Southern California:

Housing, Labor Issues in Spotlight as Recession Risks Still Aren’t High Enough

There’s a good chance Southern California’s economy can reach mid or late-2021 without a recession. However, labor market and housing issues remain a difficulty for businesses and workers, with an increasing number migrating out of the state in search of a lower cost of living.

That’s according to the most recent forecasts published by UC Riverside, Economics and Politics Inc., Cal State Fullerton, and USC in October and November. The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

UC Riverside
Presented on Nov. 6 by the Center for Economic Forecasting and Development:

A lack of housing construction remains the greatest immediate and longer-term challenge to the Inland Empire’s economy. The region suffers from a lack of housing supply and weak rates of homebuilding, particularly within the single-family home market. This is the most urgent challenge to local economic growth as local housing stock falls seriously short of demand. On a side note, residential building permits in the region (both single-family and multi-family) declined by 8 percent in the first-half of 2019 compared to the same period one year ago.

The slowdown in local residential construction is not unique in Southern California, where Los Angeles saw residential permits fall by a much higher 28 percent and San Diego by 47 percent during the first-half of 2018 versus 2019. Construction has pulled back statewide with residential permits down 17 percent across California compared to last year. However, the Inland Empire’s multifamily building activity has been stronger, which is likely what has moderated the region’s relatively lower level of decline in residential permits. “The consequence of high demand and low supply is, of course, upward pressure on home prices and rental costs,” the forecast report states. “Both have increased substantially in the Inland Empire over the past year as the number of home sales has declined. This is a problem today, and unless we add housing stock it’s going to be even more of a problem tomorrow.”

Operating at ‘full employment’ and with an unemployment rate that is trending lower than its historical record low, the Inland Empire’s economy is sure to grow through 2020 at the very least. However, it will grow at a slower pace than in the recent past. Driving much of the region’s ongoing jobs growth are the local health care and logistics sectors, while significant growth at the Ontario International Airport is showcasing the region’s increasingly strong economic presence among Southern California’s local powerhouse economies.

Although the national, state and Inland Empire economies have all been slowing down, the local two-county region’s economy has been keeping its above-average momentum over the past year even as it slows. “All the handwringing over a coming recession is just that. Nothing on the foreseeable horizon would have a big enough or rapid enough impact to knock the region into a downturn,” according to the forecast report. “Although there is always the potential for some yet unseen impact on the global or national level, and there are certainly long-term threats that stem from California’s statewide housing shortage — which is helping drive labor shortages — slower growth is expected to continue.”

Of all the industrial and business development in the Inland Empire, rapid expansion occurring at the Ontario International Airport stands out compared to Southern California. Year-over-year growth in passenger traffic at the airport has jumped 10 percent compared to just 0.3 percent at Los Angeles International Airport (and a 3.4 percent contraction at John Wayne Airport).

Recent local monthly employment figures may be underestimating the Inland Empire’s true jobs growth trend. This is due to the multiple ways that employment is measured by the U.S. Bureau of Labor Statistics and the California Employment Development Department (EDD), and also due to a lag in some of the data. There is a good chance that growth levels will be revised upward when the annual benchmarking occurs in March 2020.

Despite the China trade war that has been underway with some of California’s most key trading partners since March of 2018, the Inland Empire’s logistics sector has continued to grow. It has grown at a robust pace with 3 percent job expansion from August 2018 – August 2019.

As of second quarter of 2019, average rent in the Inland Empire reached $1,390 per month. This is a nearly 4 percent year-over-year increase. Notably, rents are most expensive in submarkets closest to Los Angeles County where vacancy rates are also the lowest, indicating higher demand (likely from commuters who drive to the coast for work).

Sales of existing single-family homes in the Inland Empire were down 6.4 percent in the first half of 2019 while they fell 7.2 percent statewide. The pullback can partially be traced to last year’s sharp rise in mortgage interest rates and limits on mortgage deductibility that resulted from the federal Tax Cuts and Jobs Act. The good news is that 2018’s surge in mortgage rates has largely been erased, and today’s lower rates should stimulate the market in coming quarters.

You can view speaker materials from the forecast event (trends in demographics, housing, business activity, employment and much more): see the booklet "The House That Wasn't Built"; the presentation slides "Inland Empire Economic Update: Focus on Local Trends"; the presentation "Built Out Cities? Zoning and California's Housing Shortage"; and the presentation "Housing Scarcity: The Inland Empire's Natural Barrier to Economic Growth".

‘Inland Empire Quarterly Economic Report’
Released Nov. 5 by Redlands-based economist John Husing (Economics and Politics Inc.):

The continuing increase in Inland Empire job growth within sectors that provide access to middle-class employment for residents is resulting in declining poverty rates. In 2010, the U.S. Census found that the region had 24 percent of its children under age 18 living below the U.S. poverty line (compared to 17 percent for the entire population). From 2010 – 2018, the California Employment Development Department’s (EDD) data show that the Inland Empire created 352,200 local jobs. This is a rapid 30 percent increase that put total employment above its pre-Great Recession level (before 2007). With more people finding work, it is no surprise that the census bureau’s 2018 American Community Survey showed the Inland Empire poverty rate had dropped to 19 percent for children and 14 percent for the entire population. These rates are close to California averages of 17.4 and 12.8 percent.

Three Inland Empire job sectors have recently driven the local economy up and poverty levels down. The first is logistics. In the 2010 – 2018 period, this sector added 83,970 jobs or 24 percent of the total-jobs increase for the area. The second was construction, which added 45,140 workers or 13 percent of total growth. Third was health care, which grew by 37,860 or 11 percent of the entire gain. These sectors were responsible for 47 percent of the 352,200 new jobs the entire region has added since 2018.

For poverty levels, an important characteristic of these Inland Empire job sectors are the opportunities they open up for marginally educated workers given that 46 percent of local adults have stopped their educations with high school or less schooling. Trucking, warehousing, and construction (median pay of $45,000 – $55,000) offer chances for this population to enter the workforce with little or no schooling and move to “near middle-class” incomes. Health care (median pay of $60,000 – $65,000) offers an even better chance to people who obtain associates degrees or credentials in local community colleges. Even entry-level pay in these three sectors is rising due to the competition for labor. Thus, the fact that Amazon is paying $15 an hour for even its part-time staff is forcing other logistics firms to match them to stop losing workers.

“A good deal of California and national policy aims at stifling these sectors and the jobs they create,” the quarterly report states. “Logistics is hammered by legislators and regulators who don’t like trucks. Construction is slowed or stopped by neighborhood lawsuits using the California Environmental Quality Act (CEQA). Health care is hurt by groups wanting to destroy the federal Affordable Care Act. In each case, the more they are successful, the less vital these sectors will be in lowering poverty in the Inland Empire.”

You can view the Inland Empire Quarterly Economic Report — by clicking here and seeing trends in city population, taxable retail sales, assessed property valuations, poverty rates, residential/housing market data, new home construction, household income, job/worker breakdown, health insurance, higher education, and median annual worker wages.

Cal State Fullerton
Presented on Oct. 30 by the Woods Center for Economic Analysis and Forecasting:

Orange County’s employment growth will continue at a moderate pace in 2020. It’s projected the county will see job growth of 25,500 (1.6 percent increase) in 2019; 16,000 jobs (0.9 percent increase) in 2020; and 14,300 jobs (0.8 percent increase) in 2021. The unemployment rate in the county will hover between 3 – 3.5 percent from 2020 to 2021.

The unemployment rate in Los Angeles County is expected to hover between 4.3 – 4.8 percent from 2020 to 2021, and the Inland Empire’s should be in the range of 3.8 – 4.8 percent. Expected company payroll gains for Los Angeles County will be 53,400 jobs (1.2 percent increase) in 2019; 39,700 jobs (0.9 percent increase) in 2020; and 36,000 jobs (0.8 percent increase) in 2021. For the Inland Empire, company payroll employment gains of 42,500 are expected (2.8 percent increase) in 2019; 33,000 jobs (2.1 percent increase) in 2020; and 27,600 jobs (1.8 percent increase) in 2021.

The Orange County Business Expectations survey is significantly lower going into fourth-quarter 2019 compared to fourth-quarter 2018 (96.2 versus 90.9). But it is higher than third-quarter 2019 (87.1). The overall value of the index is a weighted average of survey responses, providing a measure of overall business expectations. Business leaders in Orange County are more upbeat and see little to worry about in the near term. A reading above 50 indicates expected continued growth in the economy. However, local business leaders pointed out political turbulence and trade wars/tariffs as the leading causes of future risks, followed by the Federal Reserve’s policy on interest rates and the state of the Chinese economy. “When asked about the probability of recession by 2020, more than 60 percent stated that it was a 20 percent probability or less,” the forecast report states.

More local trends are available. For housing, labor market, business and other economic analysis in all Southern California counties, click here to view the full report.

Presented on Oct. 25 by the Lusk Center for Real Estate:

Rents in Southern California will increase by $100 per month over the next two years (by 2021). Although income grew faster than rents in 2019 for most individuals, workers will continue fleeing Southern California for markets where new apartment construction is occurring at a faster pace (higher supply). Housing costs and below-average construction of units are forcing workers to seek employment and housing elsewhere.

Over the next two years (2020 – 2021), rents will increase over their 2019 levels by: $139 in Los Angeles County, $106 in Orange County, $209 in San Diego County, $110 in Ventura County, and $100 in the Inland Empire (San Bernardino and Riverside counties).

Meanwhile, home and apartment rental vacancy rates remained relatively stagnant as Southern California added new units at a much slower rate than other western U.S. cities. The region approved fewer than three units for every 1,000 people compared to five units for every 1,000 individuals in places such as Phoenix, AZ and Las Vegas, NV. These two cities are the top destinations for workers who decided to leave the state last year. Despite California’s low unemployment rate in 2018, the Southern California region lost 20,000 people to outmigration. These cities with “thriving economies” and “more robust pipelines of new housing units” coming to the market are draining skilled workers that would otherwise be part of the California economy, the forecast report states. “Housing is more affordable in places where land is cheaper and developers face fewer regulatory and legal barriers that, in California, delay construction and drive up legal and consulting fees.”

Los Angeles County rental housing market forecast: In the only market with more renters than homeowners, apartment dwellers pay the highest rent despite having lower income than San Diego, Ventura and Orange counties. The county’s reliance on the information technology sector, which accelerated the local post-Great Recession recovery, is showing signs of becoming an economic liability as sector employment growth has slowed to about half the statewide average. Despite the region’s highest pace of multifamily construction, vacancy rates will remain virtually unchanged and average rent will climb. (2019: $2,230 average rent and a 3.5 percent vacancy rate. 2021 forecast: $2,369 average rent and a 3.6 percent vacancy rate)

Orange County rental housing market forecast: This county still has the region’s highest household income and homeownership rate, and it has seen steady job growth so far in 2019. With a significant reduction in new multifamily construction compared to earlier in the decade, the region’s second most expensive multifamily market will experience a combination of rent increases and fewer vacancies in the next few years. (2019: $2,090 average rent and a 3.8 percent vacancy rate. 2021 forecast: $2,199 average rent and a 3.3 percent vacancy rate)

San Diego County rental housing market forecast: With so much focus on the housing crisis in Los Angeles County, it’s often overlooked that San Diego County’s economic prosperity is coupled with a chronic housing shortage. The forecast predicts a continuation of limited construction as jobs and population continue to grow. As a result, rents will increase while vacancies remain virtually unchanged. (2019: $1,980 average rent and a 3.5 percent vacancy rate. 2021 forecast: $2,100 average rent and a 3.4 percent vacancy rate)

Ventura County rental housing market forecast: Being the entire region’s slowest-growing county, Ventura County produced one of the biggest surprises of this year’s forecast with a 50-percent increase in multifamily construction permits. With much of its housing stock tied up as second homes or units reserved for seasonal use, rents will continue to increase as vacancy rates decline. (2019: $1,970 average rent and a 3.4 percent vacancy rate. 2021 forecast: $2,080 average rent and a 2.7 percent vacancy rate)

Inland Empire rental housing market forecast: Despite having Southern California’s fastest growing job market, the Inland Empire’s economic expansion has been somewhat constrained by the sluggish labor supply that exists throughout the state. Regardless, the region’s most affordable multifamily market also experienced the fastest increase in housing costs. Rents are expected to grow while vacancies decrease over the next two years. (2019: $1,500 average rent and a 3.5 percent vacancy rate. 2021 forecast: $1,600 average rent and a 3.1 percent vacancy rate)

The following materials shed light on all counties in Southern California: For the 2019 multi-family real estate/rental forecast report, click here. For the forecast event’s slide presentations, click here.

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).

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

Demographic Profile and Projections: Southern California

  • *(Combined counties of Los Angeles, Orange, San Bernardino and Riverside)
  • Total population: 18.3 million (and will hit 19 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): 8.9 million out of 14.3 million adult population.
  • Labor force participation rate (adults who “want” to work): 62 percent (or 8.9 million individuals).
  • Unemployment rate: 4 percent (versus 3.5 in CA and 3.6 in U.S.)
  • Unemployed workers: 342,000.
  • Median household income: $69,000 as of 2018 (compared to $71,800 for CA and $60,400 for U.S.)
  • Poverty rate: 16 percent (versus 15 in CA and 13 in U.S.)
  • Education of population: 31 percent have a college degree; 29 percent some college; 21 percent high school diploma; and 19 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: Los Angeles County; Inland Empire; and Orange County.
  • * 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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