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California Economic Outlook Report- April 2022

Scott Anderson
Chief Economist
Bank of the West
  • California's job growth averaged a sizzling 6.4% from a year ago in March and has easily exceed the U.S. average job growth over the last four quarters. Despite sustained rapid and robust job growth over the past year, the state's nonfarm employment is still 1.7% below its February 2020 peak, compared to 1.0% for the nation as a whole.
  • California job growth is projected to accelerate to 4.6% this year following a strong 3.2% rebound in 2021, but then slow to 1.8% in 2023. The acceleration is being propelled by services businesses that are nearly operating at full capacity despite challenging labor shortages. Moreover, the state's labor market recovery has broadened to other sectors as the expansion picks up steam.
  • California is also experiencing a worsening demographic challenge that could negatively impact future long-term growth. According to the Census Bureau, California's population fell 0.7% from July 1, 2020 to July 1, 2021. This is the first annual decline in data that begins in 1900. If population continues to contract or just stagnates, economic activity will slow and sales tax revenue, property taxes and fee revenue will suffer, pressuring government budgets.
  • California's jobless rate fell to a pandemic-low of 4.9% in March. Despite declining sharply from the peak of 16.1% in May 2020, California's unemployment rate is still far above the pre-pandemic level. California tied for the fourth highest jobless rate of all states in March. The state's unemployment rate is expected to decline to around 4.6% by the end of the year, but average 4.8% in 2023 well above California's 4.1% pre-pandemic jobless rate.
  • The housing market rebound in California than began in the second half of 2020 is fading as existing home sales have declined year-on-year for the last eight months. Despite the recent weakness, housing starts are projected to increase 9.6% this year following an advance of 7.9% in 2021 as homebuilders attempt to make up for years of underbuilding that led to too little inventory for sale and contributed to the current weakness in home sales.
  • California home price growth has cooled off a bit in response to slowing housing demand, but the median California home price was up a strong 10.3% year-on-year in February. Home price growth is forecast to slip from 19.2% in 2021 to a still-solid 11.1% in 2022 and moderate to just 3.3% next year as housing demand cools on surging mortgage rates, poor affordability, and rising inventory.

Employment Outlook
The California job recovery continues to outdistance the nation's with 6.4% job growth from a year ago in March, easily surpassing U.S. growth of 4.5%. This is the eleventh consecutive month in which the state's employment growth has topped the nation's.

Despite the extended outperformance, the state has still only regained about 90% of the 2.76 million jobs that disappeared in the spring of 2020. While this lags the national jobs recovery that stood at 92.8% through March, the difference has narrowed as sizeable progress has been made to reduce the employment gap with the nation.

The previously decimated leisure & hospitality sector led the way with employment growth of over 28% from a year ago. Still, employment in this hard-hit industry remains over 10% below the pre-pandemic peak of February 2020, implying firms are having a hard time retaining and attracting workers despite significant wage increases.

Pandemic Impacted Sectors Growing Faster
California total nonfarm payrolls are forecast to rise 4.6% this year – the fastest pace since 1984 – following growth of 3.2% in 2021. California job growth is expected to decelerate to just 1.8% in 2023 – one percentage point below the long-run average from 1940 to 2021 as inflation and Fed rate hikes sap consumer strength. Over the near-term pent-up demand for travel and entertainment and steady consumer spending bolstered by strong wage gains, excess savings and high levels of household wealth will power continued job growth in California.

California's labor market is still on the road to recovery. The state's unemployment rate has plunged rapidly since peaking at 16.1% in April 2020 to just 4.9% in March. Though joblessness in the state is still much higher than the national average of 3.6% and 0.8 percentage points above the pre-crisis rate of 4.1% in February 2020.

CA Jobless Rate Hit Pandemic Low in March
The California jobless rate is forecast to average 4.9% this year and edge down to 4.8% in 2023. While a noticeable improvement from 10.3% in 2020, it is still significantly above the projected U.S. average of 3.5% this year and 3.6% in 2023.

Housing Outlook
Despite higher mortgage rates and the worst consumer inflation in 40 years, home sales in California were firm in February with existing single family home sales totaling an annualized 424,640 units. This was down 4.5% from January and 8.2% lower than a year earlier when the housing market was atypically strong. California home sales have been lower than a year ago for eight consecutive months, but the 8.2% decrease in February was the smallest since July of 2021. Moreover, the level of homes sales in February was the second highest for a February in the last 10 years and strong compared to pre-pandemic levels of 2018 and 2019.

California Home Sales On Gradual Decline
Low housing affordability is expected to be a continuing obstacle for California homebuyers and existing home sales this year and next year. The California Association of Realtors Housing Affordability Index was at a historically low 25% in the fourth quarter of 2021 down from 27% a year ago and well-below the long-term average of 33% from 2006 through 2021. This means that only 25% of households in the state could afford to purchase a median-priced home in the fourth quarter of last year.

Fortunately, the existing home inventory shortage vexing many parts of California eased a bit in February. The Unsold Inventory Index rose to 2.0 months from 1.8 months in January. Despite the modest monthly improvement, the index remains at a very low level and indicates the number of months it would take to sell the supply of existing homes on the market at the current sales pace. Disconcertingly, the median number of days it took to sell a single-family home in California fell to just nine days in February. This is down from 12 days in January and one point lower than the February 2021 reading, pointing to fierce competition for homes as homebuyers still compete for scarce listings.

California home prices continue to rise, regaining momentum again after slowing for eight straight months. The statewide median price was $771,270 in February, up 0.7% from January and 10.3% higher than a year ago. The rebound in the median price is partly due to a change in the mix of sales toward homes in the million-dollar price range, as sales gains were solid in the relatively higher-priced Central Coast and Bay Area regions.

Home Price Gains Accelerated in February
The outlook for California homebuilding this year is buoyant. Limited inventory for sale, a strong desire for suburban housing and unprecedented demand from millennials as they enter their prime home buying years are leading to a sharp upturn in California homebuilding.

Consequently, housing starts are forecast to rise by 9.6% this year, up modestly from 7.9% in 2021 and a significant improvement from growth of just 2.2% in 2020. Starts are expected to decline by 2.2% next year as significantly higher mortgage rates further erode housing affordability in the state.

California home prices increased at a scorching 19.2% in 2020 and are expected to climb a more modest 11.1% this year and then slow to 3.3% in 2023 – the slowest growth since 2019 – as homebuilding accelerates and higher mortgage rates crimp demand.

California Population On The Decline
California is undergoing a unique demographic change that is expected to pressure the state's economic future longer-term. According to recently released data from the U.S. Census Bureau, the state's population fell 0.7% from July 1, 2020 to July 1, 2021. This is the first decline in California's population dating back to 1900.

Population Declined for the First Time in 2021
Net interstate migration hit a decade-long low, surging from a loss of 34,000 in 2012 to 277,000 in 2021. While numerous factors are compelling California residents to consider moving to lower cost locales, high and rising housing costs are a paramount concern. Indeed, according to a UC Berkeley poll, high housing costs was by far the biggest factor cited by people wanting to move, with over 70% of Californians considering them "a very serious issue."

If California' population continues to contract or just stagnates, the state's long-term economic growth will continue to slow and sales tax revenue, property taxes and fee revenue will suffer, further pressuring state and local government budgets.

BAY AREA

Employment Outlook
The Bay Area's weaker jobs recovery persisted through February. The region recorded the second slowest job growth of the four main economic regions, outperforming only the less-dynamic Central Valley. Employment increased from a year ago in 10 of 11 sectors. Strong gains continued in leisure & hospitality (+40.7%) and other services (+16.5%) employment over the past year. Collectively, these two sectors were responsible for over 50% of Bay Area job growth – with leisure & hospitality contributing 43% – despite only representing around 12% of total nonfarm employment.

Bay Area Jobs Increased in Most Sectors
Despite below average employment growth, the Bay Area unemployment rate dipped another 20 basis points in February to a pandemic-era low of 4.0%. While the Bay Area has the lowest jobless rate of the four economic regions, it is still far above the February 2020 level of 2.9%. The region's jobless rate is forecast to average 4.1% this year – easily the lowest of the 4 regions – and then decline slightly to 4.0% next year on continued job gains.

Bay Area job growth is expected to accelerate to 2.6% this year – the fastest pace since 2017 – and then slow to just 0.9% in 2023. The Bay Area's jobs recovery will be propelled by relatively higher rates of COVID vaccinations across the region, which will allow more leisure and hospitality employment gains. However, high Bay Area home prices and other costs that encourage workers and companies to relocate to lower cost areas will preclude the region's growth from being even more vigorous.

Housing Outlook
Bay Area existing home sales fell from a year ago for the sixth consecutive month in February, although the decline moderated to -13.7% from -22.3% in January. Although base effects are at play with home sales growth solid early last year, higher mortgage rates, eroding affordability and diminishing demand are also behind the recent weakness.

Home sales declined from a year earlier in seven of the nine Bay Area counties in February with the largest decreases in San Mateo (-24.4%), Marin (-22.5%) and Contra Costa (-19.6%) Counties. Home sales increased from a year ago in San Francisco (+5.9%) and Solano Counties (+8.7%).

Home Sales Declined in Most Bay Area Counties
The inventory of existing homes remain extremely low in the Bay Area. The Unsold Inventory Index was only 1.9 months in February, down from 2.1 months a year ago – helping to push Bay Area home prices up 15.9% from a year ago. Bay Area home price growth accelerated for a second straight month in February after slowing in December.

Bay Area home prices are projected to climb 12.0% this year – down from 17.9% in 2021 – and then ease to 5.9% in 2023 as demand slows and the supply of homes for sale rises. Indeed, Bay Area housing starts growth is projected to accelerate to 14.6% in 2022 and then slow to just 2.2% in 2023 as increasing supply and cooling demand from higher interest rates prompt homebuilders to curtail construction.

Bay Area Metro Losing Residents
The Bay Area has experienced severe out-migration during the pandemic. From July 1, 2020 to July 1, 2021, the population of the San Francisco Metro Area fell by 116,385 or 2.5%. This is the third steepest decline across all metros in the United States, trailing only Odessa, TX (-2.6%) and Lake Charles, LA (-5.3%). Some of the decline can be attributed to the Bay Area having a comparatively larger percentage of residents who work in jobs that can be done remotely. This enables people to move to lower cost in-state and out-of-state places while still being able to retain their current jobs. But the trend in out-migration might persist as housing costs continue to rise and affordability erodes.

This significant loss of residents means fewer people are employed in the metro. This reduces retail sales, housing demand and construction activity, and even commercial real estate. Payroll, sales and property taxes diminish which often leads to future government spending cuts, re-enforcing the downward growth cycle. Fortunately, more people appear to be moving in to the Bay Area over the last nine months, so the worst of the pandemic related out-migration might be in the rear view mirror for the metro.

SOUTHERN CALIFORNIA

Employment Outlook
Southern California's nonfarm employment increased by a solid 7.3% from a year ago in February. Southern California has had the strongest job growth of all four regions of the state over the past year, edging out the Central Coast. The largest job gains were in three sectors that continue to recover from sharp losses early in the pandemic: leisure & hospitality (+34.5%), other services (+16.1%) and information services (+14.7%), which includes movies and sound recording and broadcasting.

Trade, transportation & utilities employment climbed 4.5% from a year ago – the fastest pace since September of 2021 – as activity at the region's two largest ports accelerated to 5.3% year-on-year. The only two sectors that shed jobs in February were financial activities (-0.3%) and mining and logging (-2.3%). These sectors were less than 5% of total employment in the region, so the modest declines did not materially restrain the overall strong gain.

So. California Employment Rose in Most Sectors
Total nonfarm employment growth in Southern California is forecast to improve to 4.9% this year and slow to just 2.2% in 2023. A comparatively higher exposure to jobs in television and film production, entertainment, leisure & hospitality and recreation will drive the acceleration in job growth in 2022 as service sector businesses finally begin operating at or near full capacity. The region's unemployment rate continues to be elevated relative to most regions of California with the exception of the Central Valley, but its trending lower. Indeed, the Southern California jobless rate in February was 5.6%, the lowest of the pandemic and down sharply from a peak of 17.0% in May 2020.

The Southern California jobless rate is projected to average 5.0% this year – less than half of the 10.9% rate in 2020 – and then fall to a 4.8% next year. Southern California's relatively higher exposure to service industries most impacted by the pandemic will push the 2023 unemployment rate closer to pre-pandemic levels as these businesses come roaring back to life.

Housing Outlook
The recent weakness in the Southern California residential housing market endured in February with existing home sales declining 10.9% from a year earlier, the biggest decrease since October 2021. Despite the drop in home sales in Southern California, the median home price climbed 12.6% year-on-year in February, up from 13.8% in January. Homes have appreciated at a double-digit year-on-year pace for nineteen straight months in Southern California.

Home prices gains were robust in every county in the region over the last year, ranging from 15.4% in San Bernardino to 26.6% in Orange County. Prices gains have been strongest in Orange County with prices rising at least 20.0% from a year ago for the last six months.

Regional home prices are forecast to jump 11.3% in 2022 – a little more than half of the 20.0% rise last year – and moderate sharply to 3.6% next year with housing starts projected to expand a solid 12.3% this year.

Home Prices Rose in All So. California Metros

Elevated Shipping Rates a Risk
Another casualty of the supply chain crisis is its impact on container shipping rates, particularly from Asia to North American ports. All-inclusive container shipping rates from China to the West Coast were $3,876/FEU (forty equipment unit) on January 1 and reached $20,586 on September 17, an increase of 431%. Business interruptions at major ports in China due to COVID shutdowns and lockdowns and strong U.S. orders demand were the foremost reasons behind the skyrocketing shipping prices.

Container Rates Have Fallen but Are Still High
While container shipping rates have fallen to just under $16,000 they remain very elevated by historical standards and appear to be rising again as China supply disruptions reappear. If higher rates are passed along to the consumer, consumers balk at higher prices. That, in turn, could reduce employment at the region's biggest ports and result in slower regional job growth than currently projected.

CENTRAL COAST

Employment Outlook
Employment growth in the Central Coast region was a solid 7.2% from a year earlier in February, down from 8.1% in January. Despite 11 straight months of annual job increases, total nonfarm employment in the region is 3.1% shy of the peak in February 2020. The Central Coast has an above average exposure to the leisure and hospitality sector and tourism and there are still extreme shortfalls in the region's leisure & hospitality and other services employment of 10.6% and 9.4% respectively.

The solid gain was supported by robust growth in leisure & hospitality (+31.2% but down from 45.9% in January), other services (+14.8%) and information services (+9.4%). Collectively, these three sectors accounted for less than 20% of total nonfarm employment but were responsible for around 60.0% of total job growth. Job growth was above average in manufacturing (+7.3%) while mining & logging was the only job sector to lose jobs (-0.5%). Although mining & logging jobs have fallen year-on-year for nearly 2 ½ years, it was only 0.15% of total employment in February and did not limit the solid growth.

Employment Increased in All But One Job Sector
Total nonfarm employment growth in the region is projected to accelerate to 2.2% this year from a rather anemic 0.8% in 2021 and then drop to 1.5% next year. Demand for travel is expected to remain strong with more people fully vaccinated, supporting the region's vital tourism industry.

The solid employment growth drove the jobless rate down to 4.5% in February, a sizable decline from 5.1% in January. Moreover, the jobless rate has mostly fallen since January 2021 and is now just below the pre-pandemic level of 4.6% in February 2020.

The Central Coast unemployment rate is forecast to average 5.5% in 2022 – an improvement from 6.6% last year – and fall to 5.2% next year as service sector job growth measurably quickens. The 5.2% jobless rate would be the lowest since 2019, suggesting the regional labor market has fully recovered from the pandemic.

Housing Outlook
Central Coast existing home sales plummeted 16.3% from a year ago in February, a negligible improvement from the 20.7% decline in January. Moreover, home sales have declined annually for the last six months as higher mortgage rates and lower housing affordability start to dent the demand for Central Coast homes. Home sales declines from a year ago were broad-based across the Central Coast, with the largest decreases in San Luis Obispo (-26.2%) and Santa Cruz (-18.4%). Home sales fell at a more modest pace in Monterey (-12.8%) and Santa Barbara (-5.3%).

In spite of the extended weakness in home sales, the median home price climbed a solid 10.1% in the Central Coast from a year earlier in February, following a 10.9% jump in January. Home price growth was extremely vigorous in Santa Cruz (+30.4%) and San Luis Obispo (+18.8%). Home prices rose a more modest 7.9% in Monterey and fell 10.6% in Santa Barbara.

Home Prices Grew in Three Metros in February
Central Coast home prices are forecast to rise 7.0% this year – about one-third last year's pace of 20.4% – and then moderate to 3.9% in 2023. Significantly higher mortgage rates and a robust 20.3% increase in housing starts this year will narrow the supply-demand imbalance and push price gains lower.

End of Indoor Mask Mandates
In mid-February, indoor mask restrictions were lifted across the state, encouraging visitors to return to the Central Coast. As a result, after two years of pandemic issues and a sharp decline in travelers, the tourism industry is seeing a much-welcomed comeback. According to Visit Santa Barbara, hotels sold more occupied rooms in the five weeks through the end of March than ever over the same period. The region is more dependent on tourism than the state or the U.S. to drive economic growth. In 2021, consumer services employment – which includes retail trade and leisure & hospitality – as a percent of total employment was higher in the Central Coast (23.5% with the highest share of 25.9% in San Luis Obispo) than California (18.7%) or the nation (20.4%).

A sharper-than-expected increase in the number of visitors to the Central Coast is an upside risk to our forecast and could result in faster job and income growth for the region than projected, which could lift retail sales growth higher.

CENTRAL VALLEY

Employment Outlook
Total nonfarm job growth moderated to 5.2% in February from a year ago, the smallest gain of all four regions. Job growth was fairly broad-based across sectors with double-digit advances in leisure & hospitality (+21.3%) other services (+10.4%) and information (+10.2%). Job growth was practically unchanged in financial services (+0.2%) while employment contracted 3.1% in the mining & logging industry.

Jobs Declined in Just One Sector in October
Total nonfarm jobs are projected to advance 3.0% this year, nearly double the pace of last year and the second fastest increase of the four regions, trailing just Southern California (+4.6%). Job growth is then expected to slow to 1.3% in 2023 but will be more than double the average growth rate of 0.6% from 2008 to 2021.

The unemployment rate in the Central Valley has declined for six consecutive months and hit a pandemic-low of 6.0% in February. Although the jobless rate in the region is just slightly above the pre-recession level of 5.6%, it is the highest of the four major regions in California. Historically, the region has higher unemployment rates than other, more dynamic regions of the state due to its heavy reliance on the agricultural sector for growth.

The unemployment rate in the Central Valley is projected to average 6.0% in 2022 and then dip to 5.6% in 2023 on continued job gains. This would be the lowest unemployment rate since 2019, suggesting the labor market recovery in the region is nearly complete.

Housing Outlook
Central Valley existing home sales rebounded 1.2% in February from a year ago after declining 3.9% in January. This is the first annual advance since June 2021 and the Central Valley was the only region to register an increase in February, partly due to higher affordability. Home sales climbed in Fresno (+7.2%), Stockton (+2.8%) and Sacramento (+2.4%), while sales fell in Modesto (-1.3%) and Bakersfield (-4.9%).

Home Sales Mixed In Central Valley MSAs
The Central Valley's Unsold Inventory Index improved to 1.9 months in February from 1.7 months in January but was unchanged from a year ago. Moreover, the median days on market slipped to 7 from 10 in January. As a result, home prices in the region rose 14.8% from a year ago, with all metros registering double-digit gains.

Home Prices Increased Sharply In All MSAs
Regional home prices are forecast to jump 12.6% this year, the third consecutive year of double-digit home price gains. Home price growth is then projected to slow sharply to 4.3% in 2023 as demand weakens on higher mortgage rates and housing starts increase another 13.2% in 2022, easing the region's housing shortfall.

Possible Drought Clouds The Outlook
Record-breaking rain and snow across much of the West in late 2021 came as welcome relief to many – including farmers and communities in California's Central Valley – but that relief proved short-lived. The extremely dry months that followed have increased the possibility for another drought, with major negative impacts on the agriculture sector.

Farming and food production in California and its Central Valley are significantly susceptible to drought and the industry's absolute size is a large reason for that. Overall, the state of California produces over 400 commodities worth over $49 billion in sales. While the Central Valley alone produces over 250 crops with a value of about $17 billion per year, contributing an estimated 25% of the country's food.

According to a study by UC Merced researchers, the 2021 drought directly cost the California agriculture sector about $1.1 billion and nearly 8,750 full- and part-time jobs. Once the effects on other economic sectors are considered, total impacts are estimated at $1.7 billion and 14,634 full- and part-time jobs lost.

The drought cost the Central Valley agriculture sector $1.35 billion and 10,593 jobs disappeared, including direct and indirect impacts. The Central Valley absorbed 79% of the statewide costs and nearly 70% of the jobs lost across California due to the drought.

A similar or even worse drought this year could have similar impacts and cause our regional job and retail sales forecasts to be overly optimistic.

To learn more, check out this week's U.S. Outlook Report.

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