California:

Slowing Labor Force and Population Decline to Impact CA’s Economy for Years

While the California and U.S. economies will most likely dodge a recession in 2020, a slowing labor force (adults who are willing and able to work) and population-rate decline could put a drag on economic growth for decades to come.

That’s according to the most recent forecasts published by UC Irvine, the California Association of Realtors (CAR), Beacon Economics, and the California Department of Transportation (Caltrans) in September and October. The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

UC Irvine
Presented on Oct. 23 by the Paul Merage School of Business and the Newport Beach Chamber of Commerce (click here to see entire video of three speakers):

The chances of a recession rocking the California and U.S. economies in 2020 is very low (and just maybe 2021 as well). The Federal Reserve will most likely lower its short-term benchmark interest rate twice in 2020, according to current financial market forecasts (even though the Fed is predicting it will not raise or drop its “federal funds” rate — something the central bank doesn’t necessarily have a great track record of forecasting). If the Fed does not cut rates next year, it will be because inflation rises (and maybe especially worker wage inflation) — but right now this isn’t expected by the financial markets. Low interest rates are providing a cushion to the current and future economy, and consumers won’t stop spending due to a 50-year record low unemployment rate (a busy, working labor force). However, areas to watch out for include the value of the U.S. dollar, slowing economic growth in foreign countries, a lack of congressional/government fiscal stimulus, uncertainty in foreign trade, and the presidential election and impeachment inquiries by some in Congress.

Nonetheless, putting aside future recessions, the California and U.S. economies are looking at average annual Gross Domestic Product (GDP) growth of approximately 1.5 percent for the foreseeable future (several decades). Demographic reasons are helping drive this trend (declining fertility and birth rates), which has been putting downward pressure on the working-age population growth rate since 2002 (workers aged 16 – 64). The average number of individuals entering the U.S. labor force is currently 25,000 per month (it used to be 240,000 in 2002, and 150,000 from 1979 – 2001). This means the U.S. economy only needs to create 25,000 jobs per month to keep economic growth afloat at a very low annual rate (1.1 percent annual GDP) — which is noticeably lower than what the nation is creating right now. Domestic labor force growth (adults entering the workforce pool) averaged 1 percent per decade from 1940 – 2010, but going forward it will be cut in half (averaging only 0.5 percent from 2020 – 2060). The economy’s heyday of growing at 4 – 5 percent GDP every year as experienced over several decades has come to an end for now (unless it experiences some sort of huge worker productivity increase that doesn’t come at the expense of laying off workers in droves).

The biggest issue isn’t a recession hitting the economy in the near future — it’s the difficulty employers are having as they try growing their businesses and cannot find “good workers” (talent). There are over 1 million more job openings than unemployed workers in the United States right now, which means some workers have so many job offers that they aren’t showing up for work on the first day (also known as “ghosting”). With the U.S. unemployment rate at a 50-year record low (3.6 percent), nearly 80 percent of the working-age population (age 16 – 64) is participating in the economy. Today, about 150,000 jobs are being created per month on average compared to 266,000 in 2015. “There’s no reason to think this isn’t going to continue,” said one forecaster at the event.

If a “bubble” is forming anywhere in the economy (prices out of line with fundamental values and increasing investment speculation), where is it? It’s probably not in crypto currencies, the stock market, or even consumer debt — because these areas “are not out of control,” one forecast speaker said at the event. However, two areas to watch are: 1) continuous cash-burning companies that have no positive cashflow/profit although many investors are still addicted to them (Netflix, Uber, Lyft, Tesla, WeWork, Space X, and others); and 2) the high volume and appetite in financial investment markets for low-grade corporate debt (triple-B rated and “junk” bonds), as well as the even riskier “leveraged loan” market. The concern is that at some point, altogether, these equity-market companies and corporate borrowers won’t be able to raise cash due to an unforeseen event and start laying off employees, setting off a downward spiral in business confidence across the entire economy.

The so-called trade war with China is slightly impacting the California and U.S. economies, but in the grand scheme it isn’t so big that the economy will plunge into a recession. The United States exports about $100 billion worth of products a year to China, only 0.6 percent of U.S. annual GDP (about $23 trillion). The bright spot for the California and U.S. economies is consumer spending. “We are really good at spending money,” one forecast speaker said. “There has to be a reason for us to stop spending money. We don’t just wake up in the morning and start to not spend money anymore.”

There is most likely no asset bubble in California/U.S. residential real estate at the moment. A few important measurements — inflation-adjusted and nominal home prices, the house-price-to-national-wage index, and the Case Shiller Price-to-Rent Index — don’t support the argument for a “bubble” in home values, as well as today’s appropriately underwritten mortgage loan programs by lenders compared to what was offered to borrowers in 2005. Also: housing starts, new home sales and existing home sales don’t support the asset-bubble argument either. (On a side note, commercial real estate growth is poised to soften a little in 2020, but no asset bubbles appear to have formed here either.)

California Association of Realtors (CAR)
Presented on Sept. 26 during a live webinar:

Experts are not overly hopeful — but not overly gloomy — about California’s upcoming 2020 housing market. Low mortgage rates and unemployment are helping the housing market, but not much progress is being made on longer-term housing challenges. CAR’s outlook for next year is for 394,000 single-family existing home sales to transact (slightly higher than 2019 but lower than 2018).

CAR forecasts the following for 2020: the 30-year fixed rate mortgage interest rate will average 3.7 percent; the association’s Housing Affordability Index will stay flat at 32 percent (due to recent and continued lower mortgage rates); and the median home price will hit $608,000 — up $15,000 or 2.5 percent, a much lower annual appreciation than the 6 – 7 percent range experienced from 2015 – 2018. “If we get into a major trade war situation with China, our housing and economic projections could go lower,” said Chief Economist Leslie Appleton-Young.

The California and U.S. economies will stay out of recession in 2020, although growth will come in at a very historically low pace — probably 1.6 percent Gross Domestic Product (GDP). Worker employment should mostly remain steady. And California’s population will hit 40.1 million by next year’s end (a record high), even as annual population growth slows to a pace it hasn’t experienced in decades. Although next year will probably see a 3.7 percent fixed rate 30-year mortgage rate on average, the risks are to the downside as to where they could end up (maybe lower). The record low was 3.31 percent in 2012.

Some issues impacting California’s housing market today across various regions include the following: 1) Seller fatigue, increased discounts, and a reduction in bidding wars on properties. 2) Sellers in many cases are accepting noticeably lower offers than the original list price. 3) Lower mortgage rates are a nice boost for the market, but they can only offset appreciating home prices by so much. 4) Historically low inventory is the “new norm” (3 – 4 months home supply at any given time versus 6 – 7 months during past housing cycles). 5) Today’s housing scene is a tale of two markets: supply for homes with lower-end prices is very tight, and upper-end homes are “more rarified” where “sellers have to be more realistic to get their properties sold.” Higher-end homes are staying on the market much longer before selling (compared to the past few years). 8) Many baby-boomers are choosing to “age in place” rather than downsize their property for various demographic, late retirement, and property tax reasons. This helps constrict existing home supply and sales.

No region across California is “particularly affordable” compared to other comparable regions in the rest of the United States. Every region across the state is “coming up short” when it comes to housing supply/inventory — even in the Inland Empire, the Central Valley and other inland areas where much more single-family home building is taking place versus in the coastal counties. Additionally, the reason California hasn’t seen robust upward pressure on mortgage lending growth with lower interest rates in play is because buyers still have to come up with very large down payments in some areas.

Beacon Economics
Released on Sept. 19 from the firm’s "Beaconomics Economic Forecast for California and the U.S." autumn 2019 report:

California’s economy will continue expanding as U.S. Gross Domestic Product (GDP) continues growing at a steady 2.5 percent quarterly pace. California’s economy has performed solidly in 2019 and is forecast to stay on track into 2020. However, as home to the largest port complex in the Western Hemisphere, the various trade disputes that have erupted over the past few years have been a point of elevated concern. California has a lot a stake in cross-border and trans-Pacific trade activity — however, the state’s overall economy has only been bruised, not broken, by these developments,” the forecast report states.

The California and U.S. economies are expanding at a safe and steady pace with no apparent stressor or imbalance that would have enough force to cause a major disruption. “Consumer spending is solid, home sales are starting to tick up, home price growth is stabilizing, and the U.S. job opening rate is significantly higher than the unemployment rate,” the forecast report states. “Although tariffs have negatively affected trade with China, even that ‘war’ has yet to have any broad, overall impact on the nation’s economy.”

Despite the slowdown in job growth, California accounted for 16 percent of all job gains nationally through the first seven months of 2019. This is essentially the same share as over the past five years. The state’s health care, professional services, leisure and hospitality, and construction industries have led the way in adding jobs.

Inflation has not heated up as a result of the trade “war” tariffs and has actually slowed to a modest 1.5 percent. Even for products that are directly imported, there has been little difference in price growth as a result of the tariffs. Much of this is being driven by the fact that the Chinese have allowed their currency to depreciate sharply, meaning they are shouldering most of the tariffs’ costs. However, U.S. imports from China through the first half of 2019 were down 13 percent, and exports to that nation fell 19 percent compared to the same period in 2018. “But trade is interchangeable, and the overall nominal value of U.S. imports and exports is largely the same as last year at this time,” the forecast report states.

U.S. business spending has slowed in 2019, but there has been more than enough of a surge in public spending to offset that slowdown. Additionally, the slowing is coming off two years of strong numbers, a result of the temporary stimulus created by the 2017 Tax Cuts and Jobs Act. Additionally, the U.S. consumer savings rate has hit 8 percent, the highest it’s been since the 1990s (outside of an odd surge in 2012). “The U.S. consumer sector hasn’t been this healthy in two decades, and a healthy consumer sector can push the nation through major issues in the global economy,” the forecast report states.

Local County-Level Perspectives
The California Department of Transportation (Caltrans) will soon release its updated 2019 – 2050 demographic forecast sometime in late 2019 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 2019 – 2024 within this annual 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).

CA ‘Future of Work’ Commission News
California's Future of Work Commission recently released the following upcoming event information and articles (scroll down on webpage): "Convening 3: Education, Skills, and Job Quality" (on Nov. 14); "Robots Aren't Taking Warehouse Employees' Jobs, They're Making Their Work Harder"; "Economic Incentives Don't Always Do What We Want Them To"; "California's Labor Secretary Envisions the Future of Work"; and "Laborers and Domestic Workers Stay Behind as Thousands Flee California Wildfires."

CA Occupational and Industry Trends
Additionally, download Chmura Economics and Analytics’ latest California Economic Overview to see 10-year future trends in worker occupations, employment, wages, cost of living, and industries.

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): 62 percent (or 19.3 million individuals).
  • Unemployment rate: 3.5 percent (versus 3.6 in U.S.)
  • Unemployed workers: 689,000.
  • Median household income: $71,800 as of 2018 (compared to $60,400 for U.S.)
  • Poverty rate: 15 percent (versus 13 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 September 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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