Economy Continues Slowdown as Labor Force Declines and Home Affordability Issues Proliferate

California’s economy is experiencing a major slowdown, but it’s still hard to make an argument for falling into a “recession” in 2019 or 2020. The slowdown is fueled by declining labor force growth, a downshift in certain industry hiring growth, and homeowner/rental affordability issues.

That’s according to a handful of recent statewide economic forecast events from June – July, including the UCLA Anderson Forecast; the “Your Economy—Your Credit Union” Conference by the California and Nevada Credit Union Leagues; the A. Gary Anderson Center for Economic Research at Chapman University; Beacon Economics consulting firm; the California Association of Realtors; and other sources.

The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

UCLA Anderson Forecast
Presented on June 5:

California’s rapid job growth — adding to a “full employment” job base for several years — has been slowing down and will continue to do so in 2020 and early 2021. Employers are having a hard time finding qualified new employees. However, employment is only part of the picture. The slowing growth in contracting sectors (non-durable goods manufacturing and retail) and more rapid growth in expanding sectors (information, scientific, and technical services) have spurred faster state GDP growth (Gross Domestic Product) than total employment growth would suggest.

California’s extremely low 3.5 percent unemployment rate has finally hit an approximate “floor” and will steadily rise over the next two years. The state’s average unemployment rate will increase to 4.6 percent by first quarter 2021 before dropping to 4.4 percent by mid to late-2021. This unemployment increase will partially be due to a slightly slowing housing market (residential building); however, in general as the economy slows, other employers may also not hire workers at the same fast pace they’ve been hiring during the past few years as new entrants continue coming into the “labor force” (adults who are willing and able to work). Moreover, the state’s total employment growth (company payroll jobs plus independent contractors and entrepreneurs) is expected to be 1.7, 0.8 and 0.4 percent each year from 2019 – 2021.

California’s “real” personal income growth (after inflation is taken into account) will average 2.3 percent from 2019 – 2021. The continued growth is reflective of the changing mix of employment in California and tight labor markets in high-wage occupations. Of the seven employment sectors (out of 17 total) that are growing at a rate faster than 1.5 percent over the past twelve months, three have an average wage lower than the median and four are higher. These three low-wage sectors are: health care/social services, leisure and hospitality, and administrative services. The four high-wage sectors are: professional/scientific and technical services, construction, durable goods manufacturing, and trade/transportation and warehousing.

California’s homebuilders will add 135,000 – 146,000 units annually to the state’s housing inventory between 2019 – 2021. This somewhat significant building rate (by 2021) will be a response to an easing in zoning and regulatory requirements for developers/builders, as well as an expected reduction in interest rates by 2021.

It’s possible the U.S. economy could dodge a recession going into 2020 and hover at a very low growth rate for a few consecutive quarters (0.5 – 1 percent). Nonetheless, if a recession doesn’t hit, and if a huge unforeseen crisis or event doesn’t happen, U.S. Gross Domestic Product (GDP) is forecasted to grow 2.1 percent in 2019, 1.4 percent in 2019, and 2.1 percent in 2021. However, “When the economy slows to 1 percent growth (in the interim), the risk of a recession becomes very real, with the second half of 2020 being most problematic,” the forecast report states. “With U.S. job growth slowing to a crawl of about 40,000 a month in 2020, the risk of a recession in the latter part of that year is nontrivial. Inflation is forecast to run somewhat above 2 percent, and the Federal Reserve will maintain stable interest rates until the second half of 2020, when we forecast two rate cuts. The downside risk to the economy comes from increased trade tensions, but the upside risk would come from national housing activity rising out of its stupor.”

‘Your Economy—Your Credit Union’ Conference (California and Nevada Credit Union Leagues)
Presented on June 13:

California’s economic growth is slowing down and will continue doing so between now and 2022. However, the implications for credit union members and balance sheets depend on how that slowdown “looks and feels” over time, especially given the state’s unique business and consumer environment. It’s still difficult to make a solid argument for the broader economy falling into a recession within the next 12 – 24 months given the current environment.

California’s pace of job growth may be downshifting, but the labor market as a whole is nowhere near a precipice of contracting at a rapid pace in the foreseeable future. Even if business spending contracts, there’s no recession in sight if the job market retains its slowing rate of growth. The greater problem is, the economy hasn’t seen compounded exponential growth in worker incomes over the past 10 years. When you hear about an “economic slowdown” in the news, these slower income growth rates being experienced since the last recession are the numbers fueling that assessment.

The Federal Reserve doesn’t want the financial markets and business leaders to know too much before things happen in the economy. “They want you to react to monetary decisions and queues at what they feel is the right time—not too early,” said Robert Eyler, keynote speaker and economist at the event. It’s possible — although perhaps not likely — that the Fed may drop its “federal funds” bank-to-bank interest rate by 50 basis points instead of 25 basis points if it decides to venture down that path in late July. “It seems the Fed is likely to drop rates before increasing them again, which could increase the probability of an economic downturn based on history," Eyler added.

Gary Anderson Center for Economic Research (Chapman University)
Presented on June 19:

California’s Growth Domestic Product (GDP) will expand 2.4 percent in 2019 — and 2020 may look promising for similar or lower growth, but with caveats. By December 2019, the California economy, which traditionally outpaces national trends, will have faced a steeper decline that brings it on par with the rest of the nation. This is due to trade tension with China and declining job growth in construction, transportation/warehousing, and technology. Whether this expansion will continue through the pivotal presidential election year of 2020 will depend mainly on whether inflation remains in check or whether it begins to show upward pressure and possibly exceed the Federal Reserve’s 2 percent inflation-target rate. “The slowing economic growth rate is something to watch closely,” the forecast report states.

California’s employment growth will slow to a 1.5 percent rate for 2019. This prediction spurs from sharp drops seen across key industries from 2018 to 2019 in construction job growth (6.1 percent to 0.9 percent), transportation/warehousing (5.7 percent to 3.2 percent), and technology/information services (2.6 percent to 1 percent).

While national trade tensions are the cause of deterioration in California’s transportation/warehousing industry, the information services sector has slowed because the state cannot foster the right environment for specialized tech jobs to flourish. Viable talent is moving to burgeoning technology hubs in other states with more manageable costs of living and lower tax rates. The sector saw double digit growth from 2016 – 2018 but stalled in 2019, resting close to zero (outside of Silicon Valley). “Information services is the most important job sector for California’s future,” the forecast report states. “These jobs support the growing technology industry and on average offer higher wages than other industries. The lack of jobs is leading to a net population loss for the state.”

California’s slowdown in construction jobs that began in late 2018 will continue through late 2019. Mortgage rates have since fallen from late 2018 to mid-2019, which will slow the construction job decline — however, positive year-to-year growth will not resume until the second half of this year. As a result, the construction sector will be neutral come the end of 2019 having sold and produced a similar amount of housing as in 2018.

A migration of 150,000 residents out of California over the past year adds additional challenges to the state’s economy. High housing prices aren’t the entire cause. Rather, high state taxes, made even more burdensome by national tax reform, is another cause. “We’ve seen more people leaving than moving to California over the last several years,” the forecast report states, looking just at migration patterns. “People are leaving California because of high income and sales taxes and moving to states like Texas, Florida or Washington where there is no income tax.”

Beacon Economics (consulting firm)
Presented on June 20:

There is no reason to anticipate an economic downturn in California’s economy until at least 2021 or later. A slowdown of some sort is already happening, but nothing on the near-term horizon has the capacity to cause an outright economic contraction. “We simply do not see the kinds of imbalances or rapid shifts that would be forceful enough or deep enough to push the economy into recession,” the forecast report states. U.S. Gross Domestic Product (GDP) will ratchet down to 2 percent for 2019, driven by a number of sources — including an end to the short-term stimulative effects created by the 2017 Tax Cuts and Jobs Act, intensifying trade disputes with key foreign trading partners, and financial market wobbles that will keep investors looking for safety.

The trade relationship with China, Mexico and Europe is a negative challenge for some businesses, but the turbulence is not a threat to broader economic growth in California and the United States. That could change, however, if the disputes balloon or spread. “For now, the threat has been hyped to a level that exceeds reality,” the forecast report states. “However, concerns abound regarding the potential long-run consequence of conflating U.S. trade policy with the nation’s foreign policy.”

California’s economy has shifted to a lower pace of job growth and will remain on this slower trajectory. As metro-area unemployment rates are holding steady or near record lows, job growth is slowing due to minimal growth in the state’s labor force. It will continue at a slower pace, most notably led by the tech-fueled economies of the San Francisco/Bay Area. Despite the employment slowdown, California continues on an impressive growth path with its Gross State Product (similar to national GDP) advancing 3.5 percent in 2018, faster than the nation as a whole and among the fastest growing states. While job growth has been slowing everywhere except San Francisco and the Southern Bay Area, employment continues to outstrip local labor supply, driving unemployment rates lower and forcing employers to look outside their local regions to fill positions.

From a year-over-year perspective, California added nearly 296,000 jobs as of June 2019 — a substantial slowing from the pace experienced a few years ago. This is a 1.7 percent annual increase, which only slightly outpaces the 1.5 percent growth rate for the nation as a whole (California has slowly come down to the U.S. year-over-year growth, although the state still hovers above depending on the month). “The problem isn’t labor demand. The economy is still very strong,” the forecast report states. “The slowing is being driven by labor supply shortages that stem from California’s housing supply crisis.”

California’s housing market may perform better this year than many expect. The 30-year fixed mortgage interest rate recently dropped well below 4 percent, and softer home prices are expected due to an increase in the supply of homes for sale. Bidding wars (a seller’s market) this summer compared to last summer have plummeted in many metropolitan areas. Expect sales to improve in the second and third quarters of 2019 and the median price to advance very modestly.

With few exceptions, home prices across different regions of California are seeing little, if any, appreciation — and in some cases they’ve contracted. Putting aside the East Bay Region of the broader Bay Area, “home price growth has either slowed significantly, or in the case of the astronomically priced San Francisco and Southern Bay Area, it’s contracted,” the forecast report states. “From first-quarter 2018 to first-quarter 2019, home prices in San Francisco fell 1.1 percent, and in the Southern Bay Area they dipped 8.3 percent.” In both Los Angeles and San Diego metropolitan areas, home price growth continues but at a pace that’s well below recent levels in 2018.

“California’s chronically undersupplied housing market continues to choke off labor force growth, limiting gains in jobs and economic growth, including areas that led the state for most of the past few years,” the forecast report states. In the most expensive places, the lack of affordability has effectively shriveled the market of potential buyers despite impressive gains in incomes in recent years. Home price declines are actually being experienced in some areas — a phenomenon not seen in several years. Also, rents have continued to climb as the demand for housing persists and the notion of buying a home has grown further out of reach for most residents. In line with housing demand has been a sustained demand for workers, which continues to be strong in every metropolitan area.

Click here to read the entire forecast report. It includes commentary, charts and graphs.

California Association of Realtors
Presented on July 10 (according to The Mercury News: “Economists Present Mid-Year California Market Forecast”):

“Despite uncertainties and sluggish growth, the economists discount talk of another recession looming. They said there are no obvious indicators to support a recession. Consumers have a reasonable amount of debt with decent balances on credit cards and auto loans. The lending environment and housing are very different today. They doubt there will be a repeat of 2008 because the fundamental imbalances then are not prevalent today.”

“The economists indicated 750,000 people have left the state since 2010. They fear the housing affordability issue is going to become an economic issue, as more millennials and Gen Xers than boomers move out of state to places like Texas, where there are no zoning or housing supply constraints. Levine indicated more than 100 cities in California are already classified as “majority renter cities.” If things don’t change, it is projected that the entire state of California will become a majority renter state by 2025.”

“The chief economist maintains ‘low housing affordability is California’s Achilles heel.’ California housing affordability is at 32 percent, compared to the country at 57 percent. Research shows the only employment field which affords you to buy a home in the state is that of a software developer earning $127,950. By year-end, the California Association of Realtors projects home sales will dip 4.3 percent, the median price will increase 4 percent, and the 30-year fixed rate interest will be at 4 percent.”

‘10 Real Estate and Housing Trends Going into Late 2019’
Published on July 23 from CU Weekly (click here):

  • Could California Residents Become ‘Majority Renter State’ by 2025?
  • Housing, Earthquakes and Other Issues: Californians Have Opinions
  • San Francisco, San Jose, Riverside are Unique as U.S. Median Hits Peak
  • Foreigner and Immigrant Home Purchases Plunge in California
  • California is a Mixed Market as U.S. Price Growth Slowdown Levels Out
  • Mortgage Rates Lowering, Refinances Up, and Affordability Perplexing
  • Is Home Price Growth vs. Household Income Growth out of Whack?
  • What’s Behind the Recent Rise in U.S. Homeownership Rate?
  • One-Quarter of Homeowners Plan to use HELOCs for Renovations
  • Growth in Home Improvement Spending is Slowing Down

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): 19.3 million out of 31 million adult population.
  • Labor force participation rate (adults who “want” to work): 63 percent (or 19.3 million individuals).
  • Unemployment rate: 3.5 percent (versus 3.7 in U.S.)
  • Unemployed workers: 678,000.
  • Median household income: $71,800 as of 2018 (compared to $63,700 for U.S.)
  • Poverty rate: 15 percent (versus 12.3 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 June 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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