Bay Area

As Economy Moderates, Reliance on Technology Remains as Home Affordability Hampers Residents

As the state’s economy slows, the Bay Area’s employment and worker wages will continue to stand out in 2019 and 2020 compared to other regions. However, the area is more reliant than ever on just one sector (technology) as housing affordability hampers all types of households.

That’s according to two recent individual local economic forecasts published by the UCLA Anderson Forecast (via the annual UC Hastings “San Francisco Outlook” conference hosted in March) and Beacon Economics (ongoing commentary). These experts’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

Bay Area Forecast (UCLA Anderson Forecast)
From the UCLA Anderson Forecast:

  • The Bay Area’s economy will continue growing in 2019 and 2020, although at a much slower pace than the past couple of years. This is in line with California’s continuing economic slowdown. Nonetheless, the probability of the state and nation falling into a recession is only 17 percent in 2019 and 28 percent by sometime in 2020—both of which could rise slightly higher in the coming months as more monthly/quarterly economic data is captured. However, recessions usually only happen when the risk level rises to approximately 50 percent (which could ultimately happen and is not being ruled out as a possibility).

  • It’s possible the Bay Area and California economies could experience a “near recession pace” sometime between late 2020 and mid-2021—but this isn’t the textbook definition of a recession. This forecast is subject to change by late 2019 (within 6 months). But with current employment levels so high, job openings at a record peak, consumer confidence and spending relatively healthy, and interest rates still comparatively low by historical standards, it would take a much larger unforeseen event to throw U.S. economic growth off its course. Some experts hypothesize something negative is brewing in the global and corporate debt markets (high risk bonds) and/or trade, tariffs and political tension. But so far indicators suggest these threats are not as imminent as imagined—they are more a “cause for concern” than anything else right now.

  • As company payroll job growth and personal income continue to slow down in the broader economy, it will remain higher in the Bay Area from 2019 – 2021. Annual employment in the nine-county region will post average annual growth of 1.1 percent each year during that time period (versus 0.8 percent for California and even slower growth for the United States). Additionally, “real” personal income (adjusted for inflation) will rise an average annual 2.8 percent in the Bay Area (versus 2.2 percent for California and slower or the same for the United States). All of this is due to the Bay Area being driven by its high-tech industries coming out of 2018. In particular, Silicon Valley and San Francisco (out of the entire region) have the highest fraction of technology jobs with the highest economic productivity and worker wages.

  • Today, the Bay Area economy (small businesses, retailers, independent contractors, etc.) has significant ties to the technology sector as it makes up a much larger proportion of total employment than ever before and is a huge source of consumer and business spending, with significant economic “spillover” effects. Technology jobs in the entire Bay Area (information, scientific, technical, and manufacturing) have grown at nearly double the rate of non-tech jobs from 1990 – 2018. The former has risen 58 percent since 1990 while the latter rose 30 percent. Additionally, during the same time period tech job growth (whether growing rapidly, slowing or contracting) has also displayed much more volatility compared to non-tech employment, with a huge upswing between 2010 – 2018.

  • One main reason technology jobs are the main driver of the Bay Area’s economy is because of the sector’s high productivity and worker wages. Whether it’s engineering, computer science, or management, the annual median wage for a tech occupation ranges from $100,000 - $160,000 depending on if it’s located in San Francisco, Silicon Valley or East Bay (compared to $82,000 – $115,000 for the entire United States). This compares with $50,000 - $60,000 for “all occupations” in the entire Bay Area.

  • Non-technology job growth in the eastern Bay Area (“East Bay”) and southern Bay Area is skyrocketing compared to the San Francisco area. Total non-tech job positions in 1990 were about the same in both the East Bay and San Francisco (750,000 in each area) and also stood at 525,000 in the Silicon Valley. But as of late 2018, East Bay had increased 33 percent (to 1 million non-tech positions) and Silicon Valley had increased 43 percent (to 750,000 non-tech positions), while San Francisco only rose 19 percent (to 890,000 positions). On the flipside, tech jobs have only slightly ticked up during the same time period in the East Bay (reaching 180,000) versus stronger growth in San Francisco (280,000) and Silicon Valley (390,000).

  • The gap between the amount of total company payroll jobs in the East Bay compared to both the San Francisco and Silicon Valley regions widened immensely from 2000 – 2009, but since then it’s almost been eliminated. This is due to the staggering amount of technology workforce build-up since 2010 in San Francisco and Silicon Valley. By December 2018, year-over-year total company payroll job growth had not ratcheted down and was a solid 1.8 percent in the East Bay (hitting a record 1.19 million workers); a strong 3 percent in the San Francisco area (reaching a record 1.17 million workers); and a solid 1.8 percent in the Silicon Valley region (hitting 1.14 million workers).

  • The Bay Area’s recent labor market displays a continuing story of technology employers (and more recently non-tech employers) challenged by a constrained pool of local “skilled” workers to choose from—all as workers are burdened by the extreme cost of housing. High apartment and home rents in the western, southern, and eastern Bay Area are impacting all types of employees, not just the “high skilled.” Meanwhile, business and consumer spending from tech-related companies and staff is spilling over into all parts of the local economy, creating secondary jobs in retail, leisure/hospitality, and professional/business services (“secondary” sectors). In fact, this is where the greater proportion of job growth is today within the entire Bay Area. Unemployment rates for each county in the nine-county region range from 2.5 – 3.5 percent (extremely low) and are expected to stay this low into late 2019 as the labor market remains tight.

  • Bay Area technology salaries (in conjunction with tight inventory) have helped push up housing prices and rents for both technology workers and non-tech workers. The median monthly home rent in the Bay Area ranges from $2,700 - $4,400, with lower rents in the East Bay, higher rents in the San Francisco area, and mid-range rents in the Santa Clara Valley region. For the average tech worker, monthly housing expenses can absorb approximately 25 – 40 percent of one’s salary depending on circumstance (considered “average to high”); but for the average non-tech worker, this housing cost can reach as high as 35 – 50 percent of one’s monthly salary (considered “high to extremely high”). Moreover, for those looking to purchase a house, the projected median home price for 2019 will range from $620,000 - $1.35 million depending on the exact location around the bay.

  • California’s Gross State Product (similar to the national Gross Domestic Product—GDP) was 3.1 percent year-over-year as of fourth quarter 2018, but it will slow down to 2 percent in 2019 and 1 percent in 2020. It could likely speed back up to 2 percent in 2021. GDP at the state or national levels is the traditional measurement of economic growth. From a national perspective, U.S. monthly non-farm company payroll growth (averaging 220,000 per month in 2018) will drop to an average 160,000 per month in 2019, and then drastically to 20,000 monthly in 2020 as there are only so many individuals to employ in a very tight labor market. California’s unemployment rate will slowly rise to 4.5 percent in 2019 as more individuals enter the labor force from the sidelines, and then slightly drop to 4.3 percent by late 2020 or early 2021—with the state’s total job base (companies plus independent contractors) growing an average annual 0.8 percent from 2019 – 2021.

  • “Real” personal income in California (adjusted for inflation) will post average annual 2.2 percent growth annually from 2019 – 2021. “The continued growth… is reflective of the changing mix of employment in California and tight labor markets in high wage occupations,” the forecast report states. (Personal income is a different measurement than average worker wages)

  • Consumer inflation will remain in the 2 – 2.2 percent range from 2019 to 2020, and the Federal Reserve will most likely increase its short-term federal funds interest rate by a quarter-point in 2019 before possibly reverting to cutting interest rates up to three times in 2020. “We are more pessimistic on the real economy than the Fed,” the forecast report states. “We are forecasting that there will be three rate cuts of 25 basis points each in 2020. In this setting of very slow growth and an end to the Fed normalization process, coupled with very low interest rates in Europe and Japan, it is hard to see long term interest rates going much above 3.25 percent. Inflation may not be as quiescent as the Fed thinks. As a result of the very tight labor market, wages are increasing at a 3 percent-plus clip and it is likely that the year-over-year gains will soon be running around 4 percent.”

  • A record 18.8 million individuals were employed in California as of late 2018—about 10 percent higher than the previous total-job peak in 2007. Jobs are mostly being created in all categories, with only some minimal weakness in the retail, wholesale trade, and federal government sectors. “After a slow start, non-farm payroll jobs (in California) increased to a monthly average of 29,000 during the second half of 2018—about 1,000 more than the average job creation in the previous two years,” the forecast report states. “This was fueled in part by a quarter-million new entrants coming into the labor force. And while we keep thinking this will slow down (eventually you run out of people), it has not done so yet.”

Bay Area Forecast (Beacon Economics)
From Beacon Economics:

  • The local job and housing markets are closely intertwined as more individuals move into the labor force in 2019 to fill employers’ continuing appetite for additional workers—keeping demand elevated for rentals and purchase homes:

    City of San Francisco region: Nonfarm total employment (company payroll plus independent contractor jobs) will rise 2.8 percent in 2019. Businesses and organizations added 42,600 jobs (rising 3.8 percent) year-over-year as of January 2019—helping total jobs in this specific geographic area hit 1.2 million. The area’s growth rate outpaced every other metropolitan area in California. Currently, the fastest-growing job sectors are construction and professional/scientific and technical services. Information is also showing some noticeable strength (but the federal government sector is experiencing losses).

    Also, the median price of a single-family home in the City of San Francisco region ($1.42 million) will rise in 2019, but at a slower pace compared to the past few years. This comes after values rose year-over-year by 5.6 percent as of December 2018. Regarding rental homes/apartments, the average rent hit $3,128 in December 2018 (rising 2.6 percent)—meaning a household would have to earn greater than or equal to $125,000 in pre-tax income to not be “rent burdened” (where 30 percent or more of monthly pre-tax income is spent on housing rent costs).

    Southern Bay Area region: Nonfarm total employment (company payroll plus independent contractor jobs) will rise 2 percent in 2019. Businesses and organizations added 26,200 jobs (rising 2.4 percent) year-over-year as of January 2019—helping total jobs in this specific geographic area hit 1.1 million. Currently, the fastest-growing job sectors are arts/entertainment and information. Manufacturing and professional/scientific/technical services are also showing some noticeable strength (but the construction and utilities sectors are experiencing losses).

    Additionally, the median price of a single-family home in the southern Bay Area region ($1.14 million) will rise in 2019, but at a slower pace compared to the past few years. This comes after values rose year-over-year by 0.5 percent as of December 2018. Regarding rental homes/apartments, the average rent hit $2,682 in December 2018 (rising 4.9 percent)—meaning a household would have to earn greater than or equal to $107,000 in pre-tax income to not be “rent burdened” (where 30 percent or more of monthly pre-tax income is spent on housing rent costs).

    Eastern Bay Area region: Nonfarm total employment (company payroll plus independent contractor jobs) will rise 1.6 percent in 2019. Businesses and organizations added 15,500 jobs (rising 1.3 percent) year-over-year as of January 2019—helping total jobs in this specific geographic area hit 1.4 million. Currently, the fastest-growing job sectors are administrative support, health care, and arts/entertainment. Professional/scientific and technical services are also showing some noticeable strength (but the finance/insurance sector is experiencing losses).

    Also, the median price of a single-family home in the eastern Bay Area region ($733,000) will rise in 2019, but at a slower pace compared to the past few years. This comes after values rose year-over-year by 4.5 percent as of December 2018. Regarding rental homes/apartments, the average rent hit $2,252 in December 2018 (rising 4.1 percent)—meaning a household would have to earn greater than or equal to $90,000 in pre-tax income to not be “rent burdened” (where 30 percent or more of monthly pre-tax income is spent on housing rent costs).

Local County-Level Perspectives
The California Department of Transportation (Caltrans) has released its 2018 – 2050 demographic forecast for all counties in California regarding local jobs, wages, home prices, population, personal income, taxable sales, net migration, wildfire issues, public policy implications, legal cannabis, industries, workforce, and more.

For forecasting purposes, the shorter-term economic projections for 2018 – 2023 within this county-wide report by Caltrans do not factor in an economic recession into its local scenarios. They are only highlights stemming from a baseline projection (view the report above for more information).

Demographic Profile and Projections: Bay Area (9 counties)* 

  • Total population: 7.7 million (and will hit 8.4 million by 2025).
  • Working-age individuals (15 - 64 years old): 68 percent of total population in 2015 (and will fall to 64 percent by 2025).
  • Labor force (at least 16 years old who are working/looking for a job): 4.2 million out of 5.9 million adult population.
  • Labor force participation rate (adults who “want” to work): 71 percent (or 4.2 million individuals).
  • Unemployment rate: 3 percent (versus 4 in CA and 3.8 in U.S.)
  • Unemployed workers: 133,400.
  • Median household income: $99,000 as of 2018 (compared to $69,000 for CA and $61,000 for U.S.)
  • Poverty rate: 9.1 percent (versus 14 in CA and 14 in U.S.)
  • Education of population: 45 percent have a college degree; 26 percent some college; 15 percent high school diploma; and 14 percent no high school diploma.
  • Employment sector growth: click the following links for local future growth breakdowns (2014 – 2024) of nonfarm job projections by industry, occupation, education, and fastest-versus-largest areas of importance — San Francisco-San Mateo-Redwood City region; Santa Clara-San Jose-Sunnyvale region; Oakland-Hayward-Berkeley region; Vallejo-Fairfield region; Napa County region; Sonoma County region; and Marin County region.
  • * Combined counties of San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Solano, Napa, Sonoma, and Marin
  • ** Data as of February 2019 from the California Center for Jobs and the Economy; California Employment Development Department; California Department of Finance; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis; and U.S. Census Bureau

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