Executive Summary

• California’s economy has been seriously lagging the national performance for more than a year now. California’s labor market was much weaker than originally estimated in 2023. Technology sector layoffs, a regional banking crisis, and the writers and actors’ strikes clearly took a toll on the California economy and it may not be completely over with high housing costs, declining population, and looming government budget deficits adding to the gloom. The December year-on-year nonfarm payroll growth rate was revised down from 1.7% to 0.9%, about one-third of the solid 2.6% pace in December 2022. Jobs were unchanged in February amid month-on-month declines in six of 11 job sectors, led by construction and financial activities.

• California’s gross state product (GSP) rose 2.1% in 2023, trailing U.S. GDP growth of 2.5%. However, the underperformance in GSP last year was not quite as severe as it was in the labor market, suggesting a somewhat higher level of productivity growth in the state. California’s job growth last year was ranked dead last among the 50 states, while its moderate GSP growth puts California in 32^nd place in terms of state economic performance last year.

• California job growth is forecast at an anemic 1.0% in 2024, significantly below the long-run average of 2.8% from 1940-2023.

• The state was already facing a large fiscal deficit at the time the 2024/2025 budget was proposed in January, but weaker-than-anticipated revenues since then point to an even more dire outlook. The recently updated revenue projection from the Legislative Analyst’s Office is roughly $24 billion below the governor’s budget, suggesting the budget deficit could balloon to an eye-opening $73 billion at the time of the May revision.

• California’s unemployment rate is climbing much faster than the nation’s, up one and a half percentage points since the August 2022 low to 5.3% in February. California’s unemployment rate is now the highest in the country and has increased nearly four times faster than the national average. The state’s unemployment rate is projected to average around 5.5% over the next two years amid historically weak job growth.

• California home sales are tentatively rebounding after a prolonged drop last year. Existing home sales climbed 1.3% year-on-year in February. Nevertheless, still-elevated mortgage rates, poor affordability, and low existing inventory continue to weigh on the residential market and there is no respite in sight with interest rates projected to remain relatively high this year.

• California home prices have been climbing since July after dropping for eight consecutive months. Home prices increased 9.7% from a year ago in February. California’s home prices are forecast to advance 5.7% this year as demand continues to outpace limited supply and then slow to 2.0% in 2025 amid weak job growth and stabilizing housing starts.

California

Employment Outlook

California’s labor market performance remains shaky and uneven so far this year. While the state added 25,600 net new jobs in January (+0.1% month-on-month), it was revised down from the initial estimate of 58,100. February nonfarm jobs were even worse, largely unchanged from January’s level and the weakest print since July 2023 led by net declines in construction, financial services, and trade, transportation & utilities jobs. Mining & logging, and education & healthcare jobs climbed 0.5% but those two sectors only comprise 18.0% of total employment and were not enough to drive total job growth higher.

California’s labor market is significantly underperforming the national average for more than a year now as the tech layoffs, bank failures, and the writers and actors’ strikes have taken a toll. Downward revisions for 2023 portray a markedly weaker picture of the state’s labor market than originally estimated. Average monthly job growth in 2023 fell sharply to 12,900 from 25,900, and December’s year ago percent change in total nonfarm jobs was revised down to 0.9% from 1.7%. There were net job losses in the first seven months of 2023, with California losing an average of 429 jobs per month instead of the initial estimate of an average gain of 32,500, triggering most of the downward revision in the state’s job creation over the past year. This revised jobs data helps to explain why many Californians are still so pessimistic about the state’s economy.

Over the past year, the information sector, heavily weighed by technology and motion picture and sound recording companies, led the decline with payrolls falling 9.2% from a year ago, the fourteenth straight monthly year-on-year decline. The level of California employment in the information sector in February was still 14.8% below the peak in August 2022. Solid advances in education & healthcare (+5.9%), other services (+3.2%), mining & logging (+2.6%) and government (+2.4%) supported the modest year-on-year gain in California non-farm employment.

California job growth is expected to inch up 1.0% year-on-year in 2024 after slowing sharply to 0.9% last year after the annual benchmark revisions were incorporated. Employment is projected to grow just 1.0% in 2025 amid high housing costs, still-tight monetary policy, a shrinking population and continued net outmigration.

The state’s unemployment rate is rising far faster than the nation, climbing 1.5 percentage points to 5.3% in February from a record-low in August 2022 compared to a much more modest increase of 0.3 percentage points in the U.S. rate to a still-low 3.9% over the same period. California’s unemployment rate is now at its highest level since December 2021, pointing to a rapidly deteriorating labor market.

California’s unemployment rate is forecast to average 5.5% in 2024—up notably from 4.7% last year—and rise to 5.6% in 2025 on modest employment growth and the continued exodus of businesses to lower cost states. The underperformance of California’s job growth suggests the number of unemployed will remain well above the national average for the foreseeable future.

Housing Outlook

Home demand in California remained firm in February despite higher mortgage rates and three straight years of population loss. Existing single-family home sales were at an annualized 290,020, up 12.8% month-on-month. That marks back-to-back double-digit monthly growth for the first time since mid-2020. Nonetheless, the growth rate from a year ago slipped to 1.3% from 6.3% in January on more difficult comparisons.

The 30-year fixed mortgage rate rose 26 basis points to 7.30% in the fourth quarter, further straining statewide affordability. The California Association of Realtors Housing Affordability Index was a historically low 15% in the fourth quarter of 2023, unchanged from the third quarter. This means that just 15% of California households could afford to buy the median-priced home of $833,170 in the fourth quarter.

The statewide existing home inventory shortage persists with so many homeowners unwilling to forsake a low interest rate mortgage for a more expensive one. The Unsold Inventory Index slid to 3.0 months in February at the faster sales pace from 3.2 months in January. The index captures the number of months it would take to sell the supply of existing homes on the market at the current sales pace, with a balanced market equal to five to six months’ of inventory.

The California housing inventory shortage continues to push existing home prices higher despite affordability constraints. The statewide median home price was $806,490 in February, up 2.2% month-on-month and 9.7% higher than a year earlier. Home prices have climbed year-on-year for the past eight months, but the median statewide home price is still nearly 10.0% below the all-time high set in May 2022.

Statewide home prices are projected to rebound 5.7% in 2024 from the modest decline of 1.5% in 2023 and moderate to just 2.0% in 2025 amid increasing existing home inventory, higher unemployment and continued net outmigration.

CA Budget Deficit Expected to Expand

California already faced a large budget deficit of $58 billion in the 2024/25 fiscal year that starts on July 1 at the time the budget was proposed in January, according to the Legislative Analyst’s Office (LAO). However, recent revenue receipts point to further weakness than initially forecast. Specifically, the LAO’s recently updated revenue projection is approximately $24 billion below the governor’s budget, suggesting the budget deficit could be far higher at the time of the May revision.

The actual increase in the state’s budget deficit will hinge on several factors, including formula-driven spending changes, particularly for schools and community colleges. The LAO estimates that a $24 billion decrease in revenues equates to a $15 billion increase in the state budget deficit. This would drive the estimated deficit up to $73 billion based on the updated revenue forecast.

If the budget deficit increases by another $15 billion, the state legislature will have to increase revenue, decrease spending, or withdraw funds from the state Budget Stabilization Account to balance the budget. One possible solution is to reduce one-time or temporary spending that has been authorized but not yet disbursed. This solution is preferred for two reasons: 1) when the spending was adopted it was understood to be a cushion for future budget problems, and 2) by slashing one-time and temporary spending the legislature can save other options to address future budget deficits that could help avoid cuts to ongoing services.

LAO calculates the state has nearly $16 billion in recent one-time and temporary spending that could possibly be withdrawn, thereby avoiding outright spending cuts that would result in another round of downward revisions for the state’s employment, income, and retail sales forecasts.

As of this writing, Governor Gavin Newsom, Senate President pro Tempore Mike McGuire and Speaker of the Assembly Robert Rivas announced an agreement on $17 billion in early actions to reduce the budget deficit. It contains a mix of $3.6 billion in reductions (primarily to one-time funding), $5.2 billion in revenue and borrowing, $5.2 billion in delays and deferrals and $3.4 billion in cost shifts. However, a budget bill needs to be voted on in the Assembly and Senate before it’s adopted.

Bay Area

Employment Outlook

The Bay Area economy has been hobbled by large-scale tech layoffs and a regional banking crisis that crippled the state’s economic performance for more than a year. Employment declined month-on-month one-third of the time last year, including for three consecutive months from June through August. The slowing trend continued this year with a flat month-on-month reading in January and a decrease of 0.1% in February, the first decline since August 2023.

Bay Area employers shed jobs in most sectors in February with the largest percentage decreases in those that are cyclical and interest rate sensitive: construction (-2.9%, the largest decline since April 2020) and information (-0.8%). Jobs also declined sharply in two sectors that are largely discretionary—other services and leisure and hospitality—implying Bay Area consumers are becoming more cautious in their spending amid the gloomy headlines of layoffs among the Bay Area’s prominent employers.

The decline in employment in February pushed the year-on-year growth rate down to flat and lifted the Bay Area unemployment rate to 4.3% in January, up from an expansion low of 2.5% in August 2022. Nevertheless, the Bay Area region still has the lowest jobless rate of all four major regions of the state, with Southern California a distant second with a 5.0% jobless rate.

Bay Area job growth is forecast to moderate to just 0.3% in 2024—the weakest gain since the pandemic began—and then improve to a still-anemic 0.8% in 2025. The sharp slowdown in job growth will be driven in part by continued weakness in technology and finance jobs and still-astronomical home prices which will prompt some residents to relocate to lower cost metro areas.

Housing Outlook

The Bay Area housing market is rebounding after 28 straight months of year-on-year sales declines. Existing home sales climbed 14.9% from a year ago in February—the strongest increase since June 2021. While the long-awaited rebound in existing home sales is encouraging, it is partially because of easy comparisons with home sales plummeting 33.7% and 28.7% respectively in January and February 2023.

Home sales rose from a year earlier in most Bay Area counties in February, led by San Francisco (+41.7%), Napa (+36.8%), Santa Clara (+32.8%) and San Mateo (+22.1%). Sales increased more modestly in Contra Costa, Alameda and Solano counties and declined in Sonoma and Marin.

Existing home inventory for sale is moving in the wrong direction for price stability. The Unsold Inventory Index fell to 2.1 months in February from 2.3 months in January and 2.5 months a year ago. As a result, the median days on market plunged to just 14 in January and remained at a low 20 days in February 2023. Bay Area median home prices have jumped 22.6% from a year ago. Still, the median price is 16.2% below the peak of $1.5 million achieved in April 2022 just after the Fed started hiking interest rates.

Bay Area home prices are projected to rebound 5.1% this year from a 7.1% decline in 2023, the largest decrease since the Great Recession. Home price growth is forecast to moderate to just 1.1% in 2025 amid growing inventory for sale, poor affordability, and weaker demand with unemployment increasing.

Bay Area Tech Layoffs Widen

Tech companies have already disclosed intentions to cut more than 3,900 jobs in the Bay Area so far in 2024 according to the California Development Department, pointing to yet another challenging year for this critical Bay Area industry. Salesforce, Snap, Maxar Space and Activision Blizzard are among the high-profile companies that have announced plans to slash jobs.

The layoffs thus far this year come on the heels of 21,600 tech job cuts in 2023 that was more than double the 10,300 layoffs in 2022. At the current pace, tech companies would slash more than 35,000 jobs in the Bay Area this year. Partly due to the persistent tech layoffs, information employment has dropped for 18 straight months and is 12.9% below the June 2022 peak.

Although the Bay Area’s unemployment rate should remain below other major regions of the state, the continued elimination of high-paying tech jobs will lead to slower employment and income growth, limiting consumer spending. Moreover, the hike in the state’s minimum wage for fast food workers on April 1 could prompt retail, food service, and personal service companies to slash workers in the face of increasing labor costs in an already high-cost region, exacerbating the fallout from the tech industry restructuring.

Southern California

Employment Outlook

Southern California’s job growth was unchanged in February, a slight improvement from the dip of 0.1% in January. There were above-average gains in information (+1.2% and the largest jump since June 2022), education & healthcare (+0.7%) and government (+0.7%). The biggest percentage declines were in mining & logging, construction, and leisure & hospitality.

Job growth from a year ago was 0.8% in February, just below the statewide average of 1.0% though well below the national average of 2.0%. Southern California’s job growth over the past year was led by education & healthcare (+5.9%), other services (+3.2%) and government (+2.7%). Leisure & hospitality job growth slowed to just 1.5%, the weakest pace since March 2021.

Information employment, which includes the large Southern California motion picture and sound recording industry that just went through the writer and actors strike, plunged 13.6% and has declined at a double-digit pace for 11 consecutive months, putting it nearly 20% below its March 2022 level. Interestingly, trade, transportation & utilities employment dipped 0.5% year-on-year despite robust cargo trade growth at the ports of Long Beach and Los Angeles in February. Job growth is expected to moderate to 1.0% this year, around half of last year’s 2.1% pace, and slump to just 0.9% in 2024, the slowest growth since 2020.

The slump in job growth drove Southern California’s unemployment rate up to 5.0% in January, the highest level since January 2022 and a touch below the statewide average of 5.2%. Southern California’s unemployment rate is projected to average 5.3% in 2024—up almost a full point from 2023—and then inch up to 5.4% next year, the highest since 2021.

Housing Outlook

The home sales downturn in Southern California ended in January with existing home sales rising 2.8% year-on-year after falling for two and a half years. Sales gains from a year ago accelerated to 6.8% in February, the strongest annual gain since June 2021. Home sales increased in four of the five major counties in Southern California with particularly strong growth of 14.2% and 12.4% respectively in Ventura and Orange counties. Home sales slipped 1.8% in San Bernardino after a sharp 15.6% increase in January.

The long-awaited rebound in home sales pushed the median home price up 11.3% year-on-year in February, the eighth consecutive month of year-on-year gains. A shortage of home inventory for sale—the Unsold Inventory Index was 3.1 months in February, down from 3.2 months in January and 3.4 months one year ago—is contributing to the persistent recovery in Southern California’s home prices.

Home price growth is broad-based with double-digit increases in Orange (+16.5%), Los Angeles (+12.4%) and Ventura (+10.6%) counties. Home prices advanced a more modest 6.9% in the relatively more affordable Riverside and 2.3% in San Bernardino. Home prices in Southern California are forecast to increase 4.0% this year and then slow to just 2.0% in 2025 on improved existing inventory and slower job creation.

Regional Port Activity Surges in February

Container trade at the two large Southern California ports of Long Beach and Los Angeles continues to rebound from the sharp declines in 2023. Two-way trade surged 41.2% year-on-year in February, the sixth consecutive monthly year-on-year increase after 13 successive declines. The growth was primarily fueled by a huge 46.4% jump in imports from a year earlier amid strong U.S. consumer demand, although easy comparisons to last year also played a role.

We are expecting further increases in two-way port trade over the next two years on steady gains in consumer spending with a gradually rising jobless rate remaining historically low. Moreover, the tragic collapse of the Francis Scott Key bridge in Baltimore and subsequent closure of the port could shift even more marine traffic to West Coast ports with many other East Coast Ports unable to accommodate the large container ships needed to transport cars. While unlikely to occur immediately, the diversion of cargo traffic is an upside risk to our forecast, increasing activity at the ports and boosting Southern California’s economic activity.

Central Coast

Employment Outlook

The Central Coast’s economy is beginning to sputter under the weight of higher interest rates. Total nonfarm employment slid 0.1% month-on-month in February after a flat reading in January. The modest jobs decline was driven by interest rate sensitive sectors, including construction (-2.0%, the second consecutive monthly decline) and leisure & hospitality (-1.4%). Those two sectors are over 19.0% of total employment on the Central Coast with leisure & hospitality alone accounting for 16.2% of employment.

Job growth was still strong in information and professional & business services with gains of 1.9% and 1.2% respectively in February, while modest growth occurred in education & healthcare, government, and financial activities.

The dip in employment to start the year pushed the year-on-year growth rate down to 0.9% in February. Employment declined in five of 11 sectors with particularly sharp decreases in information (-4.1%, the thirteenth consecutive decline) and trade, transportation & utilities (-1.6%). There were strong job gains from a year ago in education & healthcare (+4.9%), construction (+2.9%) and financial activities (+2.7%).

The slowdown in Central Coast job growth pushed the region’s unemployment rate up to 5.6%—the highest since October 2021. The jobless rate is forecast to increase to an average of 6.0% in 2024—still well below the long-run average of 7.5% from 2008-2023—and then drop to 5.9% in 2025 amid declining interest rates.

Housing Outlook

The Central Coast housing market is rebounding. Existing home sales surged 18.7% year-on-year in February after rising 5.2% in January, the first consecutive year-on-year increases since May and June 2021. Sales rose in three of four major metro areas in the region with particularly strong increases in San Luis Obispo (+36.0%) and Santa Barbara (+23.4%). Sales climbed a more modest 12.3% in Santa Cruz and dropped 2.0% in Monterey, the third consecutive month of year-on-year decline.

Existing home inventories continue to be limited in the Central Coast. The Unsold Inventory Index fell to 3.4 months in February, down from 3.6 months in January and 3.5 one year ago. The dip in home inventory in the region propelled the median Central Coast home price up 12.0% year-on-year in February, more than three times the 3.5% increase in January.

Home prices rose in all metro areas from a year ago, with double-digit increases in Santa Barbara (+13.5%), San Luis Obispo (+13.2%) and Monterey (+10.9%). Prices climbed a more modest 2.6% in Monterey. Central Coast home price growth is projected to improve to 6.7% this year from 1.0% in 2023, slowing to 3.7% in 2025 amid increasing existing inventory and slowing employment growth.

Tourism Industry Off to a Slow Start

The tourism industry is vital to the Central Coast economy. Consumer services employment—the sum of retail trade and leisure & hospitality—was 26.6% of total nonfarm employment in 2023 compared to just 20.6% in the U.S. and 20.3% in California. Unfortunately, the tourism industry is off to a sluggish start this year with revenue per available room and hotel occupancy down 4.4% and 3.9% year-to-date through February.

Despite the disappointing start, the 2024 tourism outlook remains relatively bright. According to Tourism Economics, the regional hotel occupancy rate, which reached 97.3% of 2019’s rate, is expected to climb to 102.8% in 2024 and 105.3% in 2025. If occupancy hits those targets, the Central Coast tourism sector should continue to drive the region’s economic growth over the next two years.

Central Valley

Employment Outlook

The Central Valley economy is decelerating. Job growth in the region was unchanged in February after slipping 0.1% month-on-month in January. Employment increased in four major sectors with moderate gains in professional & business services (+0.8%), government (+0.8%) and education & healthcare services (+0.7%). Sharp payroll decreases occurred in information (-1.9%), construction (-1.5%) and leisure & hospitality (-1.1%) keeping overall payrolls steady.

From a year ago, Central Valley job growth slowed to a still-respectable 2.3%. The region’s job growth remains well above the statewide average of just 1.0%. Notable above average job gains over the past year have been seen in education & healthcare (+7.6%), government (+4.1%) and other services (+3.0%). Conversely, information employment plunged 10.9% and has fallen year-on-year for the last 14 months.

Central Valley employment growth is forecast to moderate to 1.4% in 2023, but still remain the strongest of the four main California regions. Job growth in 2025 is projected to slow to 1.1%, the weakest since 2011 excluding the Covid-generated decline of 4.4% in 2020.

The Central Valley unemployment rate has been rising since September 2023 and hit 6.4% in February, the highest since November 2021. Historically, this region of the state has higher jobless rates than other regions because of its dependence on agricultural migration and the highly cyclical energy and agricultural sectors.

The region’s unemployment rate is expected to average 6.9% in 2024 and inch up to 7.0% in 2025 amid slower job growth. Despite the projected increase, the region’s jobless rate should remain well-below its long-run average of 9.2% from 2008 to 2023.

Housing Outlook

Central Valley existing home sales edged up 0.8% from a year ago in February. The Central Valley’s housing market continues to underperform all the other major regions of the state. Existing home sales from a year earlier were mixed with sales rising in Bakersfield and Sacramento (the largest metro in the region) and declining in Fresno, Modesto and Stockton.

The Central Valley’s Unsold Inventory Index slid to 2.9 months in February from 3.1 months in January, and the median number of days on the market fell sharply to 21 from 30 over the same time period and is down from 35 in February 2023. Despite the worsening existing home inventory situation, median home price growth from a year ago slipped to 6.3% from 6.8% in January. Nonetheless, home prices have risen for eight consecutive months after declining for eight months in a row. Home price gains were widespread in the Central Valley, ranging from just 2.9% in Stockton to 9.1% in Fresno.

Central Valley home prices are forecast to advance 5.0% in 2024 and then slow to 3.4% next year.

Water Challenges for Agriculture Loom

The San Joaquin Valley produces more than half of the state’s agricultural output and is critical to the nation’s food supply. Fresno, Kern and Tulare counties are the nation’s top three agricultural counties measured by revenues. Furthermore, farming and related industries play an important role in the valley’s economy, responsible for 14% of GDP, 17% of jobs and 19% of revenues. Thus, ensuring the economic viability of agriculture is critical for the region’s future.

Yet an analysis by the Public Policy Institute of California estimates that by 2040 average annual water supplies could fall by 20%, mainly because of the transition to groundwater sustainability required under the Sustainable Groundwater Management Act. In this dire scenario, nearly 900,000 acres of farmland would be idle, almost 50,000 jobs could be lost, and economic activity could decline by 2.3%. However, adaptations in water trading and investments in new supplies—along with growth in agricultural productivity—could ultimately help soften the economic fallout on the region.