California Economic Outlook – June 2018
California’s job creation continues to outperform the nation, but job growth has slowed as more metro areas exceed full employment.
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.