Discussion of Economic Outlook

Other counties in immediate market area are facing much higher unemployment rates and greater housing problems. For example, San Benito County’s unemployment rate is 17%, about double of San Mateo’s. It does appear likely that California will start to view itself not so much as “northern California” and “southern California,” but instead as coastal California and Inland (Central Valley). Housing has likely bottomed out in the coastal areas, but continues to struggle in the inland areas, and the inland areas may continue to struggle for four or more years. 

High tech businesses are doing well and this is expected to continue. Major obstacles to the housing market improvement are concerns about the high rates of unemployment and job security, and much higher credit standards applied by lenders in making mortgage loans. Banks are also not making funds available to businesses, which is causing businesses to pullback plans for future expansion. Several of the leaders expect the election in November to improve business confidence, and thereby improve consumer confidence as hiring gets started. Many of the laws and regulations put in place by the Obama Administration are strongly disliked by the business community and an increasing percentage of voters.

When “unpopular stuff” is being forced on consumers and businesses, the natural reaction is to pullback until things get “safer.” It is felt that gridlock between the White House and Congress, if the Republicans gain control of either the House and/or Senate, would have a positive impact on the economy. Indeed, a number of historical studies have shown that periods of legislative gridlock have occurred concurrently with a strong economy. A number of prominent banks and economists share this view. Tax policy is another problem blocking an economic recovery. Uncertainty regarding the extension of the “Bush Tax Cuts” are causing businesses to delay investment decisions. A number of companies are taxed in accordance with the tax rates for “higher income individuals” or what the Administration refers to as the “wealthy.” In fact, these taxes do apply to businesses. 

When tax rates are increased, businesses have reduced funds to invest in replacement equipment and business expansion. Many leaders believe that the Bush Tax Cuts (i.e., the current tax rules) will be extended, but getting this done in Congress immediately would help to get the economy going sooner. This is another reason why we can’t be optimistic about improvement in the remaining months of 2010 or early 2011. Contractors have faced two of some of the worst economic years on record. Owners of these contractors have been plowing their personal funds and financial guarantees to support the on-going business operations (likely losses). Owners feel a great deal of pride in building their firms and they want to protect their employees’ jobs. 

At some point, the owners will no longer be willing to place themselves in personal financial jeopardy and these contractors are likely to leave the business. In any case, at the present time, more and more firms are bidding smaller, faster jobs because they are feeling their way in this uncertain economy and want to avoid long-term commitments. They are also bidding fewer projects, seeking higher margins on work they get, and this is resulting in reduced business volumes for many contractors.