California Economic Outlook
However, California’s job growth has managed to accelerate since March – while U.S. job growth has continued to slow.
An unexpected resurgence of construction and health care jobs has helped bolster the state’s job gains this year. Consequently, our forecast for California nonfarm payroll growth has been revised up to 1.6% from 1.4% for 2019.
California’s job growth is still expected to slow to 1.0% and 0.4% in 2020 and 2021, as slowing U.S. and global growth, and poor housing affordability take a larger toll on the state’s economy.
Gains from a year ago remain solid for most sectors, with the strongest growth in construction (4.0%), education & health services (3.3%), and leisure & hospitality services (2.5%). Construction payroll growth has accelerated sharply this year, averaging 3.8% from a year ago over the past eight months – up sharply from a 0.1% pace through February. Lower financing costs and a strong labor market are encouraging homebuilders to quickly construct new homes in an effort to ease the inventory shortages that have been afflicting the residential housing market in California for an extended period of time.Construction Job Growth Leading the Way
The labor market expansion in California hit a record high of 116 months in October. Since the job expansion began in February 2010, the state has added nearly 3.4 million jobs or about 15% of the nation’s 22.2 million job gain over the same period. However, annual job growth in California has slowed each year since peaking at 3.0% in 2015. The moderation is projected to continue through 2021 with the growth of 1.6% this year, 1.0% next year, and just 0.4% in 2021. Weaker U.S. and global economies, slowing labor force growth, continued U.S.-China trade tensions, high housing and other costs, and accelerating out-migration will conspire to limit California’s job growth over the near-term.
California’s unemployment rate increased earlier this year after stabilizing at 4.1% for six months from July through December 2018. However, annual labor force growth has slowed since peaking at 1.6% year-on-year in February, helping to drive down the California unemployment rate to an all-time low of 3.9% in October. Despite the modest decline this year, California’s unemployment rate was still higher than the U.S. rate of 3.6%.
A slowdown in job growth is forecast over the next two years, pushing the unemployment rate up from 4.2% in 2019 to 4.3% in 2020 and 4.8% in 2021. The gradual increases should keep the California unemployment rate above the U.S. average through 2021.Housing Outlook
The California housing market continued to respond favorably to low interest rates in October. Existing home sales were an annualized 404,240, up 0.1% from September and 1.9% higher than a year ago.
The Federal Reserve’s pivot and rate cuts this year have clearly helped stabilize the California housing market.
Home sales on a year-on-year basis have risen for four months in a row after falling for 14 consecutive months from May 2018 to June 2019. Home sales, however, are still down 2.6% year-to-date through October.
Notwithstanding the modest improvement in existing home sales over the past four months, shrinking inventory likely limited growth.
The number of active listings dropped 18.0% from a year ago in October, the biggest decline since May 2013. Moreover, the number of active listing has declined for four consecutive months after rising for 15 months in a row from April 2018 to June 2019.
The inventory shortage is causing a disparity between supply and demand and supporting higher home prices. The median home price was $605,280 in October, down marginally from September but up 6.0% from a year earlier. This is the strongest growth since July 2018 and the median home price has been above $600,000 for seven straight months.
The demand for housing is expected to diminish over the next two-year forecast horizon due primarily to a slowdown in California’s job growth, weaker U.S. and global economies, and quickening out-migration. High housing costs in California are a growing impediment for job seekers and employers alike. As a result, housing starts are expected to decline 13.5% this year and 2.5% in 2020 before rising 8.0% in 2021. Furthermore, home price growth is projected to decelerate to around 2.0% in 2020 before rebounding slightly to 3.0% in 2021.California Wildfires: a Downside Risk to Growth
The 2019 California wildfire season had been relatively quiet through mid-September relative to previous years. In late October, however, the Kincade Fire became the largest fire of the year, burning 77,758 acres, destroying 374 structures, and forcing more than 180,000 residents out of their homes in Sonoma County.
According to CalFire, there have been 6,190 fires so far this year that have burned 198,392 acres and destroyed 732 structures. For comparison, in 2018 about 7,500 fires burned 1,670,000 acres and destroyed over 23,000 structures. This was the most destructive wildfire season on record.
In addition to the economic fallout from the fires – including damage to homes and businesses, job and wage losses, farm and crop losses, auxiliary business losses, and school closures – Pacific Gas & Electric and other utilities preemptively shut power off several times for more than 2 million residents due to the perceived risk of fires.
Bank of the West Economics estimates that the combined impact of the California wildfires and blackouts this year could be as high as $5.4 billion. That means the state’s rate of economic growth in 2019 could be reduced to around 2.3% on par with the U.S. GDP growth rate. If so, this will be the first time since 2011 that the state’s GDP growth has not exceeded the nation.
For a detailed outlook on California’s regions, click here.