- California's labor market is showing increasing signs of weakness and we put a high probability of a mild three quarter recession developing in 2023. California job growth noticeably downshifted below the U.S. average to 1.8% annualized in November, while California's unemployment rate has increased for two consecutive months now compared to a relatively stable U.S. unemployment rate. In short with technology company layoffs multiplying, California's employment outperformance with the nation has likely already ended and we expect to see continued job growth underperformance in 2023.
- California employment growth is forecast to be flat year/year in 2023 and then rebound just 0.1% in 2024 amid higher interest rates, and a sharp technology, international trade and construction downturn.
- California is expected to experience at least a $24 billion deficit in fiscal year 2023-2024 according to the California Legislative Analyst's Office. But we believe the state deficit could be far higher if a full-blown recession develops. Despite the gloomy budget outlook, California is somewhat better positioned to withstand an economic downturn than it has been in the past with measurable cash reserves to meet all of its near-term obligations. Consequently, the state should be able to avoid widespread layoff or the elimination of popular government programs to slash the budget deficit.
- California's unemployment rate hit a record-low of 3.8% in September but increased to 4.1% in November on sharply slower employment growth. The state unemployment rate is forecast to increase to an average of 5.0% in 2023 and 5.4% in 2024, staying higher than the national average over the forecast horizon.
- California's housing recession deepened in November with existing home sales plunging a staggering 47.7% from a year ago. This is the biggest year-on-year drop in California home sales in at least the past four decades. The outlook for the California housing market over the next two years is sobering. California housing starts are projected to plunge 20.1% in 2023 as builders pull back significantly on home construction in the face of dissipating demand.
- Declining home sales are already driving California home prices lower at a pace that out-distances nearly every other region of the country. The statewide median home price in November was down 13.6% from the record-high in May and is 0.6% lower than a year earlier – the first year-on-year decline since May 2020. With mortgage rates expected to rise further in 2023, home prices will continue to be under severe downward pressure for at least another year as affordability remains poor by historical standards and the economy goes through a mild downturn.
Nonfarm payrolls in the Bay Area are forecast to fall 0.2% next year and then rebound slightly by 0.3% in 2024 as a mild regional recession spreads across the region. Bay Area job growth will be undermined by the recent weakness in the technology sector as layoffs become more widespread and hiring plans are slashed amid increasing economic uncertainty and rising interest rates. Moreover, still-high regional home prices and other costs that push workers and companies to relocate to lower cost metros will contribute to weak population growth and slower job growth over the next two years.
Bay Area existing home sales cratered 43.0% from a year ago in November. High interest rates, low affordability and easing demand are behind the recent weakness in sales.
Home sales fell at least 30.0% in eight Bay Area counties in the region with the largest declines in Solano (-51.2%), Santa Clara (-47.0%) and Contra Costa (-46.3%) counties, while sales dropped a comparatively more modest 21.9% in Marin.
Home Sales Plunged in Every Bay Area County
The unrelenting home sales declines are driving a return to a more balanced housing market in the Bay Area. The Unsold Inventory Index improved to 2.2 months in November, more than double the 1.0 month of inventory in November 2021. Furthermore, the median time on market was 21 days in November, up sharply from 12 days a year ago. Consequently, the median home price fell 5.8% year-on-year in November.
Bay Area home prices are forecast to decline 9.0% in 2023 and another 1.4% in 2024 on weaker demand amid higher interest rates. The drop in homebuyer demand are expected to push Bay Area housing starts down 20.5% next year. Starts should rebound 3.6% in 2024 as the Bay Area housing market begins to emerge from a deep downturn.
Bay Area Layoffs Are Mounting
Slowing revenue growth, high inflation, rising interest rates and worries of a looming recession are prompting many tech companies in the region to reassess the size of their workforces. Indeed, tech and biotech companies have announced plans to shed more than 6,000 jobs in the Bay Area by February 2023 according to the state Employment Development website. That's enough to offset the gains posted by the tech industry in October, when employment in the industry appeared to rebound.
The tech sector's layoffs are a correction after explosive growth and a two-year hiring binge after the short-lived but deep 2020 recession. Moreover, the number of dislocated workers is not expected to approach the levels seen in the dot-com bust and Great Recession unless the economic slowdown morphs into a sharper longer-lasting contraction. Nonetheless, Bay Area residents will become more prudent in their spending amid the gloomy headlines.
Nonfarm employment growth remains relatively robust in Southern California at a 4.3% pace from a year ago in November. Southern California has the second fastest employment growth rate of the four economic regions, trailing only the more dynamic Bay Area. Southern California exceeded the statewide job growth average of 4.0% by a decent margin.
The strongest gains from a year ago were in leisure & hospitality (+9.6%), other services (+6.6%), education & healthcare (+5.4%) and professional & business services (+5.0%). While job growth in the leisure & hospitality sector remains solid, it has mostly slowed since peaking in January 2022 and gains in November were the weakest since job growth rebounded in this sector in April 2021.
The only other two sectors with employment growth above the average were construction (+4.5%) and information (+4.6%), which includes movies and sound recording and broadcasting. The weakest growth was in government (+1.7%), financial activities (+1.3%) and mining & logging (+0.1%).
So. California Employment Rose in All Sectors
Nonfarm employment growth in Southern California is forecast to remain unchanged in 2023 and inch up just 0.1% in 2023 as a mild recession hits the region. A relatively higher exposure to jobs in international trade, recreation, entertainment, television and film production, and leisure & hospitality will weigh on Southern California's employment growth over the next two years as the U.S and global economies endure a synchronized contraction.
The region is showing tentative signs of slowing with the Southern California unemployment rate rising to 4.1% in October from an all-time low of 3.8% in September. That is in-line with the statewide average of 4.1%.
The Southern California jobless rate is projected to average 4.7% this year – the lowest since 2019 – and then climb to an average 5.2% in 2023 and 5.6% in 2024 as the Fed's interest rate increases kick in and still-high inflation reduces consumer spending gains.
Regional Trade Boom Is OverTwo-way container traffic in Southern California swelled as the US emerged from the early stages of the pandemic and consumer demand for goods rebounded strongly amid service sector closures. Indeed, container traffic expanded at astounding double-digit rates from a year earlier for 11 straight months through June 2021. While the resumption of trade was welcome and much needed, it also led to goods price inflation and higher transportation and shipping costs.
Two-Way Port Traffic Has Fallen Recently
Southern California's trade boom, however, is in a tailspin at the moment. Total container year-on-year growth has fallen sharply for the last three months and is down 21% from a year ago through October. Trade volume declines will likely accelerate further in the months ahead as U.S. and global growth slows further, weighing on the Southern California economy.
Employment growth is rapidly losing momentum in the Central Coast. Job growth from a year ago has mostly decelerated since growing at a robust at 8.1% in January. Total nonfarm jobs climbed just 2.3% in November from a year ago. This is the smallest job gain of all four regions over the past year. The Central Coast is comparatively more reliant on tourism to drive economic growth and leisure & hospitality employment growth has slowed to an average of just over 6.0% over the last five months after growing at double-digit rates for 15 consecutive months.
Job growth in the Central Coast is mainly being driven by leisure & hospitality (+6.6%), other services (+5.7%) and education & healthcare (+4.3%). In aggregate, these three sectors accounted for over three-quarters of job growth over the past 12 months.
Manufacturing (+2.8%) and construction (+2.6%) were the only other sectors with growth above average, while gains were well-below average in government (+1.0%) and professional & business services (+0.3%). Jobs fell in financial activities and trade, transportation & utilities.
Employment Increased in Most Sectors
Employment growth in the Central Coast of California is forecast to moderate noticeably to 0.5% in 2023 and 0.6% in 2024. Demand for travel is expected to slow next year amid increasing interest rates, high inflation and lost jobs. Signs of economic weakness are already evident. The Central Coast unemployment rate increased to 4.4% in October, the highest since May.
The Central Coast's unemployment rate is expected to average 5.0% next year and 5.4% in 2024, partially due to a slowdown in travel to the region.
Central Coast existing home sales plunged 43.5% from a year ago in November as home sales declines accelerated. Home sales declines from a year ago were fairly uniform across three major metros in the region, ranging from 45.9% in Santa Cruz to 49.3% in San Luis Obispo. Home sales fell a more modest 29.5% in Santa Barbara. Weaker demand is the proximate cause of the sharp decline amid higher mortgage rates and poor affordability.
Home Sales Fell Sharply in All Metros
Despite sharply lower home sales, home prices managed to grow 0.1% in November, the only region with home price appreciation. Lean inventory – the Unsold Inventory Index was 3.1 months in November, the second lowest of the four regions – was partially responsible for the upturn in home prices. Regional home price gains were driven entirely by a 14.8% rise in San Luis Obispo. Home prices decline by 1.2%, 1.3% and 20.2% respectively in Santa Cruz, Monterey and Santa Barbara.
Central Coast home prices are forecast to fall 6.0% in 2023 and another 2.6% in 2024. Homebuilders will react to weaker demand with housing starts plunging 22.5% next year before rebounding 4.5% in 2024.
Travel Spending Is Rebounding
While travel-related spending in the region has rebounded from the ravages of the pandemic, it has not yet fully recovered. Total direct travel spending in the Central Coast was $7.61 billion in 2021, an increase of 52.6% from 2020. Despite the sharp rebound last year, spending was still 18.6% lower than it was in 2019.
Travel Spending Below Pre-Pandemic Level
The depressed travel spending in 2021 relative to 2019 is impacting employment in the industry. There were 73,000 workers employed in the all-important travel industry in the Central Coast in 2021, a shortfall of 17.0% compared to 2019. The gap is likely to persist through 2023 with the U.S. and global economies teetering on recession, which could prompt consumers to once again reduce their discretionary spending on travel.
Nonfarm job growth in the Central Valley stabilized at a moderate 3.3% year-on-year in November, unchanged from October. Job gains from a year ago have held above 3.0% for three months in a row, pointing to stabilizing growth. Job gains were broad-based with the biggest increases in education & healthcare (+5.8%), leisure & hospitality (+4.9%) and other services (+4.8%). The slowest job growth was in mining and logging (+0.1%).
Education and Healthcare Led the Way
Central Valley employment forecast to drop sharply to just 0.3% in 2023. Despite the sharp deceleration, the Central Valley is expected to outperform the other California regions next year except for the Central Coast.
The unemployment rate in the Central Valley fell for 15 consecutive months, reaching a record low of 4.7% in July. The slowdown in job growth since the beginning of the year, however, has pushed the jobless rate up for the past three months to 5.1% in October. Furthermore, this is the highest unemployment rate across the four regions with the Central Coast a distant second at 4.4%.
The unemployment rate in the region is forecast to rise to an average 6.1% in 2023 and 6.5% in 2024.
Central Valley existing home sales plunged 42.3% in November from a year ago. Nonetheless, the decline in home sales in the Central Valley was the smallest of the four major regions in California, partly because homes are quite a bit more affordable here than other regions of California.
Home sale declines were universal across all counties with the biggest declines in Sacramento (-44.8%), Bakersfield (-45.9%) and Stockton (-53.3%). Declines were relatively more modest but still sizeable in Fresno (-34.7%) and Modesto (-36.0%).
Home Sales Plunged In All Central Valley Metros
Consumers are postpone purchases of big ticket items like homes due to high mortgage rates, poor affordability and fear of recession. This is leading to an improvement in the inventory of existing homes. Central Valley's Unsold Inventory Index increased to 3.3 months in November from 1.6 months a year ago. At the same time, the median number of days on the market rose to 23 days from 9 days one year ago, pointing to a shift toward a more balanced housing market.
The sharp decline is home sales pushed median Central Valley home prices down 1.3% from a year ago in November from a flat reading in October. Home prices rose in Bakersfield (+9.8%), Stockton (+2.2%) and Fresno (+2.1%) and fell in Sacramento (-1.0%) and Modesto (-1.1%).
Home Prices Were Mixed in the Central Valley
Central Valley home prices are projected to rise 11.1% this year, the third year in a row of double-digit gains. Home prices are forecast to fall 6.5% in 2023 and another 3.2% in 2024 on high interest rates and much slower job growth.
Drought Still Downside Risk to Region
The rainy season in drought-stricken California is off to a fast start with a series of storms bringing a substantial amount of much needed rain and snow across California. Consequently, the snowpack is now 200% above-average and overall precipitation is near average in many places.
Unfortunately it may not be enough after years of precipitation deficits rendered 97% of the state in some level of drought. Furthermore, there are signs of a multi-week dry spell on the horizon that could substantially offset the gains the recent precipitation delivered.
If a return to drier weather materializes, farmers and the broader economy in the region could still be impacted in the early part of next year. Farms might be less profitable weighing further on the region's retail sales and job growth.
To learn more, check out this week's U.S. Outlook Report.