The recession that cut California deeply isn’t fully forgotten
Empty freeways, withered homebuilding and tattered household budgets.
These were California’s painful hallmarks of the quick and steep downturn of the Great Recession.
Ten years ago this month, the last domino in an economic boom fell as Wall Street giant Lehman Bros. collapsed into a $600 billion bankruptcy.
This was no ordinary failure of a stock brokerage. Lehman symbolized the misguided thinking of the era and was sunk by wrong-way bets on real estate — including its purchase of an Orange County high-risk home loan maker (BNC Mortgage) and a partnership that controlled prime ocean-view land in San Clemente.
Lehman’s demise and that of other financial powerhouses was a moment of clarity that exposed the insanity of an unprecedented and broad-based risk-taking binge. It broke the economy’s spirit, one that already had been on shaky ground.
Businesses of all sorts unraveled. Jobs were slashed. Stocks and real estate tanked. Savings evaporated. The Great Recession ensued.
Within two years, economies from Southern California, across the nation and around the world were upended. The pain wasn’t just quick, it was deep. Home values in Los Angeles and Orange counties tumbled 38 percent, peak to trough, according to Zillow. In the Inland Empire, the loss was 55 percent.
I loaded my trusty spreadsheet with some not-so-obvious economic benchmarks of local note to remind myself of the economic twists and turns since the economy last peaked over a decade ago. The data revealed immense financial pain — as well as healing from the much-debated recovery.
Nothing says more to me about 2008’s economic pain than the relatively empty roadways that followed.
Before that fateful year, the last time that miles driven on the state’s highways declined in a year was 1974 — a 1.6 percent drop amid historic gasoline shortages created by the Arab oil embargo.
In 2009, miles driven by Californians fell 3.4 percent — twice the drop of 35 years earlier.
Credit — if you can call it that — goes to the recession, which slashed the number of commuters going to work. That same unemployment trimmed consumer spending and limited the need for truckers to deliver goods. It wasn’t just 2009: In the next four years, California driving levels barely budged.
Then the broad economy’s rebound finally got folks moving again. Driving rose to a record 200 million miles in 2017 after a four-year surge of 12 percent in traffic. That’s the fastest increase since the boom days of the late 1980s.
So, you can blame the economic rebound for the traffic jams you’ve been suffering of late.
Roads were less congested because the downturn’s impact on the Southern California family budget was harsh.
Unemployment in the four counties covered by the Southern California News Group — Los Angeles, Orange, Riverside, and San Bernardino — went from 5.1 percent for 2007 to 9.5 percent in 2009 and 12.2 percent in 2010.
That translated to a 10 percent loss in a typical local household’s income in the two years ended in 2008-2009, according to the federal government’s tracking of consumer spending for the four counties.
And shrinking incomes slashed Southern California spending by an average 7.2 percent from in two years. Basically, if it wasn’t a necessity it wasn’t bought.
Money spent on vehicle purchases fell 25 percent. Household furnishings and equipment sales tumbled 19 percent. Dining out and entertainment was cut by 7 percent.
Even housing costs fell — by 2.4 percent — as demand dipped. Extra bedrooms and garages housed those folks whose financial fortunes soured. Only spending on health care rose significantly, up 12.7 percent.
Yet all this budget pruning — an average $4,403 per household — did not recoup the $7,635 of income typically lost. That cash flow gap pushed many families to — and past — the financial brink.
Local consumers did eventually return to the workplace en masse and regained monetary wherewithal.
By 2016-17, Southern California households were earning 11 percent more than the recessionary era — a $7,722 increase to a record $76,471.
It’s both encouraging and worrisome to see spending habits rebound as well.
Southern California’s consumer spending rose 18 percent in the recovery, certainly a sign of revived confidence. But that buying jump totaled $10,442 per household — $2,720 more than the boost in pay.
The region’s high cost of housing can take its share of the blame as spending on one’s home jumped $2,520 (12 percent) since 2008-09. And medical bills are a culprit, too, up $1,336 or 51 percent.
Changing lifestyles also are taxing family budgets. Dollars spent dining out rose 30 percent or $911 per household.
Real estate was clearly the meltdown’s culprit.
Aggressive lending helped fuel home buying binges and house-building sprees in the last boom era. Well before Lehman Bros. went broke, real estate was in reverse gear with numerous players — from homeowners to giant property owners to developers to lenders themselves — all of whom were unable to pay their bills.
Building plans for housing show how early in the cycle real estate’s downfall was brewing.
Southern California hit its cyclical permitting peak in 2004 as builders in the four-county region were approved for 86,697 residential units, up 88 percent in five years.
By the time 2008 started, the local permitting pace had been sliced by one-third. In the next two years, as global markets crashed and the regional economy fully imploded, construction plans fell another stunning 72 percent. Southern California homebuilding by 2009 had shrunk to one-seventh the pace it had been five years earlier.
In recovery, local housing construction has more than tripled off its bottom. But it was not until last year that Southern California permitting topped 2004’s peak. By the way, nationwide permits have yet to top their last high.
The economic turmoil pounded household finances, leading to a rush of personal bankruptcies.
Locally, the annualized pace of consumer filings between 2006-2007 and 2010-12 in the U.S. Bankruptcy Court district for Southern California rose 405 percent — yes, five-fold — to 115,000.
The district — comprising Los Angeles, Orange, Riverside, San Bernardino, San Luis Obispo, Santa Barbara, and Ventura counties — had the biggest percentage jump among all U.S. court districts just ahead of districts in Arizona and Florida. Nationally, filings doubled in the period.
Like other markers of economic stress, bankruptcy filings in the region have dramatically improved in the recovery. The pace of filings in the 18 months ended in June — a 34,137 annualized rate — is 70 percent lower than the recessionary high. Nationally, total bankruptcies were halved.
But there’s a haunting residual of 2008’s turmoil, the ensuing Great Recession and the uneven economic rebound.
Some folks never fully escaped the recession’s financial body blows and eventually were wiped out. Others never regained their earning power and fell into a monetary abyss. And it’s particularly tough to be cash-challenged in high-cost Southern California.
The nation also has still not come to grips with a major cause for bankruptcy filings — the high cost of medical care, especially when catastrophic illnesses and injuries are involved.
In an era of seemingly solid economic improvements, bankruptcies have not returned to pre-debacle levels — unlike measures of traffic, incomes and spending.
Nationally, filings are still 9 percent above the 2006-07 pace. But in Southern California, sadly, bankruptcies remain 49 percent higher than the last good-times era — the 12th worst recovery among U.S. court districts.
Despite a noteworthy economic resurgence, the ghosts of 2008 haven’t been fully erased.
For 32 years, Orange County has debated how much growth is too much