January 29, 1999
An active but slower growing economy is the outlook for the nine-county region over the next two years, according to the Association of Bay Area Governments (ABAG).
"The regional economy is experiencing moderate activity in some sectors, but we expect economic growth to slow in 1999," said Paul Fassinger, research director for ABAG. "And in the year 2000, we see some risk of recession."
Risk of Recession – "Because we are more dependent on the international economy than the rest of the nation, the Bay Area faces more significant risk of recession," Fassinger said. "The growth of exports that fueled economic growth for this region in recent years, now accounts for the slowdown that lies ahead."
We will continue to see slowdowns in Southeast Asia, Latin America and Mexico, Fassinger said. Therefore, the risks are going to stay. "There won’t be a recession in 1999, but there is much more risk for the year 2000," he warned.
The slowdown is more likely to impact the Bay Area’s five more urbanized counties—Santa Clara, San Mateo, San Francisco, Alameda and Contra Costa—because they do more trade outside the United States. The other counties will feel the impact, but it will be a smaller trough for them, Fassinger said.
Mergers – "The past year was certainly the year of the merger," Fassinger said, "and the mergers were usually accompanied by announcements of layoffs. "It takes a while for the workforce reductions to happen," Fassinger warned. "And the Bay Area has not yet felt the full force of those layoffs."
The Bank of America, for example, recently announced the layoff of 23,000 employees worldwide. A significant number of those cuts are likely to happen in the Bay Area, Fassinger said.
Jobs – "We see a lot of contraction in the manufacturing sector," Fassinger said. "It’s not just the trend that service jobs are replacing manufacturing jobs. On top of that, we are seeing manufacturing companies retrench, particularly in high tech, due to concerns about the current and future economic situation."
In 1997 and 1998, the number of new jobs was growing more quickly in the Bay Area than the rest of California—and manufacturing was leading the way. That growth, and the "leadership" of the Bay Area in terms of new jobs, has slowed. "The retrenchment is a new phenomena observed in the second half of 1998," Fassinger said.
Infrastructure Spending - One bright spot for the local economy is major public sector construction, with several significant projects recently completed around the bay—such as the city hall and state building in Oakland, and the San Francisco city hall. Other projects will have a long life, with state and federal dollars pouring into the region—such as the expansion at the San Francisco Airport and the BART extension to the airport. Also, federal money for highways and other transportation projects has increased. All these projects have related benefits of current and future jobs, as well as associated retail spending.
However, other than major infrastructure spending, non-residential construction will continue to cool as 1999 progresses, and will worsen in the year 2000.
Retail Sales – 1998 was the year that "e-commerce" made its mark and began to be taken seriously.
Consumer sales over the Internet tripled between 1997 and 1998. Internet sales are likely to double again in 1999, said Brian Kirking, senior regional planner at ABAG.
However, it is important to put those sales into context: Amazon.com, the successful Internet bookseller, reported $250 million is sales for the fourth-quarter of 1998. In comparison, WalMart transacts an average of $300 million nationwide in one day. The Internet is growing—remarkably—but still accounted for less than two percent of the total retail sales nationwide in 1998.
Since the Bay Area has a high number of computers per household, it is reasonable to expect that Bay Area consumers are more likely to make online purchases than consumers in other parts of the country. This presents a problem for sales tax revenues for our state and local governments, since many online purchases are not charged sales tax. [Note: Legislation is pending in Sacramento to provide a three-year moratorium on Internet taxation in California.]
On the statewide perspective, Ted Gibson, chief economist for the State Department of Finance, says we have a pretty good year ahead—but not as strong as the last few years. "We’re going to see slower growth in 1999," Gibson said. "The effects of Asia are still with us, and they’re not righting themselves very much."
"The Bay Area, in particular, has been hard hit by the downturn in Asia," Gibson said. "It had been the strongest region in the state. Now it’s one of the weakest in terms of growth."
"There is considerable risk to the forecast," Gibson warned, "especially from the overpriced stock market. We’re telling people to look out. Things could go awry if it should break."