California Economic Outlook – June 2018

Scott Anderson
Posted by Scott Anderson
Chief Economist

California’s job creation continues to outperform the nation, but job growth has slowed as more metro areas exceed full employment.

Side view of tall concrete bridge spanning two peaks along the coastline of California at sunset.Below is a top-level summary of the report, followed by a link to the full report.

  • Annual job growth was 2.1% in California in 2017, positive for the seventh year in a row but the slowest pace since 2011. Job growth is forecast to decelerate to 1.8% in 2018 and 1.2% in 2019 as the economy overshoots full employment and rising living costs and tighter financial conditions slow California’s job growth engine.
  • California’s unemployment rate hit an all-time low of 4.2% in April. The rate is projected to hold at an average of 4.2% this year, but begin to rise in 2019 and 2020.
  • The Bay Area had the tightest labor market with a 3.4% unemployment rate last year, followed by Southern California (4.5%). Unemployment rates in the Central Coast (5.4%) and the Central Valley (6.6%) remain relatively higher, but have come down sharply over the past 12 months.
  • The Federal Tax Cut and Jobs Act (TCJA) is expected to shave over $33 billion from the tax liability of California residents, providing at least a temporary boost to consumer and business spending. This is equal to approximately 1.6% of California after-tax income.
  • However, there are provisions unfavorable to California under the TCJA, such as the state and local tax deductions being capped at $10,000 and the maximum mortgage balance on which taxpayers can deduct mortgage interest being limited to $750,000. Therefore, the boost to California after-tax incomes will prove smaller than other low-tax states like Texas and the nation as a whole. These unfavorable provisions of the TCJA could also weigh on the California housing market over time.
  • Even so, California home prices are expected to rise a sturdy 8.5% in 2018, but will moderate from that robust pace over the next two years.· Bay Area home prices rose by over 12% last year and are forecast to increase by a similar pace this year (+10.9%). Beyond 2018, however, slowing job growth, eroding affordability, rising mortgage rates, and the lagged impact of tax reform will cause a noticeable slowdown in home price growth.
  • Out-migration in California is expected to be more pronounced in the years ahead and will weigh on California’s economic growth rate. Out-migration is expected to be most visible in the Southern California region. Net-migration is projected to turn modestly negative in the Bay Area, Central Coast, and Central Valley regions, too, but will be less of a drag on economic growth in those regions.

Read the full California Economic Outlook report.

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