January
2008 Quarterly Forecast
> Labor Market Update
Labor Market Update
By Ryan Ratcliff
While the Bay Area labor market on balance remains slightly better off than California as a whole, the job market news in the fourth quarter of 2007 was almost all bad. The East Bay / Oakland Metropolitan District (MD) posted overall job losses for the first time since 2004, as real estate related jobs losses swamped small gains in other sectors.
Beyond the East Bay, both the San Francisco and San Jose metros have seen job growth in the tech sector slow significantly. However, relatively low exposure to job losses in Construction when compared to the rest of California make the San Francisco and San Jose regions two of the bright spots remaining in the state economy, even with this slowdown in tech job growth.
Interestingly, the San Jose MSA was one of the few regions of California to see an acceleration of job creation at the end of the year, fueled by a fourth quarter explosion of Leisure and Hospitality employment. Thus, we can view the East Bay’s job market at the end of 2007 as the sum of two parts: the overall slowing in the Bay Area economy, exacerbated by housing weakness. To understand the interaction of these two forces, we’ll first focus on some statewide and Bay Area trends, and then talk specifically about how these trends are interacting with the housing weakness in the East Bay.
Figure 1: Year-over-Year Growth in Non-Farm Payroll Employment
Source: CA EDD, UCLA Anderson Forecast
Figure 2: Quarterly Changes in Non-Farm Payroll Employment (1000s SA)
Source: CA EDD, UCLA Anderson Forecast
One of the biggest stories in the state labor market in recent months has been the surge in the unemployment rate, which has risen by 1.3% over the last 12 months to stand at 6.1% at the end of 2007. Bay Area unemployment has seen a similar increase in all three regions, though the level of unemployment continues to be lower than the state as a whole, in stark contrast to 2001. This statewide spike in unemployment has been the cause of much concern, since California’s unemployment rate has never risen this fast without a recession. However, there are several suspicious features of this recent increase in California’s unemployment rate. For the first three quarters of 2007, California’s unemployment rate was rising as the US rate stayed flat – which is also unprecedented. Each of the last two recessions were concentrated in California-specific industries (aerospace and high-tech), yet in both of these recessions US and California unemployment spiked almost simultaneously. It is also quite suspicious that we’ve seen a recession-like increase in unemployment without an actual contraction of job growth in California: the source of this unemployment spike is fundamentally different than previous increases. In this case, unemployment has been created by the combination of weak employment growth coupled with abnormally high growth in the labor force. With California’s population growing at around 1.3% for the past several years, the 2% labor force growth we’ve seen in 2007 starts to sound like a major demographic shift, or a statistical quirk.
Figure 3: Unemployment Rates (Seasonally Adjusted)
Source:
CA EDD, UCLA Anderson Forecast
There’s no doubt that the weakening economy in 2007 has resulted in a significant increase in California unemployment. But before we start screaming recession, it’s important to recognize that this increase in unemployment is fundamentally different than the increase that has accompanied previous recessions, and looks like it is in part a statistical quirk. Perhaps the Bureau of Labor Statistics’ (BLS) own estimate of the imprecision of the unemployment estimate is our best guide. The BLS lists the December 2007 unemployment rate for California as 6.1% +/- 0.4% (i.e. the 90% confidence interval for the unemployment rate is 5.7% - 6.5%). This means that even a statistician would concede that the California unemployment rate has increased substantially from the beginning of the year, and is higher than the US rate. Revisions to the 2007 unemployment estimates are due in a few months, and should provide some much need clarity on California’s unemployment situation.
Speaking of revisions, we’re also very close to the annual revision of California’s payroll employment numbers. Before we wade into the industry level detail of recent job growth in the Bay Area, it’s worth reiterating that these end of the year estimates will likely be substantially revised in March. However, we can make some educated guesses about which way the industry level revisions might go at the state level by comparing the official monthly estimates from the Current Employment Statistics (CES) survey with the more detailed but less timely Quarterly Census of Employment (QCEW) and wages. Figure 4 presents the difference in the estimates of sectoral employment between these two surveys for 2007Q2, the most recent period in which they overlap.
Figure 4: Differences in 2007Q2 Estimates of CA Non-Farm Payroll Employment by Sector (QCEW – CES, 1000s Seasonally
Adjusted)
Source:
CA EDD, UCLA Anderson Forecast
Since this new QCEW data is also subject to revision, we should treat these estimates fairly cautiously: sectors with negative numbers (i.e. lower QCEW estimates relative to the official CES numbers) will likely see some negative revisions in March, while sectors with positive numbers will probably be revised up to some extent. Overall, it looks like more sectors will receive negative revisions, which will likely bring down 2007’s overall job growth even more than the already weak initial estimates. However, California job growth remained positive in 2007 even when viewed through the QCEW numbers. On a sector by sector basis, it appears that the real estate slowdown took an even bigger bite out job growth than what was initially perceived, with Construction and Financial Activities likely to receive a negative revision in March. The news outside the real estate sectors is also mixed: the recent weakness in Retail Trade and Professional/Technical Services may not be as bad as the numbers suggest, both the Administrative Business Services and Durable Goods Manufacturing will likely see substantial negative revisions. Given that Manufacturing is usually implicated with Construction as the major sources of job loss in a recession, this worse-than-expected job loss in Manufacturing is cause for concern.
With these revision caveats in mind, we can now turn to a closer look at recent job growth in the Bay Area. At first glance, the big story in the San Francisco MD has been the major slowdown in Professional/Technical Services job growth in the fourth quarter, moving from the major source of new jobs in the previous three quarters to next to no job growth in the fourth quarter. However, we also saw this pattern in 2006: growth slowed dramatically in the 2006Q4, but came back strong in 2007Q1. Now in 2007Q4, the seasonally-adjusted series once again looks flat, but the raw data still shows steady job growth. This starts to look like we’re seeing the beginnings of a change in this industry’s seasonal pattern – especially since we’re seeing a similar pattern in the San Jose MSA. Otherwise, most of the sectors look like they are extending the slowing trends seen earlier in the year: Financial Activities was the biggest loser in the fourth quarter, but Retail Trade and Information employment also posted very small job losses. Perhaps the biggest surprise was that San Francisco’s biggest source of new jobs in Q4 was… Construction?! As we’ve pointed out in previous reports, at the end of the year it always pays to look at the seasonal variation in Construction first. Once again, it looks like a large part of the growth in seasonally-adjusted Construction jobs is actually a by-product of the slowdown in construction activity. During the boom, construction employment had a very pronounced seasonal cycle, but now that the boom is over, this cycle is not nearly as big. But when the seasonal adjustment is calculated on the basis of history, the smaller than usual decline in Construction employment ends up looking like seasonally-adjusted gains.
Figure 5: San Francisco MD, New Payroll Jobs by Sector (1000s SA)
Source:
CA EDD, UCLA Anderson Forecast
Bottom line for the San Francisco MD: while there are few seasonal quirks in the data, the overall message is across-the-board slowing. While we are hopeful that we’ll see a 2008Q1 recovery in Professional/Technical Services growth, we can’t help but worry that some of the slowing in this sector is being driven by a weaker economy.
Many of these same themes are present in the San Jose MSA as well. Professional/Technical Services actually posted job losses in 2007Q4, which lends some credence to our worry that some of this slowdown is based on fundamentals rather than seasonal factors alone – San Jose’s 2007Q4 slowdown looks much bigger than the corresponding drop in 2006Q4. Information and Retail Trade also show slightly bigger job declines, but the same basic pattern as the San Francisco MD. Like San Francisco, San Jose also experienced a similar but smaller increase in 2007Q4 Construction employment. One notable difference is that Durable Goods production provided some good news for San Jose, as both Durable Goods Manufacturing and Durable Goods Wholesale Trade saw job growth accelerate in 2007Q4. This surge has not come in any one specific industry (such as Computer and Electronics Product Manufacturing), but rather is the accumulation of small gains in just about every durable goods category. And while this good news must be tempered a little with our previous discussion of the potential downward revisions to the Durable Goods Manufacturing, the corresponding health in Wholesale Trade for Durable Goods sector suggests that some of these gains may have some staying power.
Figure 6: San Jose MSA, New Payroll Jobs by Sector (1000s Seasonally Adjusted)
Source:
CA EDD, UCLA Anderson Forecast
The big news for San Jose in Q4 was the explosion of Leisure and Hospitality employment, which generated more than twice the job growth of any other sector. Unfortunately, this too has a seasonal explanation: Food and Drinking Establishments in San Jose saw a smaller than usual decline in employment, rather than an outright increase. A less than expected seasonal decline is still good news, but it hardly marks the beginning of a tourism boom in San Jose. The bottom line for San Jose is very similar to San Francisco: slower growth across the board, tempered by a couple of bright spots. The positive growth in durables-related industries is certainly a welcome dose of good news amidst the slowing, but it remains to be seen how this industry will fair in the March revisions.
Not surprisingly, the East Bay at the end of 2007 can be viewed as combination of wider Bay Area trends combined with the metro’s above average exposure to the real estate slowdown. The East Bay’s story has to start with Construction: everything else pales in comparison to the 7,000-plus jobs lost in this sector in the last three quarters. As in other Bay Area regions, a small gain was posted in 2007Q4 Construction employment, driven largely by the fact that the typical contraction of employment in 2007Q4 didn’t occur thanks to the job losses in the previous quarters. Job losses in Financial Activities also accelerated substantially in 2007Q4, fueled largely by real estate related finance losses. Outside of the East Bay’s real estate woes, the rest of the economy looks similar to the rest of the Bay Area: small job losses in Retail and Professional/Technical Services, with across the board slowing in most other sectors. There is one small dose of good news: the Transportation Warehousing and Utilities sector sustained its trend of small but steady growth even at the end of 2007. The official statistics don’t give enough detail to nail down the exact source of these gains, but it seems likely that one way or another this growth can be traced back to the East Bay’s ports.
Figure 7: East Bay (Oakland MD) New Payroll Jobs by Sector (1000s Seasonally Adjusted)
Source:
CA EDD, UCLA Anderson Forecast
Bottom line for the East Bay: A slowing Bay Area economy coupled with the Region’s prior real estate and construction boom is an unfortunate combination, resulting in an economy that is now underperforming the state as a whole. We look for real estate to continue to be a major drag on the East Bay economy for most of 2008. The important question now is how well the entire Bay Area’s recovering specialty industries will fare in the sluggish economy of the coming year.
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