California

Job Growth to Slow Significantly while Economy Dodges Recession amid 'Jitters'

There’s no question California’s economy is slowing down as employment growth continues moderating. However, it remains on track to dodging a recession—quite possibly until 2021—as the state’s local regions fare differently for various reasons.

That’s according to three different local economic forecasts recently held in March by the UCLA Anderson Forecast, Beacon Economics consulting firm, and the Stanford Institute for Economic Policy Research. These experts’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

UCLA Anderson Forecast
From the "March 2019 Economic Outlook” conference, presented and published by the UCLA Anderson Forecast:

  • California’s economy will continue growing in 2019 and 2020, although at a much slower pace than the past couple of years. 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 take place and is not being ruled out as a possibility).

  • 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 up back to 2 percent in 2021 (baring an economic recession). 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 as low as 20,000 monthly in 2020 as there are only so many individuals to employ in a very tight labor market.

  • It’s possible California’s economy 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.

  • 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. The state’s total non-farm job base (payroll companies plus independent contractors and/or “gig” workers) will grow an average annual 0.8 percent from 2019 – 2021, which is noticeably slower than recent years.

  • 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. For the most part, both payroll and independent contractor jobs are mostly being created in all employment 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.”

  • From 2019 – 2021, the following California employment sectors will experience varied growth (adding 466,000 jobs in total over three years): information and state/local government (high growth); professional/business services, education/health services, manufacturing, and financial activities (moderate growth); and construction (low growth). Sectors that will experience job losses will probably be in the wholesale trade and federal government sectors. Put into context, by 2021 annual job growth will have slowed down dramatically after ranging in the 300,000s and 400,000s every year from 2012 – 2019, but then stooping to only 99,000 in 2019 and 51,000 in 2021 as the economy continues slowing down and the employment market continues tightening more than some experts ever thought it could.

  • The latest “hot” job markets (higher employment growth) in the second-half of 2018 are all located inland—the Sacramento region, Inland Empire, and middle of Central Valley. In the middle of the pack are the San Francisco/Bay Area and San Diego areas, and lagging at the bottom are Los Angeles County, Orange County, and most of the Central Coast. Putting geography aside, the biggest sector-growth came in the following job categories: professional/scientific/technical and transportation/warehouse/utilities. Down the line, moderate growth was experienced in leisure/hospitality, administrative services, health care/social services, and construction. Lastly, slower growth came in state/local government, durable goods, information, education, mining/logging, and finance. And job losses were experienced in management, retail trade, federal government, “other” services, and wholesale trade.

  • “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)

  • The annual new-home-building-permits metric in California (single and multi-family units combined) finally reached a level it hit 12 years ago (2007). It is forecasted to reach 120,000 - 130,000 annually in 2019 and 2020, and then accelerate to 148,000 by 2021. “This will be a response to easing zoning and regulatory requirements for developers, and an expected reduction in interest rates by 2021,” the forecast report states. For context, annual new-home permits across the state averaged 125,000 from 2006 – 2008; 40,000 from 2009 – 2011; 60,000 from 2012 – 2014; 100,000 from 2015 – 2016; and 120,000 from 2017 – 2018.

  • U.S. consumer inflation will likely 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 possibly up to three times in 2020. “We are more pessimistic on the real economy than the Fed,” the forecast report states. “We are forecasting 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 the year-over-year gains will soon be running around 4 percent.”

Beacon Economics
From "Beaconomics: An Economic Forecast for the U.S. and California,” published by Beacon Economics:

  • Overall, California’s economy is on a steady growth track for 2019 due to its 2018 fundamentals. “The unemployment rate in the state as a whole, and in many of its metro regions, continues to be at or near record lows,” the forecast report states. “Job gains persist across nearly all of California’s industries.”

  • “Nothing on the near-term horizon has the capacity to cause a downturn in the California and U.S. economies, much less a recession,” the forecast report states. “Public sentiment has turned remarkably—and unnecessarily—grim. Driving the pessimism could be anything from the recent stock market slump to slowing home sales to the fear of an expanding trade war.” U.S. economic growth (Growth Domestic Product—GDP) will fall to the low 2-percent range this year from 2.9 percent in 2018, and labor markets will continue adding jobs but at a slower rate.

  • “Growth in the economy will certainly slow this year, but this is because the sugar rush and short-term stimulative boost created by the 2017 Tax Cuts and Jobs Act is wearing off—as expected,” the forecast report states. “While there have been weaker-than-normal numbers in some economic data, they are in line with the normal ebb and flow of growth. Moreover, fundamental indicators of economic health such as the consumer savings rate, wage growth, and debt levels all look good. The current economic expansion has been historic and it will come to an end, but that end has to be driven by a large, rapid, and negative shock to the economy. We simply don’t see any imbalance right now that has the capacity to knock economic growth off its rails this year.”

  • Assuming mortgage interest rates hold steady in the next few months, the peak homebuying season of 2019 in California could be better than many expect. However, California’s economy is increasingly hampered by the state’s housing shortage, and a greater sense of urgency has developed around the issue as reflected by more aggressive action from state policymakers and lawmakers.

  • Longer term, however, the chronic lack of home supply coupled with high housing costs in California is only growing in magnitude. “California needs to build far more homes than it has been building,” the forecast report states. “The state’s economic future will be tied to our ability to do that. This is a stubborn, complicated problem—and it’s taken a long time to get to where we are. It won’t be solved overnight. Part of the complexity lies in the fact that efforts at the state level to increase housing venture into land-use policymaking (which has historically been the purview of local jurisdictions) make it challenging to craft a comprehensive solution.”

  • Click here to read more on pages 9 - 13 regarding the “California Outlook.”

Stanford University
From the “2019 Economic Summit,” presented and published by the Stanford Institute for Economic Policy Research:

California Real Estate Trends and Projections 
Based on surveys and other analysis, the latest comprehensive report published by the Urban Land Institute and consulting firm PWC (“Emerging Trends in Real Estate”) reveals the following California real estate characteristics: 

  • The “homebuilding prospects” of several California metropolitan areas and suburban communities recently rated in the top 79 U.S. real estate markets due to their current local economic environment.

  • The five-year projected annual median home-price growth for “existing” housing (2019 – 2023) is higher for certain regions in California than others depending on the consumer/business and population dynamics of the locality in focus.

  • From an investor standpoint, select areas across California’s industrial real estate market, space, activity and potential rank in the top-20 U.S. industrial markets because of future growth projections.

  • One particular spot in California (the Inland Empire) is one of four U.S. industrial real estate markets where one-third of all new industrial construction nationwide is taking place (sharing the spot with Dallas, Atlanta, and Pennsylvania).

  • Select areas across California rank in the “top 10” within the entire Pacific West region regarding the strength of their local economy and other variables affecting commercial and residential real estate markets.

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: California 

  • Total population: 40 million (and will hit 42.3 million by 2025).
  • Working-age individuals (15 - 64 years old): 67 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): 19.6 million out of 31 million adult population.
  • Labor force participation rate (adults who “want” to work): 63 percent (or 19.6 million individuals).
  • Unemployment rate: 4.4 percent (versus 3.8 in U.S.)
  • Unemployed workers: 868,000.
  • Median household income: $68,000 as of 2017 (compared to $58,000 for U.S.)
  • Poverty rate: 14 percent (versus 14 in U.S.)
  • Education of population: 34 percent have a college degree; 29 percent some college; 20 percent high school diploma; and 17 percent no high school diploma.
  • Employment sector growth: click here for a local future growth breakdown (2014 – 2024) of nonfarm job projections by industry, occupation, education, and fastest-versus-largest areas of importance in California.
  • * Data as of March 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

CU Quarterly Performance Report
Access California and Nevada trend analysis for YOUR credit union.

 

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