State Monitor
August 12, 2024 | 15:25
California Economic Outlook — August 2024
Executive Summary
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California |
Employment Outlook |
Cautious hiring persists in California. Average monthly employment growth is a moderate 0.1% year-to-date, unchanged from 2023. Moreover, job growth decelerated to 0.1% month-on-month in June following May's 0.2% advance. There were above-average gains in just four sectors, led by information (0.8%, the strongest since May 2022), trade, transportation & utilities (0.3%) and financial activities (0.3%). Employers shed net workers in manufacturing, other services, and construction. | Despite the deceleration in June, job growth rose 1.3% y/y, the strongest since February 2023. Nonetheless, it has remained in a tight range of 1.0%-to-1.3% thus far this year. Education & healthcare led the way with job growth that was nearly four times the average, although there were also above-average advances in other services (which includes equipment and machinery repair and laundry services) and government. Those two sectors comprise over 18% of total employment, keeping overall jobs rising, despite another large decline in information employment, which has fallen year-on-year for 18 straight months amid persistent labor market weakness in California’s technology sector. Statewide job growth should edge up 1.2% in 2024 after moderating sharply to 0.9% last year—the weakest pace since 2011 excluding the Covid year of 2020. Employment is projected to increase 1.0% in 2025 amid still-restrictive monetary policy, declining population and continued net out-migration. The California unemployment rate increased to 5.3% in February—the highest since December 2021—and remained at that level through April before sliding to 5.2% in May and June. In spite of the modest drop, California was tied with Nevada for the second highest jobless rate in the U.S. (just below D.C.’s 5.4%), pointing to a looser labor market than the nation as a whole. |
California’s jobless rate is forecast to average 5.4% in 2024—the highest since 2016 except for 2020—and climb to 5.6% in 2025 amid sluggish job growth and the continued relocation of jobs and businesses to lower-cost states with more business-friendly policies. Housing OutlookCalifornia housing market activity remains under pressure from elevated mortgage rates. Existing home sales were an annualized 270,200 in June, 2.7% lower than a year ago. California existing home sales have been below 300,000 for 21 straight months, underscoring the dampening impact of interest rate hikes. | However, a dip in 30-year mortgage rates in Q1 did modestly improve statewide affordability at the start of the year. The California Association of Realtors Housing Affordability Index was 17% in the first quarter of 2024, up from 15% in the fourth quarter. While a modest step in the right direction, that means that just 17% of California households could afford to buy the median-priced home of $814,280 in the state in the first quarter. Furthermore, the index is well-below the long run average of 32% from 2006-2023, pointing to on-going affordability challenges. Another bright spot, California’s home inventory shortage appears to be improving. The Unsold Inventory Index was 3.0 months in June, up from 2.6 months in May and 2.2 months a year earlier. Despite the improvement, inventories remain well shy of the long-run average of 5.7 months from 1990-2023 and nowhere near the range of 5-to-6 months characteristic of a balanced housing market. California’s median home price took a step back in June after hitting all-time highs in the two previous months. The median home price was $900,720, down 0.8% month-on-month but 7.5% higher than a year ago. After falling for eight consecutive months from November 2022 to June 2023, home prices have climbed year-on-year for the past 12 months. |
The upward pressure on home prices will persist until enough inventory comes on the market and it becomes more balanced. Unfortunately, that is not expected to occur until next year. California median home prices are forecast to rebound 5.7% in 2024 from the modest dip of 1.7% in 2023 and then slow to 2.0% in 2025 amid rising inventory, higher unemployment and continued net outmigration. CA Tourism Spending Hits Record HighAccording to data prepared by Dean Runyon Associates and released by Visit California, travel spending statewide hit a record-high of $150.4 billion last year, surpassing the previous peak of $144.9 billion in 2019. That is up 5.6% from 2022 and 3.9% higher than 2019. | There is also the economic impact stemming from spending on travel that is based on “statewide visitor trips,” which are defined as trips taken by individuals who stay overnight or travel more than 50 miles one way on a non-routine trip. This definition is derived from the California Tourism Marketing Act. In 2023, the travel industry:
Travel spending in California is projected to grow 4.2% in 2024 to a second straight all-time high according to Tourism Economics, adding an additional $6.3 billion in direct tourism spending to the state economy. While domestic spending is expected to be weak at just 0.3%, international travel continues to rebound and is forecast to surge 23.3% following rapid growth of 28.2% in 2023. Solid gains in travel spending over the next two years—6.7% growth is projected in 2025 following 4.2% growth this year—will add much needed support to California’s economy. |
Bay Area |
Employment Outlook |
The Bay Area economy remains lackluster. Job growth was unchanged in June after rising 0.2% month-on-month in May. Employers added jobs in six of 11 sectors in June, led by solid gains of 0.3% in trade, transportation & utilities, construction, and information. There were also above-average gains in education & healthcare, other services, and professional & business services, while employers cut payrolls in leisure & hospitality (-0.4%) manufacturing (-0.2%), government (-0.2%) and financial activities (-0.1%). | Despite the flat reading in June, the job growth rate from a year earlier improved to 0.6%, the quickest pace since March 2023. While the unemployment rate jumped from 2.7% in August 2022 to 4.4% in May, it dipped to 4.2% in June, and is still the lowest unemployment rate of all four major regions of the state. Regional job growth is forecast to accelerate to 0.5% this year—the second weakest increase since 2010 excluding the pandemic year—and then improve to a still-moderate 0.9% in 2025. Modest job growth will be propelled in part by continued weakness in technology and construction as commercial real estate and home building demand remains under pressure. |
Housing OutlookThe housing market recovery was brief, as it lasted for just two months this year. Existing home sales slipped 1.1% year-on-year in June after climbing 4.3% in May and a sizzling 23.1% in April. The pattern so far in 2024 is two steps forward (home sales rise) and one step back (home sales drop). Home sales increased year-on-year in just two Bay Area counties in June: Alameda and Santa Clara. In contrast, large declines were seen in Napa, Marin, and San Mateo Counties. The latter two are the highest-priced metro areas in the region with median prices of $1.8 million and $2.1 million respectively. The inventory shortage continues to vex the Bay Area housing market. The Unsold Inventory Index was a historically low 2.0 months in June, up from 1.9 months in May and 1.6 one year ago. The median days on market rose to 14 from 13 one year earlier and pushed year-on-year home price growth down to 5.8%, the slowest pace since November 2023. Even so, the 11-month stretch of home price appreciation bumped the median home price in June to within 6.7% of the all-time high of $1.5 million in April 2022. Bay Area home prices are forecast to rebound 8.3% this year from a 6.9% decline in 2023. Home price growth is projected to moderate to 4.5% in 2025 on rising housing starts and increasing unemployment. | Office Vacancy Rate Hits Record HighThe San Francisco office vacancy rate hit an all-time high of 34.5% in the second quarter of 2024, up from 33.2% in the first quarter, 28.0% one year ago and just 5.0% before the pandemic began. The average asking rent fell to a 9-year low of $68.27 per square foot in the second quarter. The San Francisco office market is challenged on two fronts: a relative inability of companies to entice workers to return to the office and a slowdown in the tech industry that’s resulted in a slew of layoffs. Indeed, tech companies have jettisoned 44,900 employees in the region since the beginning of 2022, according to Layoffs.fyi. San Francisco is benefiting from the explosion in artificial intelligence, with OpenAI, Anthropic and Scale AI signing big leases in the past year, and some of the city’s top employers, including Salesforce, Visa and Wells Fargo, bringing back employees to offices part time. While these two developments will help the office vacancy rate recover eventually, it could drift somewhat higher through the remainder of the year before stabilizing in late 2024 or early 2025. |
Southern California |
Employment Outlook |
The Southern California economy gained some momentum in June. Employment was up 0.3% month-on-month, the fastest pace since December 2023. There were above-average advances in four sectors, including a 3.9% monthly surge in information employment, the largest gain since August 2021. The other three sectors with growth above 0.3% were professional & business services, trade, transportation & utilities and education & healthcare. On the other hand, employment fell 0.5% in leisure & hospitality and other services. | The pick-up in employment growth pushed the year-on-year growth rate up to 1.2% in June—the strongest pace since February 2023. Advances over the past year were led by education and healthcare, government and other services. Employment in the cyclical manufacturing sector contracted year-on-year for the fifteenth consecutive month, while information shed jobs from a year ago for the eighteenth month in a row, keeping information employment around 17% below the July 2022 peak. Trade, transportation and utilities employment rose 0.5%—the first year-on-year increase since January 2023—as two-way maritime trade surged 16.8% year-on-year at the region’s two large ports. Southern California employment is expected to increase 1.0% this year—up from 0.8% in 2023—and increase another 0.9% in 2024 amid near-zero population growth and net out-migration. In another sign that Southern California’s labor market is stabilizing, the unemployment rate fell to 4.9% in June after holding at 5.0% for five successive months. Southern California’s jobless rate is projected to average 5.1% in 2024—up sharply from last year—and then edge up to 5.3% in 2025, the highest since 2021. |
Housing OutlookThe Southern California housing market went into reverse in May and the decline accelerated sharply in June with home sales falling 13.5% year-on-year, the largest drop since September 2023. Home sales saw double-digit declines in each county except for Ventura. The drop in home sales in June pushed the year-ago price gain down to 7.7% from 9.8% in May. Furthermore, the shortage of homes for sale is beginning to ease. The Unsold Inventory Index was 3.2 months in June, up from 2.8 in May and 2.2 a year ago, putting additional downward pressure on home price growth. Home price growth in Southern California was still broad-based with strong increases in Orange (+15.1%) and San Bernardino (+11.2%). Home prices rose a more moderate 6.8% in Los Angeles, 4.0% in Ventura and 2.5% in Riverside Counties. Home price growth in the region is projected to accelerate to 7.5% this year—up sharply from 0.3% in 2023—and then drop to just 3.2% in 2025 on improved inventory and rising joblessness. | Long Beach Port Activity Surges in JuneThe Port of Long Beach experienced its busiest June on record, propelled by resilient consumer spending, possible tariff increases and ongoing labor contract negotiations at seaports on the East and Gulf coasts. Total two-way container traffic was 842,446 twenty-foot equivalent units (TEUs) in June, up a sizzling 41.1% from a year ago and surpassing the previous record of 835,412 in June 2022. Loaded inbound containers spiked 53.0%—the fastest pace since March 2021—while loaded outbound containers rose a much more modest 4.0%, the first increase since May 2023. Consumer spending growth is forecast to cool in the second half of 2024 and remain moderate in 2025. This will result in more modest growth in inbound containers and a deceleration in port activity. However, the lack of a resolution to the ongoing labor contract negotiations could lead to more activity being directed to the Port of Long Beach, which already moves about 20% of loaded containers through U.S. ports. |
Central Coast |
Employment Outlook |
The Central Coast’s economy is softening under the weight of tight monetary policy. Job growth month-on-month fell to 0.1% in June, in line with the 2024 average. The moderate gain was partly driven by above-average growth in education & healthcare (+1.6%) and information (+2.6%). Those two sectors comprise over 18% of total employment with education & healthcare alone accounting for 17%. Employment has fallen in four major sectors led by manufacturing (-1.2%) and leisure and hospitality (-0.6%). Jobs declined more modestly in professional & business services and trade, transportation & utilities. | The slowdown in June job growth pushed the year-ago growth rate down to 0.8%. There were year-on-year job gains in over half of the sectors, led by education & healthcare and professional & business service, while the biggest job declines came in trade, transportation & utilities, manufacturing, and information. The Central Coast unemployment rate remained at 5.3% for the third straight month. The region’s jobless rate is forecast to climb to an average of 5.5% in 2024—still well below the long-run average of 7.5% from 2008-2023—and then increase to 5.8% in 2025 on slowing job growth. |
Housing OutlookThe Central Coast housing market recovery hit a roadblock in June. Existing home sales fell 9.7% year-on-year, the first decrease in six months and the largest decline since November 2023. Sales were mixed with large declines of 21.0% and 25.3% respectively in Monterey and Santa Cruz Counties. Home sales increased modestly in Santa Barbara (+1.2%) and San Luis Obispo Counties (3.3% following a sharp drop of 21.4% in May). Existing home inventories are rising in the Central Coast but remain historically low. The Unsold Inventory Index was 3.5 months in June, a sizable increase from 2.5 months in June 2023. Despite the increase in inventory for sale, the median home price climbed 8.9% year-on-year, up sharply from 5.9% in May and the tenth straight annual increase. Home prices climbed in all four metro areas in the Central Coast, with double-digit increases in Santa Barbara, Santa Cruz, and Monterey Counties. Prices rose much more moderately in San Luis Obispo. Regional home price growth is projected to rebound to 8.0% this year after dipping 0.2% in 2023, and then slow to 3.5% in 2025 amid rising inventory and weaker job growth. | Economic Impact of the Ag SectorThe region’s geography and climate afford idyllic conditions for the production of crops such as wine grapes, berries and cattle. The counties of San Luis Obispo and Santa Barbara—which represent about half of the Central Coast’s population—reported record crop values in 2022 (the most recent year of available data), with a combined total of $3 billion in value. Just under one-half of that amount was attributable to two crops: strawberries and wine grapes. The agriculture sector is a significant part of the Central Coast economy. Goods and services produced by agriculture and Agtech businesses contributed $4.42 billion or approximately 8.5% of gross regional product in 2022. Lightcast—a leader in labor market analysis—projects an increase of 6,651 jobs in the agriculture sector through 2027. Moreover, an impact analysis conducted by Lightcast identified an employment multiplier of about 1.89 for the agriculture sector, meaning that every agricultural job results in nearly one new additional job in the region. Based on that scenario, growth in the sector could result in a total of more than 12,500 additional jobs, $749 million in earnings and $118 million in tax revenues, after accounting for the sector’s supply chain and household spending impacts. |
Central Valley |
Employment Outlook |
The Central Valley labor market is cooling. Year-to-date job growth has averaged 0.1% this year, down from 0.2% in 2023. Employment rose 0.2% in June following solid growth of 0.3% in May. Employment increased in six major sectors, with notably strong gains in education & healthcare (0.8%), other services (0.7%) and construction (0.6%), while the biggest declines were in leisure & hospitality (-0.9%), professional & business services (-0.4%) and financial activities (-0.2%). | The slowdown in job growth drove the year-on-year growth rate down to 2.2% from 2.3%, but it remains notably above the statewide average of 1.3%. There were above average gains in just two sectors from a year ago: education & healthcare and government. These two sectors are over 40% of total employment and supported the strong annual gain. Conversely, information employment plunged 10.4%, the third straight double-digit year-on-year decline. Central Valley information employment is nearly 60% below the January 2002 peak. Central Valley employment growth is forecast to firm to 2.0% in 2024, the fastest pace of the four main regions of the state. Job growth next year is forecast to slow to 1.3%. The Central Valley unemployment rate increased to 6.8% in February—the highest since October 2021—and remained there for three consecutive months. However, the solid rebound in job growth in May drove the jobless rate down to 6.4% and it held there in June. The region’s unemployment rate is expected to average 6.8% in 2024 and inch up to 7.0% in 2025 amid slower job growth. Despite the increase, the Central Valley jobless rate should remain significantly below the long-run average of 9.3% from 2008 to 2023. |
Housing OutlookThe Central Valley’s existing home sales slid 5.5% from a year ago in June after a flat reading in May. Existing home sales from a year ago were mixed with sales rising in Modesto, Bakersfield, and Stockton, and falling in Fresno and Sacramento (the largest metro in the region). The Central Valley’s housing market continues to rebalance. The Unsold Inventory Index rose to 2.8 months in June from 2.2 a year earlier, and the median number of days on the market climbed to 17 from 13 over the same period. Despite the improving inventory situation, the median home price gain accelerated to 4.8% in June from 4.6% in May. Home price gains were mixed, ranging from -1.6% in Bakersfield to 7.6% in Modesto. | Central Valley home prices are forecast to advance 4.5% in 2024 and then slow to 3.4% next year as demand softens with decelerating job growth and inventory build. High-Speed Rail Economic ImpactFrom July 2006 through June 2023, the California High-Speed Rail Authority invested just over $11 billion in designing and constructing the nation’s first high-speed rail system. This big investment created jobs and generated economic activity in various ways in the Central Valley. High-speed rail contractors employ workers and spend money at other businesses for goods and services. Furthermore, workers spend what they earn throughout the economy. These direct and indirect impacts generate economic activity by injecting money into local/regional economies. Overall, this investment supported 92,000 job-years of employment—a job-year is defined as one year of work for one person, for example a new construction job that lasts five years is five job-years—and generated $18 billion in total economic activity statewide, including $13 billion or about 72% of the total in the Central Valley. The investment also created $7 billion in labor income, which is all forms of employment income stemming from this activity, including employee compensation and business income. |