By the Bank of the West, Special forUSDR
Despite the drought and lingering effects of the Great Recession,California’s economy will continue to expand at a respectable pace in 2014 and 2015, said Bank of the West Chief EconomistScott Anderson, Ph.D. in his semi-annual California Regional Economic Outlook report. Anderson explained that the Bay Area will remain the fastest growing region in the state, but there remain a few key factors that may prevent some Californians from realizing their American Dream over the next few years,including:
- A higher than average unemployment rate
- Expiration of federal funded long-term unemployment benefits
- Poor housing affordability
- A sharp decline in agricultural output due to the severe drought plaguing the state
“Despite these potential headwinds, California’s population is expected to increase steadily into the future, as the economy, labor force, and personal income levels in the state continue to rise,” Anderson said. “As job growth accelerates, we can anticipate a boost in private sector industries, creating new business opportunities in traditional and emerging sectors. Similarly, we can expect job creation in some of the most dynamic sectors in the state, including professional and business services, leisure and hospitality, trade, education andhealthcare.”
Written along with Bank of the West Economist Myasnik “Nik” Poghosyan, Anderson’s analysis also projects a better-than-expected state budget outlook, with income tax revenues continuing to be the main driver of this positive force thanks to job growth and expanding capitalgains.
“This revenue momentum will be sustained only if payroll and earnings continue to improve and consumer spending strengthens further,” Anderson highlighted, “but unfortunately the state’s positive balance sheet is not strong enough yet to eliminate inherited budgetary issues. Overall, California still needs more sustainable sources of tax revenue to tackle lingeringproblems.”
Anderson’s Key RegionalObservations
Economic expansion in the Bay Area is expected to be among the most vigorous of all U.S. metropolitan areas in 2014. This is primarily due to the healthy job growth in professional and business services and educational and health services. Tourism and trade, and more recently construction, are also contributing to the Bay Area’s economicstrength.
In the past year, the Bay Area created 30 percent of the state’s total jobs and as a result of the increase, the unemployment rate dropped rapidly to 5.8 percent on a seasonally adjusted basis in April 2014 from 6.9 percent a year ago. Employment in the Bay Area is expected to continue its outperformance of the state and national averages, as well-established large tech companies continue growing and expanding their market shares and Bay Area startups attract the largest share of U.S. venture capital investment. In addition, during the last 12 months the median existing home price posted a strong 12 percent surge in the Bay Area; however, the housing market is likely to cool down in the coming years due to diminishing housing affordability and disappearing distressed housinginventory.
The six-county Southern California region holds more than 55 percent of California’s economy. Its unemployment rate dropped to 7.7 percent in April from a seasonally adjusted 9.1 percent a year ago, and nonfarm employment increased by 188,600 jobs, with 96 percent of those created in the private sector. Despite the notable improvement in the labor market over the last three years, the region is still 146,400 nonfarm jobs short of its pre-recessionpeak.
Southern California’s strongest job growth in the past 12 months was in educational and health services, and professional and business services. Similarly, the past year saw construction payrolls grow the fastest in percentage terms at 8.6 percent, adding 28,600 jobs in the region. This was clearly due to improving housing markets and positive sentiment among homebuilders, as housing starts in Southern California are already back to pre-recession levels. Overall, the unemployment rate improved substantially across all regions of Southern California since April2013.
“Still, potential downside risks in Southern California include a more severe slowdown in the housing sector which could have some negative spill-over effects,” according toAnderson.
Southern California is a major foreign trade hub for the United States, with the ports of Los Angeles and Long Beach facilitating a total of $80.5 billion in seaborne exports in 2013. As state, regional, and global economies continue to recover, Anderson expects this positive trend in the trade sector to become more sustainable in the next few years, creating thousands of new permanent jobs in theregion.
With a total population of nearly 1.4 million residents, the Central Coast of California experienced positive signs of economic stabilization and housing recovery during the last 12 months, despite distress in terms of housing and labor markets following the Great Recession. Unemployment improved notably during the last two years across all four counties; however, the overall regional improvement in unemployment has been slower than the California average. According to Anderson, the region still needs to create 4,100 additional jobs to reach its pre-recessionpeak.
Like other regions of California, the housing sector in the Central Coast of California has been strong during the economic recovery. Yet, the latest California Association of Realtors April 2014 report reveals that home sales were down in three out of four counties of the Central Coast due to diminishing distressed inventory, decreased affordability and relatively high interest rates compared to April 2013. While dry weather conditions are a downside risk that could have negative ripple effects on agriculture and related sectors, Anderson said he expects the housing market will follow suit in terms of economic expansion, though at a much slower pace than it has over the past fewyears.
Anderson noted that the Central Valley is the most economically volatile region in California. Regardless, in April 2014 nonfarm payrolls in the largest metro areas of the Central Valley increased by 46,400 jobs or 2.6 percent – well above the state average growth rate. While the unemployment rate is still relatively high at 9.9 percent, it is down from 11.0 percent a year ago. However, the overall job recovery in the Central Valley has been relatively sluggish and is expected to grow at a slower pace in the next fewyears.
Sacramento has been responsible for creating nearly two-thirds of the jobs in the Central Valley – the only metro area in the Valley where the unemployment rate was lower than the state average for April 2014. In addition, in Fresno – the agricultural heartland of California – farming sector employment declined by 2,700 jobs, likely due to the drought in the region. Anderson said he expects a moderation of home price increases throughout this year and into 2015 in the Central Valley as sales remainsubdued.
For more information on Anderson’s 2014 California Regional Economic Outlook Report, to be added to his email distribution list or to request a media interview, please contact Bank of the West CorporateCommunications.
About Bank of theWest:
Founded in 1874, $68 billion-asset Bank of the West (www.bankofthewest.com), Member FDIC and Equal Housing Lender, offers a wide range of personal, commercial, wealth management and international banking services. The bank operates more than 600 retail and commercial banking locations in 19 Western and Midwestern states. Bank of the West is a subsidiary of BNP Paribas, which has a presence in 80 countries with 190,000employees.