Economist: Salinas can expect sound economy in 2015

This year likely will see job growth, cheap energy and continued economic expansion – but it all could be tempered by global volatility –Robert Dye, chief economist for Comerica Bank, told the Salinas Downtown Rotary Thursday night in the National Steinbeck Center.

The lion’s share of his hour-plus talk focused on macroeconomics – big-picture trends around the world. But they all can have impacts on the agricultural and tourism industries of Monterey County.

For example, oil prices are at recent lows, which benefit growers by cheaper fuel to run their equipment. It could also mean more people taking trips since gasoline prices will likely remain low, a potential boost to the tourist trade on the Peninsula, Dye said.

Dye described the current status as a “mid-cycle economy,” meaning the U.S. economy is now hitting its stride after the second worst economic downturn since the Great Depression. A few key signs Dye points to as evidence of a sound 2015 outlook include:

•Jobs are coming back and unemployment is falling, including in Monterey County.

•The gross domestic product, the sum of all goods and services produced in the United States; showed solid expansion in the last half of 2014 and forecasts show continued expansion into this year.

•Consumer spending is reemerging as a driver of the domestic economy.

•Inflation is tame.

With the positive indicators, Dye said the Federal Reserve is in the process of “unwinding” all the monetary policies put in place by former Fed chief Ben Bernake to prevent what some economists believe would have been ruinous had they not been instituted.

But some sectors are and will continue to suffer. Construction of new homes is running at a pace of 1 million new units a year. But that’s only half the number needed to keep up with population growth, Dye said. California’s housing market is an anomaly in that both sales and prices are rising. In the rest of the country one in 10 homeowners are still underwater – the value of their home is less that the debt owed.

“Economic growth will be on the coasts this year,” Dye said. “Other than oil producers everyone in the country are winning.”

Oil prices are affected by myriad pressures. The Organization of the Petroleum Exporting Countries, or OPEC, has not cut production in order to boost prices. Dye calls the move right out of Economics 101. Since the boon in oil supply from shale oil extraction in the U.S. and Canada increased global supply, prices were driven down. Historically OPEC responds to strong supply by cutting production, creating an artificial shortage that drives prices up.

But since shale oil is more expensive to produce – roughly $77 per barrel versus OPEC’s $35 a barrel – OPEC is creating a glut so that it is costing U.S. and Canadian shale oil producers more to pump that they can get on the global oil market.

“If you are making a product, but a business across the street is making it cheaper, they are going to flood the market with their cheaper product in hopes of putting you out of business,” Dye said.

Every time a farmer in the Salinas Valley fills up his truck and harvesting equipment with diesel, he can thank that global dynamic for the cheap fuel.

Another factor affecting oil prices is a downward trend in consumption. More fuel-efficient vehicles combined with consumers still jittery from the Great Recession and driving conservatively is lowering demand at a time when the world is awash in supply.

But there is a macroeconomic hitch that could affect the Salinas Valley. Because of policy decisions – austerity measures, mostly – in China, Japan and the European Union, those nations currency has been falling against the dollar. That’s good news for U.S. consumers who can buy cheap imports. But the reverse is true for exporters. It costs more for, say, a Japanese food wholesaler to import produce from the U.S., which carries the potential of less demand for our products.

“This exposure to foreign exchange volatility,” Dye said, “can have a dragging effect on the goods and services we export.”

Dennis L. Taylor covers economic issues for TheCalifornian.com. Follow him on Twitter @taylor_salnews.