Executive Summary

• California’s job growth slowed sharply in the third quarter and has been cooling faster than the nation so far this year. A few factors weighed: less catch-up hiring in leisure and hospitality and other services, the writers' and actors' strike pressured motion picture and sound recording employment, and the Bay Area’s technology sector shed net jobs to control costs. The state’s job growth rebounded modestly in October on above-average gains in construction, education & healthcare, other services, and manufacturing. Despite the improvement, statewide job growth slipped to 1.6% year-on-year in October, the slowest pace since March 2021 and below the national average of 1.9%.

• California job growth is forecast to slow to 2.1% y/y in 2023—well shy of last year’s pace of 5.6%—and fall to 0.8% in 2024 along with a slowing U.S. and global economy. The main driver of the sluggish state labor market over the near-term horizon is the rapid interest rate increases engineered by the Federal Reserve beginning in March 2022, although continuing net out-migration and state budget pressures will both be important contributing factors.

• California’s population is expected to continue shrinking in fiscal year 2023. According to the California Department of Finance, the state’s population is on track to drop 0.1% in the fiscal year ended June 30. That would mark the third consecutive year of net population loss. An increase in deaths, sharp drops in international immigration, and a rise in residents moving to other states were responsible for the decline. On a brighter note, the population is forecast to stabilize in fiscal year 2024 then gradually start growing again, helping to support economic activity.

• The sharp slowdown in job growth has pushed California’s unemployment rate up a full percentage point in just over a year to 4.8% in October from an all-time low of 3.8% in August 2022. The state’s jobless rate is forecast to average 4.5% in 2023 and then increase to an average of 5.2% in 2024 as job growth statewide continues to slow.

• The California housing market correction continues but appears to be moderating with existing home sales sliding 11.9% from a year ago in October. Existing home sales in the state have been declining now year-over-year for twenty-eight consecutive months; however, October’s decline was a significant improvement from the 21.5% decline recorded in September. Nonetheless, still-high mortgage rates and low existing inventory continue to vex the residential market, and there is little relief imminent with interest rates expected to remain relatively high in 2024.

• Despite affordability challenges, California home prices have been on the rise since this summer. Home prices increased 5.3% from a year ago in October, the strongest pace since just after the Fed started hiking interest rates. California’s home prices are projected to slide 1.2% from the 2022 peak this year—the first decline since 2011—before rising 3.0% in 2024 as the Fed starts cutting interest rates and housing demand rebounds.

California

Employment Outlook

California’s job growth is slowing. October saw a slight improvement of 0.2% growth following a modest 0.1% rise in the previous month and two straight flat job readings in July and August. Strong increases in construction and education & healthcare jobs—which together represent just over 22% of total employment—helped the October result. Notably, information employment only rose a modest 0.1% following the end of the Hollywood strikes and after contracting for six months in a row amid widespread weakness in the technology sector.

Job growth from a year ago reveals the slowdown trend, slipping from 3.3% at the start of this year to 1.6% in October—the weakest yearly pace California has seen since March 2021. The interest rate-sensitive and strike-battered information sector has been particularly hard-hit with payrolls dropping 5.4% year-on-year. Strong gains in education & healthcare (+5.1%), leisure & hospitality (+4.5%) and other services (+3.7%) have kept modest job growth going.

California's employment growth is projected to slow to 2.1% y/y in 2023 after a sizzling gain of 5.6% in 2022—the fastest annual pace since 1978. The moderation is expected to continue to just 0.8% in 2024 as tight monetary and financial conditions, and slowing U.S. and global growth, take a toll on consumer and business spending power.

The state unemployment rate has been climbing faster than the nation's, rising by a full percentage point to 4.8% in October from an all-time low of 3.8% in August 2022. The number of unemployed people in California has surged 28.7% over that period.

California’s unemployment rate is projected to average 4.5% in 2023 and climb to 5.2% in 2024 on a sharp slowdown in employment growth. The underperformance of the state’s economy implies joblessness in California will remain notably above the nation’s next year.

Housing Outlook

High mortgage rates and poor affordability continue to pressure California’s residential market, but the pace of decline appears to be slowing. Still, existing home sales have been below year-ago levels for twenty-eight consecutive months through October. California existing single-family home sales were 241,770 in October on a seasonally adjusted annual basis—the second month in a row below 250,000. Sales are up a modest 0.3% from September’s level—the first upturn since May—but are still 11.9% lower than a year ago.

The sharp increase in mortgage rates in the third quarter—the 30-year fixed rate was 7.04%, up from 6.51% in Q2—further pressured California’s housing affordability. The California Association of Realtors Housing Affordability Index slipped to 15% in the third quarter of 2023, the lowest since 2007Q3. This means that only 15% of California households could afford to purchase the median-priced California home of $843,600 in the third quarter of this year.

The state's supply shortage of existing homes remains a serious problem, as many homeowners are unwilling to give up a lower-rate mortgage. The Unsold Inventory Index slipped to 2.7 months in October from 2.8 months in September, pointing to decreasing inventory for sale. The index signals the number of months it would take to sell the supply of existing homes on the market at the current sales pace. A balanced market is characterized by five to six months of inventory.

Because inventory remains so tight, California home prices continue to rebound despite affordability issues. The statewide median home price was $840,360 in October, down 0.4% from September but up 5.3% y/y. Home prices have risen year-on-year over the last four months after prices fell for the prior eight months by an average of 4.2%. Despite the solid gain recently, median home prices are still 5.9% below the record high set in May 2022.

The prospects for California homebuilders have improved somewhat given the dearth of existing homes for sale, but we expect still-high mortgage rates, low affordability and net outmigration will be a formidable constraint on California homebuilding. Accordingly, housing starts are forecast to decrease 6.1% this year and 2.4% in 2024.

California home prices are expected to decline by an average of 1.2% in 2023 and rebound 3.0% next year as mortgage rates decline from recent peaks and housing inventory remain historically tight.

CA Population Forecast to Stabilize

After the population peaked at 39.6 million in January 2020, California lost 600,000 people as of July 2022, with most of the decline occurring during the first year of the pandemic. An increase in deaths (mainly from COVID), sharp drops in international migration and a rise in residents moving to other states were responsible for the losses.

A dearth of young people—the state’s birth rate dropped 31% from around 15.6 births per 1,000 people in 2007 to 10.7 in 2022—and new migrants imply less consumer spending and labor force growth longer-term, possibly threatening the dynamism that has fueled the state’s economy for decades.

The good news—at least over the near term—is that the state’s population is forecast to stabilize by 2024 and then gradually start growing again. This welcome demographic development should aid California’s disposable income and consumer spending growth over the next few years. Longer term, the Department of Finance projects California’s population will stagnate at around 40 million until at least 2060, a radical change from earlier predictions of around 50 million. In either case, demographic challenges will clearly exert more downward pressure on the California economy and could limit the state’s growth potential.

Bay Area

Employment Outlook

Bay Area job growth has been cooling rapidly with two straight monthly declines in nonfarm employment in August and September, but modest employment growth (of 0.1%) returned in October. Despite the uptick, average monthly job growth in 2023 has slipped to 0.1% from 0.3% in 2022, indicating a loss of momentum looking past the vagaries of the monthly fluctuations.

Employers eliminated net jobs in five major sectors in October, including large percentage decreases in government (-0.4%); manufacturing (-0.3%); and trade, transportation & utilities (-0.1%). Combined, these three sectors represent just over one-third of total nonfarm employment and limited the modest uptick. The biggest percentage job gains in October were in the financial services (+0.8%), information (+0.7%) and leisure & hospitality (+0.3%) sectors.

Moreover, the October rise was not strong enough to prevent the year-on-year job growth rate from slipping to 1.3%, the slowest pace since March 2021. The persistent slowdown in job growth pushed the Bay Area unemployment rate up to 3.7% in October from the cyclical low of 2.7% in August 2022. Even so, the Bay Area still has the lowest jobless rate of all four main regions of the state, with Southern California a distant second, sporting an unemployment rate of 4.6%.

Bay Area job growth is expected to drop to just 2.3% in 2023—less than half of last year’s pace—and then decelerate to 0.5% in 2024. The sharp downshift will be driven by continued weakness in technology, finance, trade and manufacturing jobs.

Housing Outlook

The Bay Area housing market correction brightened somewhat in October with existing home sales falling just 3.9% from a year ago, the smallest decrease since July 2021. Nonetheless, home sales have fallen year-on-year for more than a year and a half amid higher mortgage rates, low affordability and widespread layoffs in the technology sector.

Home sales fell from a year ago in five Bay Area counties in October with the largest declines in Solano (-11.4%), Alameda (-10.7%), Contra Costa (-8.0%) and Marin (-3.8%). Sales surged nearly 50.0% in Napa and rose much more modestly in San Francisco (+5.3%), Sonoma (+2.7%) and San Mateo (+1.9%).

Existing home inventory remains tight. The Unsold Inventory Index fell to 2.0 months in October after climbing for four consecutive months. The dearth of inventory pushed the median Bay Area home price up 5.7% from a year ago in October.

Bay Area home prices are projected to slump 6.3% this year—compared to a 7.3% rise in 2022—as housing demand slows amid higher mortgage rates, sharply slower job growth, rising unemployment and improving inventory. Home prices are forecast to increase 3.2% in 2024 as mortgage rates gradually decline and demographic trends turn more favorable.

SF Office Vacancy Rate Rises Again

The San Francisco office market remains challenging as Bay Area workers are increasingly reluctant to return to the office. The metro area’s office vacancy rate rose to a record high 30.4% in the third quarter on climbing inventory—both sublease and move-outs. That is the fifteenth straight quarterly increase, and the vacancy rate is up about 25 percentage points since 2019Q4. While Q3 leasing volume rose relative to the past two quarters, leasing levels remain around 33% below the quarterly pandemic average.

While availability is at an all-time high, asking rents remain flat, while effective rents are down 37% since 2020 as both concessions and free rent offers have risen to attract tenants.

While San Francisco’s economic fundamentals remain solid (with an unemployment rate of just 3.7% in October), vacancy rates are expected to increase further until leasing volume picks up. That is unlikely to occur in the absence of more workers returning to the office, which could hinge on the ability of companies to convince them to do so. An increasing, or even stable, vacancy rate at high levels is a significant downside risk to San Francisco’s job and retail sales growth as fewer people are commuting to the city where they would be likely to spend at center city restaurants, bars and retail stores.

Southern California

Employment Outlook

Southern California’s job growth was steady at 0.2% in October, in-line with September’s increase and after flatlining in August. The October growth was primarily driven by strong gains in construction (+1.5%), information (+0.7%, after five straight drops during the writers’ strike in Hollywood) and government jobs (+0.4%). Financial services employment slipped 0.1%.

Southern California’s year-over-year job growth was 1.7% in October, just above the statewide average. Job gains over the past 12 months were notably strong in education & healthcare (+5.5%) leisure & hospitality (+4.5%), and other services (+3.2%), while jobs decreased in information (-10.2%) and manufacturing (-1.2%).

Maritime activity at Southern California’s two largest ports of Los Angeles and Long Beach declined for 13 straight months through August, but activity rebounded in September and accelerated in October to the strongest pace since June 2021. The rebound in port activity in part drove employment in trade, transportation & utilities up 0.6% from a year ago. Southern California’s employment growth is forecast to slow to 2.0% this year from 5.6% in 2022 and slump to just 1.0% in 2024, the slowest pace since the start of the pandemic.

The slowdown in job growth pushed Southern California’s unemployment rate up to 4.6% in October, its highest level since February 2022. The region’s jobless rate is now just below the statewide average of 4.8%. Southern California’s unemployment rate is projected to average 4.3% in 2023—up slightly from 4.2% in 2022—and then jump up to 5.1% next year as growth in leisure and hospitality and other service sectors fades.

Housing Outlook

The home sales slump in Southern California persisted in October with existing home sales dropping 7.6% y⁄y as 30-year mortgage rates hit new highs. This is the 28^th straight month of year-on-year sales declines but a significant improvement from the decrease of 20.8% in September. Home sales declines were broad-based across the region, ranging from -4.1% in Orange to -20.3% in Ventura.

Even so, Southern California home prices are stabilizing, and climbed 5.8% from a year ago in October. That marks the fourth straight month of year-on-year home price growth after five months of declines. A dearth of inventory—the Unsold Inventory Index was 2.9 months in October, well below the long-run average of 6.1 months—is contributing to the rebound in Southern California home prices.

Home prices rose in all five Southern California Counties with the biggest increases in Orange (+9.4%), Ventura (+5.1%) and Los Angeles (+4.6%). Home prices advanced a more modest 3.5% in Riverside and San Bernardino. Home prices in Southern California are forecast to slip just 0.5% this year and then rebound 4.0% next year as mortgage rates decline, population growth stabilizes, and pent-up demand kicks in.

Regional Port Activity Rebounds

The two Southern California ports of Los Angeles and Long Beach—which process about 40% of all containerized imports and 30% of all exports in the United States and are the largest ports in the country—experienced 13 consecutive months of contracting container trade volume through August 2023. Cargo volume, however, rebounded in September and growth improved to 10.8% in October on a 16.7% surge in imports. The near-11.0% pace of growth was the fastest since June 2021.

The sustained declines in two-way trade at Los Angeles and Long Beach for just over a year weighed on regional economic growth. The trade, transportation & utilities sector’s share of total metro nonfarm employment in October was nearly 19.0%, reflecting the sector's importance to the region. Further advances in two-way trade would be an upside risk to our forecast, boosting activity at the ports and prompting additional hiring, and economic growth for Southern California.

Central Coast

Employment Outlook

The Central Coast’s economy is holding up better than much of the rest of the state. Employment growth accelerated to 0.2% in October from 0.1% in September and -0.2% in August. The region’s job growth has averaged 0.3% per month this year, up from 0.2% in 2022 despite aggressive interest rate increases and tighter financial conditions.

Job gains were well above average in two of 11 sectors in October: government (+1.3%) and construction (+1.2%). Mining & logging employment fell 2.7%, while employment in other services and professional & business services declined 0.7% and 0.6% respectively. These three sectors comprised 16.5% of total employment in the region in October and limited the overall gain.

The Central Coast’s job growth from a year ago remains strong at 3.1%, nearly double the statewide average of 1.6%. Still, leisure and hospitality demand has begun to wane with yearly employment growth slowing to 5.7%, the weakest gain since March 2021. This deceleration bears watching as the tourism industry is a key driver of the region’s job growth. The solid job gains from a year ago were also lifted by strong growth of 6.6% and 3.2% in education & healthcare and government employment, respectively.

The Central Coast’s unemployment rate inched up to 5.1% in October—the highest since November 2021. The jobless rate is expected to climb to an average of 4.9% in 2023—still comfortably below the annual average of 7.6% from 2008-2022—and then rise to 5.3% in 2024, primarily on slower leisure and hospitality and other service sector job growth.

Housing Outlook

Central Coast existing home sales rose 1.9% from a year ago in October, the first year-on-year increase since August 2021. Home sales climbed in three of the four metros within the region with the biggest increases in Santa Cruz (+10.0%) and Santa Barbara (+4.5%). Home sales rose a more modest 0.6% in San Luis Obispo and fell 4.6% in Monterey. Inventory levels remain a big driver of existing home sales activity.

Existing home inventories took a step back in the region with the Unsold Inventory Index edging down to 2.9 months in October, down from 3.0 months in September. The decrease in the number of homes for sale in the region pushed the median home price up a strong 12.0% year-on-year in October, the largest increase since April 2022.

Home price declines were limited to Santa Cruz (-9.8%, the third decrease in a row), while prices surged in Monterey (+29.8%) and Santa Barbara (+22.9%) and climbed a more modest 8.9% in San Luis Obispo. Central Coast home prices are forecast to rise 0.3% this year and another 3.7% in 2024.

Tourism Projected to Remain Robust

Although the number of overnight visitors in the region declined in August—hotel occupancy was down 5.2% from a year ago—the outlook for the all-important Central Coast tourism industry remains relatively promising. According to Tourism Economics, the Central Coast occupancy rate (which is expected to tick higher this year) is forecast to climb to 73.2% in 2024 and 75.0% in 2025. If occupancy reaches those heights, the tourism industry could continue to push regional economic activity higher in the year ahead.

Central Valley

Employment Outlook

Central Valley job growth slowed for three months in a row after reaching 0.5% month-on-month in April, but rebounded in August and accelerated to 0.4% in October. Job creation was particularly solid in manufacturing (+2.9%), construction (+1.5%), education & healthcare (+0.7%) and leisure & hospitality (+0.6%) in October. Jobs declined in information (-0.6%), government (-0.2%), and professional & business services (-0.2%).

The pick-up in job growth in October nudged the year-on-year growth rate up to 1.8% from 1.7%, just above the statewide average of 1.6%. There were above-average gains in five sectors over the past 12 months led by a robust increase in education & healthcare (+5.4%).

Central Valley employment growth is forecast to slow sharply to just 2.1% in 2023, the second-lowest rate of the four main regions of the state. Job growth in 2024 is then expected to weaken further to 0.3% in 2024.

Despite the rebound in job growth over the past few months, the Central Valley unemployment rate rose to 6.0% in October, the highest since December 2021. Historically, this region has higher unemployment rates than the rest of the state because of its reliance on net in-migration and the highly cyclical agricultural and energy sectors to support job growth.

The Central Valley’s jobless rate is forecast to average 5.7% in 2023 and rise to 6.2% in 2024 as employment growth stalls. Despite the expected uptick, the region’s jobless rate should remain well below the long-run average of 9.5% from 2008 to 2022.

Housing Outlook

Central Valley existing home sales were 11.3% lower than a year ago in October, about half of the 22.5% decline in September. The Central Valley’s housing market is largely underperforming all the other major regions of California. Year-ago declines in existing home sales were broad-based across the region, ranging from a modest 2.9% in Bakersfield to a plunge of 28.0% in Modesto.

The Central Valley’s Unsold Inventory Index increased to 2.8 months in October—just above the statewide average of 2.7. Meanwhile, the median days on market climbed to 17 in October from 16 in September. However, it is down significantly from 26 in October 2022.

Despite the inventory improvement, the median home price in the Central Valley climbed 4.0% from a year ago—the fourth consecutive year-on-year increase. The largest increase was in Sacramento (+7.8%).

Home prices are forecast to fall 2.2% in 2023—the first annual drop since 2011—and then rise 1.2% in 2024 as demand rebounds with lower interest rates and a resumption of positive population growth.

High-Speed Rail Lifts Economic Activity

The high-profile high-speed rail project—intended to reduce travel times in California, lower pollution and carbon emissions, alleviate traffic congestion and boost the economies of the Central Valley—is already underway with construction spanning 119 miles across Madera, Fresno, Kings, Tulare and Kern counties. The initial construction has created nearly 9,000 jobs, with 30% of all project work hours to be performed by someone living in an economically distressed area, such as the Central Valley.

The already created jobs, along with those that will be generated from the planned 171-mile extension of the high-speed rail into Merced and Bakersfield, will lift construction and economic activity in a region that has historically underperformed the rest of the state. This is a near-term and longer-term upside risk to the Central Valley’s economic outlook.