Issue #3:  Are there any “savior sectors” that can pick up the slack?

The cooling housing market has already taken a heavy toll on job growth in California: weakness in real estate related sectors bringing January-October 2006 job creation in at 36% lower than January to October of 2005, with almost every sector experiencing slower job growth.  Since 2007 will hold just as much if not more real estate related job weakness, one of the central questions for the California forecast is whether there are any sectors poised to offset this housing drag.  Based on their external orientation and their current importance to total job growth, we think there are two possible candidates: the Professional/Business Service (PBS) sector, and Leisure and Hospitality (L/H).

CA New Jobs by Sector, Year-to-Date (1,000s, Seasonally Adjusted)

These two industries have been a crucial part of the recovery from the 2001 recession. The period from October 2003 through October of 2006, our most recent data, roughly spans California’s climb back from the low point of total employment after the recession.  During this period, California added 662,000 payroll jobs.  On several occasions we have pointed out that this recovery was heavily reliant on the 108,000 jobs created in the Construction industry.  However, the Construction industry was in fact only the third biggest source of new jobs in California, behind PBS (158,000 new jobs), and L/H (116,000 new jobs). 

Although the PBS sector continued as the biggest source of new jobs in 2006, a change is in the wind.  Growth during this three-year recovery period was fairly evenly split between the knowledge-intensive Professional/Technical Services (Pro/Tech) and Administrative Services categories, with a slight edge going to Pro/Tech.  However, 2006 saw an across-the-board slowdown in Pro/Tech, with year-to-date job creation in 2006 down by over 50% compared to last year.  Part of this is a real estate driven slowdown in Architecture and Engineering Services, but the consulting and computer design sectors have also slowed compared to similar data for 2005.  Pro/Tech employment is still a slightly larger share of total employment than it was at the height of the tech boom, so this slowdown looks like a transition from a recovery period back to a slower long-run trend level of growth.  In this light, an acceleration of job creation in Pro/Tech looks unlikely in 2007.

CA New Jobs in Professional / Technical Services, YTD (1,000s, Seasonally Adjusted)

Thus, any PBS help would have to come from the decidedly less exciting Administrative Services category.  The murky realm of Employment Services, which includes temp workers of all stripes, from secretaries to engineers, makes up 45% of employment in this category.  In fact, the top three occupations represented in this industry in 2004 might surprise you: Laborers and Freight, Stock, and Material Movers was #1 at 85,800 workers, Production Workers (i.e. manufacturing jobs) was #2 at 32,500, and Office Support Workers was  #3 at 28,800.  Employment in this industry was mostly flat through the early part of the PBS recovery, but saw significant growth in 2005 and even better growth in 2006.  In fact, Employment Services has been the main engine of growth in Administrative services – most of the other components saw 2005’s moderate growth slow in 2006.

CA New Jobs in Administrative Services, YTD (1,000s, Seasonally Adjusted)

Based on what we see, it looks unlikely that PBS is in any position to pick up the slack from a slowing real estate sector.  Job growth on the Pro/Tech side looks to be transitioning from a period of rapid growth in the aftermath of the tech bust to a period of slower “normal growth.”  On the Administrative Services side, the only candidate for faster growth in 2007 would be Employment Services, but this seems improbable for two reasons.  First, demand for temp workers has to come from somewhere else in the economy – this industry can’t pull itself along by the bootstraps.  Second, any significant expansion of this industry at this point in the business cycle would more likely represent replacing permanent workers with temps, as opposed to filling new positions quickly with the intent of hiring full time later.  While we will continue to watch developments in this important sector in 2007, at this point it looks like the best we can hope for from PBS is steady as she goes.

How about the Leisure and Hospitality industry – can California’s booming tourist industry offset housing weakness?  L/H has seen strong and steady employment growth in the past two years, and is one of the few sectors to show no sign of slowing in 2006.  However, the industrial distribution of this steady growth suggests that tourism is only part of the story.  69% of the L/H jobs added in 2006 have been in the restaurant industry, with limited service restaurants (i.e., fast food) as the biggest source of growth.  While some of this growth can undoubtedly be linked to a healthy tourism sector, the boom in fast food employment suggests that some of this is the second wave of the residential building boom – as major new developments create new populations centers, restaurant and retail centers will surely follow. 

CA New Jobs in Leisure/Hospitality, YTD (1,000s, Seasonally Adjusted)

CA New Jobs in Food Service (1,000s Seasonally Adjusted)

The importance of the restaurant industry to this sector’s growth over the past two years diminishes our hope that L/H could play the role of savior sector in 2007-8, since productivity in the Accommodation/Food Service industry is the lowest of any industry in California ($36,494 of Gross State Product per worker in 2004). Imagine a scenario where 2007 has exactly the same level of overall job creation as 2006, but the bulk of those new jobs were in Accommodation and Food Service instead of in Construction.  The lower productivity of workers in the Leisure and Hospitality sector means that even though total employment was unaffected, the overall economy ends up producing less.  So even if the pace of job creation in this sector accelerates substantially next year, it would not be enough to counteract the slump in construction and real estate.