California Economic Outlook – April 2021

Scott Anderson
Chief Economist
Bank of the West

Executive Summary

  • California job growth rebounded strongly on service and restaurant business reopenings in February, but moderated a bit in March. Despite the two-month rebound, total nonfarm employment in California is still nearly 9% below the February 2020 peak - badly lagging the national jobs recovery.
  • Job growth will continue. California employment is forecast to rebound 2.0% this year after a steep decline of 7.4% in 2020 as the pandemic ravaged the state’s labor market, particularly those service industry businesses that were more impacted by the government-mandated closures. The rebound will be supported, in part, by the two Federal pandemic aid packages totaling $2.8 trillion.
  • California’s budget outlook improves. In June, the 2020/21 state budget was initially expected to face a $54 billion deficit due to sharp projected revenue losses and spending increases from the pandemic. However, high-income state residents have fared well during the pandemic and the subsequent recession was not as bad as many originally feared thanks to unprecedented fiscal and monetary support from the government. Consequently, California’s tax revenue is now projected to be $71 billion higher than originally anticipated over the three-year budget period from 2019-20 through 2021-22.
  • California’s unemployment rate fell to a pandemic-low of 8.3% in March, but is tied for the third highest among states in the nation. California’s unemployment rate is expected to move lower in 2021 and 2022 as service business returns and the federal pandemic aid revives consumer and business spending. California’s jobless rate is expected to remain above the national average its pre-pandemic level, averaging 7.8% in 2021 and 6.2% next year.
  • Pent-up housing demand, historically low mortgage rates and lean inventories continue to underpin the California housing market recovery. Housing starts are forecast to increase 18.8% this year and 12.9% next year as homebuilders ramp up construction to make up for the prolonged inventory shortfall.
  • California median existing home prices are projected to accelerate from a solid 9.8% in 2020 to 13.1% this year and then moderate to 5.0% in 2022 as housing demand wanes on higher mortgage rates, declining affordability, and rising inventory.

CALIFORNIA

Employment Outlook

California’s jobs recovery slowed in March. Total nonfarm employment in California increased by 119,600 jobs last month. Despite the continued jobs rebound, California has only recouped about 44% of the jobs the state lost since the pandemic began - 1.20 million of the over 2.70 million jobs that disappeared in March and April. This is well behind the national jobs recovery that stands at 62% since the pandemic began. The prolonged business restrictions and stay at home orders have hurt the state’s labor market performance more than other regions and California’s underperformance is now in its fourteenth consecutive month.

Many of the state’s industries have yet to call-back significant percentages of their workers. The largest year-on-year job declines remain in leisure & hospitality services (-29.1%) and other services (-20.7%). Other services includes equipment and machine repair, personal care, pet care and temporary parking. In contrast California trade, transportation and utilities and construction employment has nearly returned to year ago levels, outperforming all other major sectors. Trade, transportation and utilities is benefitting from a surge in international traffic at the two largest ports in Southern California – total trade volume was up a vigorous 85.9% in March from a year earlier. Construction payroll losses have been modest as homebuilders’ ramp up the construction of homes and remodeling demand has soared during the pandemic.

All Job Sectors in CA Contracted in March

California nonfarm payrolls are projected to rebound 2.0% this year after falling 7.4% in 2020, and then growth is expected to pick up to 3.2% in 2022. Pent-up demand for capacity-limited service businesses, robust consumer spending, and the federal pandemic relief packages totaling $2.8 trillion since December are the primary drivers behind the rebound.

The proliferation of COVID vaccinations and a slowdown in new cases is bolstering consumer confidence and helping to unleash pent-up demand across the state. The number of unemployed Californians peaked at nearly three million in April 2020, driving the jobless rate to a previously inconceivable height of 16.0% in April. Since then the state has seen steady declines in the unemployment rate, hitting a pandemic low of 8.3% in March. Even so, the current California unemployment rate is nearly double the 4.3% rate seen in February 2020. Clearly, California’s labor market recovery still has a long way to go.

CA Jobless Rate Fell To Pandemic Low in March

The easing of business restrictions on leisure and hospitality businesses, and food service and drinking places, as well as firming consumer demand will send the state’s jobless rate lower in the quarters ahead. As a result, the state unemployment rate is expected to average 7.8% in 2021 and 6.2% next year, a noticeable improvement but still considerably higher than the forecasted U.S. average of 5.5% in 2021 and 4.2% in 2022.

Housing Outlook

California’s housing market recovery is on steroids with home price gains easily outdistancing many other regions of the country. Existing single-family home sales totaled an annualized 446,410 in March up 19.7% from a year earlier. Low interest rates – the 30-year fixed mortgage rate averaged 3.08% in March, down from 3.45% in March 2020 – and unwavering homebuyer interest are collectively driving the robust gains in home sales and prices.

Home Sales Growth Accelerated in March

However, declining housing affordability could curtail existing home sales in the months ahead as rapidly rising home prices limit the number of qualified homebuyers. Indeed, the California Association of Realtors Housing Affordability Index dropped to 27% in the fourth quarter of 2020, down from 35% in the first quarter. This means that only 27% of households statewide could afford to buy the median-priced home of $713,660 in the fourth quarter of 2020.

The protracted inventory shortfall that is contributing to eroding home affordability is not showing any signs of easing. In fact, the Unsold Inventory Index from the California Association of Realtors remained at a very low 1.6 months in March, down dramatically from 2.7 months in February 2020. The index reflects the number of months it would take to sell the supply of homes on the market at the current sales pace.

Median California home price increased 23.9% from a year ago in March – the strongest rate of growth since late 2013 and an all-time high of $758,990 as the competition for California homes remains fierce. Median California home prices have climbed at double-digit rates for eight consecutive months now.

California Home Prices Soared in March

The persistently strong demand for homes in the state and a chronic under-building of new housing supply is creating another housing boom. Historically low mortgage rates, the ability of many residents to work remotely and pent-up demand from millennial buyers – is contributing to a shortage of active listings in California. As a result, housing starts, which rose just 1.4% in 2020, are forecast to surge by 18.8% in 2021 and 12.9% in 2022. Despite the expected and welcome surge in housing starts this year, California home prices are projected to increase a solid 13.1% this year and then moderate to 5.0% in 2022 as housing supply becomes more closely aligned with demand.

California Budget Outlook Brightens

The 2020-21 state budget agreement passed in June of last year included measures to close an expected $54 billion budget deficit due to sharp projected revenue losses and spending increases from the pandemic and subsequent recession. However, the governor’s 2021-22 budget proposal points to a greatly improved revenue outlook over the 2020 Budget Act assumptions and a one-time $15 billion windfall that can be used during the current budget cycle. In fact, the administration’s estimate of the windfall is markedly lower than the Legislative Analyst’s Office November estimate of $26 billion.

The dramatic and sudden change in the revenue outlook and one-time windfall is mainly due to two factors. One, high-income state residents have fared well during the pandemic and they are responsible for a large portion of the state’s General Fund revenue due to the progressive nature of the personal income tax. Second, the recession has been less severe than expected, largely due to federal assistance to unemployed Californians and businesses. Consequently, the administration projects state revenue will be $71 billion higher than anticipated in 2020 over the three-year budget period from 2019-20 through 2021-22.

The improved state revenue outlook and one-time windfall means that the state will be able to largely avoid furloughing or laying off additional state employees and might be in a favorable financial position to bring back employees who were let go early during the recession when the outlook was bleak. This represents an upside risk to our state employment and spending growth forecasts, which could turn out to be stronger than anticipated.

BAY AREA

Employment Outlook

The Bay Area jobs recovery slowed in March and the region continues to underperform the state of California and the nation in recovering lost jobs. The previously high-flying tech sector – an integral source of growth during the expansion – was the only sector to experience job growth from a year ago in March, with information services employment rising 0.3% over the last 12 months.

Employment in all other major sectors fell from a year ago through March, led by continued large decreases in sectors that continue to operate at reduced capacity because of either diminished consumer demand or government mandates: leisure & hospitality (-39.6%) and other services (-21.0%). These two sectors collectively were responsible for 55% of total nonfarm job losses in the Bay Area over the last year, despite being less than 10% of total employment.

Bay Area Jobs Declined in Most Sectors

The Bay Area has the second sharpest decrease in nonfarm jobs across the four major economic regions of California at -8.8%. Only the Central Coast has lost a greater percentage of jobs at -9.6%. Bay Area jobs have been slower to recover in Napa, San Francisco and Santa Rosa, where food service, drinking places, and tourism play a larger part of their economies.

The Bay Area jobless rate fell to 6.4% in February as the number of unemployed fell 3.6% month-on-month. The unemployment rate in the region is forecast to continue to decline as economic growth picks-up steam. The Bay Area jobless rate is forecast to average a still high 6.0% this year and then dip to 4.6% in 2022. Bay Area employment, which plunged 7.9% last year, is projected to rebound 1.8% this year and accelerate to 3.8% in 2022. The recovery in the Bay Area is likely to be relatively weak as leisure and hospitality and tourism remains challenged, and more workers and firms consider relocating to lower cost locales to escape the high living and business costs and congestion in the region.

Housing Outlook
Bay Area home sales began to grow again in July and year-on-year gains have been vigorous ever since with double-digit gains for nine straight months through March. Steady demand for suburban homes with more amenities and space and historically-low interest rates have collectively propelled Bay Area home sales higher. Existing home sales gains were positive in all but one Bay Area county from a year ago in March, with particularly stout growth in San Francisco (+56.1%), Napa (+52.3%), Alameda (+45.1%) and Santa Clara (+44.3) Counties. Home sales growth was somewhat more modest in Marin (+16.3%) and sales fell 3.7% in Solano County. In concert with rebounding home sales, Bay Area home prices jumped 21.3% from a year ago in March, the third consecutive month of growth of over 20.0%. Despite the sharp increase, the Bay Area had the second slowest pace of home price growth of all four California regions, ahead of only the Central Valley. In addition to solid demand, a shortage of existing homes for sale is supporting white-hot home price growth in the region. Indeed, the Unsold Inventory Index in the Bay Area was 1.6 months in March – tied with the Central Valley and Los Angeles for the lowest – and down from 2.1 months a year ago.

Bay Area home price growth is projected to accelerate to 12.8% this year and then slow to 7.8% in 2022 as the number of homes for sale increases – housing starts are projected to increase 16.5% this year and a robust 23.3% in 2022 as builders try and catch up with demand.

How Many Leaving The Bay Area?
It has been widely reported that Bay Area residents have been fleeing since the pandemic hit. Working remotely has proved viable for many, and has encouraged some people to leave the Bay Area for relatively lower cost metro areas. /

A U.S. Postal Service analysis of address change requests shows nearly 80,000 San Francisco households moved out of the city from March to November 2020, while 27,000 moved in for a net loss of 53,000. Of those 53,000 households that left, 28,000 or more than half moved into another county in the Bay Area and 4,000 stayed in California. Of those who stayed in the Bay Area, the top destinations were Alameda, San Mateo, Marin, Contra Costa, Santa Clara and Sonoma counties.

Thus, despite anecdotes about Bay Area tech workers relocating to Texas, Florida and other low cost areas, the reality is many have also moved to the suburbs for larger homes with more amenities. While the outflow of workers from the Bay Area is expected to be a drag on the region’s economic growth, the Bay Area’s well-deserved reputation as a tech magnet that is attractive to young, college educated workers is probably not completely extinguished.

SOUTHERN CALIFORNIA

Employment Outlook
The combined Southern California region includes Los Angeles, Orange, San Bernardino, San Diego, Riverside, and Ventura counties that is home to nearly two-thirds of Californians.

Southern California nonfarm employment was still 8.3% below the year ago levels in March, the second best labor market performance across the four major regions of California, but trailing the Central Valley region by a wide margin. Predictably, the largest job declines took place in leisure & hospitality (-28.1%) other services (-21.7%), and information services (-20.2%), which includes motion picture and sound recording. These sectors were particularly hard hit by the reinstated regional business restrictions and stay-at-home orders in early December. Construction employment is holding up well in comparison, declining only 0.9% from a year ago. The lack of existing homes for sale – the median time on market in the Southern California region was only eight days in March – is bolstering new home construction in the region.

So. California Employment Fell in All Sectors
Total nonfarm payrolls in Southern California fell 8.0% last year but are projected to rebound 2.1% this year and 3.1% in 2022. A comparatively higher concentration of employment in leisure and hospitality, entertainment, recreation, and television and film production will contribute to an acceleration in job growth this year as more service businesses – including large employers like Disneyland – are allowed to reopen. The Southern California unemployment rate has been relatively slow to recover from the pandemic compared to the other three regions in the state. In fact, it has the distinction of having the highest jobless rate for 11 months running. While the jobless rate fell to 9.5% in February, it is just the second month it has been below 10% since April 2020.

The Southern California unemployment rate is expected to average 8.1% in 2021 and is forecast to decrease to a still elevated 6.3% in 2022 as the labor market recovery continues. The region’s jobless rate is forecast to be the highest of the four regions this year, mainly due to Southern California’s relatively higher exposure to industries most impacted by COVID.

Housing Outlook
The Southern California housing market cooled off considerably in January and February but rebounded in March with existing home sales surging 24.5% from a year ago. Despite the sharp rebound last month, Southern California had the second slowest pace of home sales growth across the four major regions of California. Home sales increases from a year ago were the largest in Orange (+30.4%), Los Angeles (+26.2%) and Riverside (+22.5%) Counties. Existing home sales increased at a more modest pace in San Bernardino (+19.7%) and Ventura (+15.6%).

Home Sales Rose in all Counties in March

Southern California existing home price growth picked up to 22.2% year-on-year in March, the strongest pace since October 2013 as existing home inventory continued to be lean. Southern California home prices have increased for nine consecutive years with the last decline in 2012.

Home prices in every county in the Southern California region increased at solid rates over the last year, with the largest home price gains in the lower priced suburbs of San Bernardino (+30.4%) and Riverside (+23.0%) Counties. Home prices gains in Orange and Ventura Counties were comparatively modest at 16.2% and 9.3% respectively. Home prices in the region jumped a solid 9.1% last year but are forecast to rise 11.1% in 2021 and moderate to 4.8% next year on increased supply with housing starts forecast to advance by double-digit rates over the next two years.

Region’s Port Activity Bottleneck
Maritime traffic at the ports of Los Angeles and Long Beach fell sharply in the months following the onset of the pandemic but began to rebound last July on the initial wave of reopenings. Import growth was particularly sharp as U.S. consumers exercised their considerable amount of pent-up demand. Indeed, imports grew by an average of over 30.0% year-on-year from July through March.

The surge in imports – primarily the result of the continued shift to the e-commerce channel and rebounding consumer demand – began to cause congestion at both ports in November that persists today. The congestion at the ports has resulted in longer lead times in shippers' supply chains, as ships sit longer and containers remain at the terminals for days.

Consequently, shippers are considering directing traffic to less congested ports such as Seattle or Oakland. If this occurs in mass, trade and transport job growth at the Southern California ports could be at risk.

CENTRAL COAST

Employment Outlook
The decline in total nonfarm jobs in the Central Coast region moderated to 9.6% from a year ago in March. Prior to last month, job losses had accelerated for four straight months and swelled to double-digit rates from a year ago in December through February. The Central Coast region has experienced by far the largest employment decrease of all major California economic regions due to its dependence on the tourism and the leisure and hospitality industry for jobs.

Acute job losses were pervasive across all metros in the Central Coast region with employment in Santa Cruz (-11.8%) and San Luis Obispo (-11.5%) tumbling by double-digit rates. A comparatively larger share of jobs in the tourism and leisure and hospitality industries in these metro areas is the foremost reason for the large decline in jobs. Employment declines in Santa Barbara have been somewhat more moderate with total nonfarm employment falling 8.0% from a year ago in March.

Recent Performance and Outlook
The Central Coast region is comprised of Santa Barbara, Monterey, San Luis Obispo, and Santa Cruz counties.

Central Coast job losses in the leisure & hospitality (-30.1%) and other services (-18.2%) industries remain staggering, and even mining & logging employment plunged 18.9% in March. Jointly, these three sectors were responsible for 56% of total job losses in March and continue to lag the other sectors of the labor market. Despite the massive loss of jobs in some sector, the unemployment rate in the Central Coast managed to improve to 6.7% in February, the second lowest among the four major California regions.

Central Coast Jobless Rate Down Sharply
Employment in the Central Coast is projected to rebound 1.6% this year and then accelerate to a solid 2.8% in 2022 as the COVID vaccine is more widely distributed, leading to a healthy bounce-back in the region’s all-important tourism industry.

The Central Coast jobless rate is expected to average 6.5% in 2021 – down from 9.2% last year – and 5.7% in 2022 as service job growth snaps back.

Housing Outlook
Central Coast existing home sales jumped 31.8% from a year earlier in March, the second strongest gain of all four California regions, trailing only the Bay Area. The vigorous growth in existing home sales is being sustained by pent-up demand and historically-low mortgage rates. Sales soared in each of the four counties, with particularly impressive gains in Santa Barbara (+47.2%) and Santa Cruz (+44.3%). Home sales increased at solid but relatively more modest rates of 27.0% in Monterey and 19.4% in San Luis Obispo.

Home prices in the region climbed 26.4% from a year earlier in March on robust housing demand in Santa Barbara and Santa Cruz Counties. The increase in home prices over the past year was the strongest of all four California regions. Home prices soared in Santa Barbara (+66.7%) and Monterey (+36.9%), while gains were strong but more modest in San Luis Obispo (+19.1%) and Santa Cruz (+18.9%).

Home prices in the Central Coast jumped 13.7% last year, the fastest pace of growth since 2013. Prices are forecast to rise another 18.0% this year on continued lean inventory and slow to 5.3% in 2022 as a rapid rise in housing starts increases the inventory for sale. The Central Coast’s Unsold Inventory Index was 1.6 months in March, down from 3.0 months one year ago.

Rebounding Tourism An Upside Risk
An upside risk to the Central Coast outlook is the region’s reliance on leisure tourism. The sum of retail trade and leisure & hospitality was 24.9% of total nonfarm employment in the Central Coast in 2020, with the largest share being 25.9% in San Luis Obispo. This compares to the national share of 19.8% and the California share of 18.9%. A combination of accelerating U.S. economic growth – partly due to the two pandemic aid packages – and a ramp up in COVID vaccinations could lift the number of visitors to the Central Coast region even more than we currently expect as households unleash pent-up demand for vacations, resulting in faster job and income growth for the Central Coast region than projected.

CENTRAL VALLEY

Employment Outlook
The Central Valley labor market has held up better during the pandemic than the other major regions of California. The Central Valley is less exposed to leisure and hospitality service industries that were most directly hurt by business restrictions related to the virus. The region’s outperformance extended into March, with total nonfarm employment falling 5.5% from a year earlier – by far the smallest decrease of any major California region and more than two percentage points better than the statewide average of -7.7%.

Even so, Central Valley jobs disappeared across all but two sectors over the last 12 months through March with the largest percentage declines in the severely disrupted leisure & hospitality industry (-25.0%). Employment in the mining & logging sector (largely oil extraction) plunged 16.4% despite oil prices being up 32% year-to-date. On a positive side, trade, transportation & utilities employment rose 1.9% year-on-year in March. Growth in this category has been positive for seven months in a row as economic activity recovers from the pandemic recession and the trade war with China.

Total nonfarm jobs are forecast to grow 2.3% this year with growth accelerating to 3.2% next year. Job gains would be more vigorous if not for persistent outmigration and weak population growth over the next two years.

The unemployment rate in the Central Valley has largely fallen since peaking at 16.1% in April, absent the slight increase in December after regional business restrictions were re-imposed. The jobless rate sank to a pandemic low of 8.2% in February and is forecast to average 7.6% in 2021 and then dip to 6.8% in 2022 as job gains accelerate. The historic pattern of the Central Valley having higher jobless rates compared to the other regions in the state is not expected to hold, partly because the regional labor market was less affected by the pandemic.

Housing Outlook
Central Valley home sales are growing at a slower rate than the other regions of California, but this is due in part to the lack of a downturn last year. Existing home sales rose 9.6% from a year ago in the Central Valley, while the other three California economic regions experienced home sales growth ranging from 24.5% to 35.0%. Home sales spiked 36.0% in Bakersfield while gains were much more modest in Sacramento (+7.8%), Fresno (+7.0%) and Modesto (+5.8%). Home sales declined 7.7% in Stockton. Home Sales Mostly Higher in the Central Valley

Despite the moderate gain in home sales, home price growth from a year ago was a solid 18.6% in March, primarily due to too few existing homes for sale. The number of months it would take to sell the existing home inventory at the current sales pace was just 1.6 months in March, down significantly from 2.6 one year earlier. Home price gains were pervasive in the Central Valley with notably strong growth in Fresno (+23.9%), Sacramento (+21.3%), Modesto (+19.9%) and Bakersfield (+19.5%). Central Valley home prices are projected to rise 16.0% this year, considerably higher than the long-run average gain of 2.0% from 2008 to 2019. Gains are forecast to moderate to 6.1% in 2022 as demand weakens and housing starts increase at double-digit rates for three years in a row, easing the severe existing home inventory shortage.

Oil Prices An Upside Risk
The sharp spike in oil prices this year is an upside risk to the Central Valley outlook. Prices for West Texas Intermediate (WTI) crude oil are up 32% year-to-date through April 28. Oil prices are being supported by a decision in early March by OPEC and its oil-producing allies to extend its one million barrels per day voluntary production cut into April.

According to a study by the Los Angeles County Economic Development Corporation (LAEDC), there were 38,940 jobs in San Joaquin Valley supported by the oil and gas industry in 2017. Moreover, the region is home to more than 83% of all active wells and accounts for 75% of total crude oil production in California. Higher oil prices are an upside risk to our Central Valley economic and employment forecast given the region’s exposure to the oil and gas industry. If oil producers respond to higher prices by ramping up production, job growth could be stronger than forecast and local government revenues could swell.

To learn more, check out the California Economic Outlook.

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