2005 Outlook: Economy –

If you want an analysis of economic growth, chances are you’ll give the Center for Continuing Study of the California Economy a call. Since 1969, the organization has provided long-term economic trends for investors, businesses and public agencies. Stephen Levy, director and co-founder of CCSCE, isn’t your typical statistician. He’s quick to insert a little humor in his prognostications, as well as a provincial attitude. “Hey, God gave California a Pacific Rim locale. So, tough luck, Minnesota!”

Q Why do you say that a booming economy in Asia is a good thing?

A Because it’s opening up new export opportunities. We’re talking about an overseas market in which billions of people have income to spend on goods and services. Who do you think is going to supply them all that?

Related to that, most VCs are supportive of offshoring. Is this a threat to the economy?

It’s a terrible thing to those who lost their jobs. But it’s overblown. Globalization has always existed. In the long run it’s a boom to consumers in the form of more affordable goods.

So is it the economy, stupid?

I get asked this all the time. OK, the national economy stinks. We have been in the weakest national economic recovery in some 30 years. I assign some blame to the President and Congress for not stimulating the economy sooner and more aggressively and for refusing to assist state and local governments across the country. But regions rise and fall with their key industries. Tech has been slumping. Like Los Angeles and aerospace a decade ago, fortunes are guided by your tech dependence.

From our readers’ vantage point, venture funding in tech picked up in 2004. Does that mean the U.S. economy will grow in 2005?

It could come down to VC funding. The amount of money invested is not what it was a few years ago, and that’s the concern. A good omen in ’05 to watch out for is new company formation. Most forecasters say that the U.S. economy will slow down in 2005, because the supply of new ideas is dried up, and we’re not having a good run of new company formation.

Didn’t we see the beginning of this rise in new company formation in late 2004 when unemployment began to fall?

There was some good news for some companies. Google raised a couple of billion dollars when it went IPO last year. That was great for the company and its investors. But they didn’t spur new company formation. As far as jobs and new company formation goes, we’ve hit bottom and are slowly rising up. In California, we need to add between 25,000 and 30,000 payroll jobs each month to sustain an economic recovery.

How do we do that?

Innovation. VCs need to get behind new companies. In 2000, new company formation just dropped down the hole when the market collapsed. That’s what we need to recover from.

Before the 2000 crash, the Internet spawned many new companies. What’s the next new area of innovation that investors should get behind to spur the economy?

I’m sure there’s something out there. If I knew what it was, I’d be a venture capitalist-not an economist.