. He explained that government policies—the HAMP program, FHA, interest rates, hope for homeowners, and tax credits for example—are driving the market. "Government intervention is preventing the fundamental issues from being fixed," he said, "and has created its own set of potentially serious problems for the economy."

So what’s next? Thornberg says that the next year will be solid, and after that, no one knows, "but it’s not likely to be pretty." He warned the audience to watch out. "There are big warning lights, not for the next 12 months, but after that" because the US economy, he said, has not fully burned off the excesses that "got us into this mess in the first place."

As for L.A., Thornberg pointed out that the region was hit first by the collapse of the real estate bubble, then by the downturn in international trade and industrial product, and finally by the pullback of advertising driven by declining corporate profits. But the area is better off than some neighboring economies, he said. 

Diving further into L.A. specifically, Brad Kemp, director of regional research at Beacon Economics, pointed out that "We have hit the bottom of the pool in Los Angeles and are not falling any further. But how many of you think it feels good at the bottom and not pushing off to the top?"

Kemp pointed out that as with the state overall, L.A. was hit harder and earlier by the current downturn. And as bad as things are now, job losses in L.A. County, he said, "have been average compared to the state overall, and relative to some regions, L.A. is in the rare position of being one of the stronger economies in Southern California."

With international trade and industrial production on the rise, the core business elements of the economy—wholesale trade and manufacturing—will feel a strong lift, said Kemp. And with business earning profits again, "the primary source of profits for the entertainment industry will start to increase." Those two points, he said, will help steady the economy, but will not lead to a rapid recovery.

"The housing market in L.A. hasn’t turned the corner at all," he explained. Also, he said, the construction industry was not as powerful an economic driver in L.A. as in some other areas of California.