April 2008 Quarterly Forecast
> Labor Market Update
Labor Market Update
By Ryan Ratcliff
With the recent release of the benchmark revisions to California’s employment statistics, we can finally close the book on 2007. For California as a whole, the revised numbers for 2007 were worse than previous estimates, but did not contain any big surprises. Estimates of seasonally adjusted non-farm payroll growth in California between December 2006 and December 2007 were almost cut in half, revised from 78,800 (0.5%) down to only 40,700 (0.2%) – still positive, but just barely. Unfortunately, the new numbers show an outright decline in payroll employment through the second half of 2007, with January 2008’s level of non-farm payroll employment down 0.3% from its peak in July 2007. California job growth started decelerating in the summer of 2006, rather than in the spring of 2007, as the previous estimates indicated. This change in timing was almost entirely due to real estate related employment, with the slump in the Construction and Financial Activities sectors coming much earlier than we previously appreciated.
Figure 1:
Year-over-Year Growth in CA Non-Farm Payroll
Employment
Source: CA EDD, UCLA Anderson Forecast
Figure 2: Year-over-Year Growth in Oakland MD Non-Farm Payroll Employment
Source: CA EDD, UCLA Anderson Forecast
The East Bay / Oakland MD received one of the most surprising metro-level revisions. At first glance, the overall outcome was very similar to California. Like California, the decline in real estate related employment was moved forward from the spring of 2007 to the summer of 2006. As a result, the new figures suggest that East Bay has seen virtually no job growth over the past 12 months. The surprising parts of these revisions are at the sector level. Previous estimates suggested that the East Bay’s job growth was essentially a stalemate between real estate job losses and internally-oriented service employment growth (Education / Health Care, State and Local Government, etc.). According to the old estimates, from December of 2006 to December of 2007 Construction lost 7,400 jobs and Financial Activities lost 3,700 jobs. Over the same period, these losses were offset by the three big sources of job gains in the East Bay: Government (+5,500), Education and Health Care (+4,000), and Leisure and Hospitality (+2,000).
However, a closer look at March revisions reveals that the microcosm story no longer fits the data – in the new estimates, the most remarkable thing is how different the sectoral patterns of job growth are in the East Bay, relative to the state as a whole. Figure 3 shows 2007’s percentage growth in the major employment sectors in the East Bay versus California. Some of these differences are good news for the East Bay. Ironically, the biggest positive revision was in Construction, which was not nearly as weak as we thought: instead of losing 7,400 jobs over 2007, the job loss in the East Bay Construction sector was revised to only 400, largely thanks to much smaller losses among subcontractors. This amounts to a -0.5% decline in 2007, compared to the -6.5% decline experienced in the state as a whole. In the 2008Q1, we have seen Construction losses increase, with Construction employment in March 2008 down 4,200 jobs relative to March of last year. Not surprisingly, these losses were concentrated in Residential Building Construction (-1,500) and Specialty Trade Contractors (-1,300). But even categories with little exposure to residential construction have lost jobs: Nonresidential Building Construction and Heavy and Civil Engineering Construction categories together lost another 1,000 jobs relative to March of last year. But even with these more recent losses, Construction employment in the East Bay is doing surprisingly well given the decline in building activity.
Other sectors where the East Bay is noticeably outperforming the rest of the state include Retail Trade (which grew by 0.6% while California suffered a -1.3% decline) and the Government sector (which grew at 3.5% in 2007, compared to 2% for the state as a whole). Food/Beverage and General Merchandise/Department Store employment were the major sources of strength in the East Bay Retail Trade, while local government hiring in education made the difference in the Government sector, growing at 7.5% over 2007.
Figure 3: Percentage Change in Payroll Employment, Dec ’06 to Dec ’07 (Revised Estimates)
Source: CA EDD, UCLA Anderson Forecast
Figure 4: Change in Oakland MD Payroll Employment, Dec ’06 to Dec ’07 (Old Estimates vs. Revised Estimates, 1000s)
Source: CA EDD, UCLA Anderson Forecast
Unfortunately, for every sector that has outperformed the rest of California, there is another sector where the East Bay has been weaker. Estimates of Financial Activities job losses over 2007 in the East Bay were increased from -3,700 to -5,000, which translates to a -7.7% decline, compared to a -4.3% decline in California as a whole over the same period. In terms of the total decline in Financial Activities employment since the peak, these new estimates put the East Bay second to only Orange County.
A large part of this comes from the East Bay’s often underappreciated role as one of the centers of mortgage finance in California. We can use the idea of a “location quotient” to measure the concentration of employment in a local industry by comparing its share of local employment to the industry’s share of national employment. Generally speaking, a location quotient over 2 represents a high degree of specialization in an industry. According to the 2006 Quarterly Census of Employment and Wages, Orange County had a location quotient of 3.63 for Real Estate Credit (non-bank mortgage lending), while Contra Costa location quotient for Real Estate Credit was 2.46, compared to only 1.6 in San Diego and 1.5 for California as a whole. Alameda County’s is 0.47. Similarly, job losses in the Real Estate, Rental and Leasing sector have also hit the East Bay harder than most, thanks to Contra Costa County’s above average concentration of both Real Estate Agents (location quotient of 1.95) and Real Estate Appraisers (2.07). While this above average exposure to real-estate related finance weakness is a big part of the story, the East Bay has unfortunately also experienced losses in locally concentrated financial sectors that are less directly related to the housing bust. Almost all of the negative revision to the Financial Activities sector came in the Insurance Carriers and Related Industries category. The EDD data isn’t disaggregated enough to be more specific than that, but both health insurance and pension funds are local specialties that fall in this category.
With 2007’s estimated real estate related job loss more than cut in half, we might expect the East Bay to be looking a lot better than we thought last quarter. Unfortunately, this good news from the real estate sectors was accompanied by downward revisions to just about every other East Bay employment category. Two sectors that are especially important to the East Bay economy received major negative revisions. Computer and Electronics Manufacturing had originally looked like it was contributing to small positive job gains in Durable Goods Manufacturing in 2007, but growth in this industry ended up being revised from +500 to -900. Similarly, the old estimates consistently identified the Education and Health Care sector as one of the biggest consistent sources of East Bay job growth in the past two years. However, the new estimates reduced 2007 job growth in this industry by 2,300 jobs (over 50%) as estimates of growth in non-government Education employment were reduced by 1,600 jobs. Administrative Services and Leisure and Hospitality also saw significant negative revisions of -1,900 and -1,500, respectively. Taken together, these revisions are bad news for the East Bay economy. Instead of our old story of a tug of war between real estate weakness and growth in local specialties, the new estimates suggest that real estate weakness was not as bad as it looked previously, but that several of the East Bay’s specialty industries are also weaker than we previously appreciated.
Elsewhere in the Bay Area…
In the other Bay Area metros, the revisions to 2007’s employment numbers were much less newsworthy. In the San Francisco MD, job growth in 2007 was revised up from 15,500 (1.6%) to 19,500 (2.0%), with most of the new growth coming from Construction and Leisure and Hospitality, where estimates of 2007 job growth were revised up by 1,800 and 2,500 jobs, respectively. The San Jose MSA revisions went exactly the opposite way: there was little change in overall job growth in 2007 (revised down to 10,400 from 12,800), but with some significant changes in sector level growth.
In contrast to the East Bay, the San Jose MSA got major upward revisions in high tech sectors. Estimates of job growth in Durable Goods Manufacturing were more than doubled, from 2,300 to 5,400 new jobs in 2007, with most of the new jobs coming in the Computer and Electronics Manufacturing category. These impressive gains in high tech manufacturing are a stark contrast to the continuing slow bleed we see in the East Bay and the rest of California. Similarly, the new estimates of job growth in the Information sector were also more than double the previous estimates (2,300 vs. 900). However, the good news from high tech sectors was almost entirely offset by the big negative revision to Leisure and Hospitality employment in San Jose: job growth in this sector was revised from +2,200 to -500. Thus, the positive gains in high tech were wiped out by negative revisions to other sectors, leaving us with the same basic story as before: San Jose’s economy is growing noticeably slower, but remains one of the bright spots in the California economy.
Figure 5: Change in San Francisco MD Payroll Employment, Dec ’06 to Dec ’07 (Old Estimates vs. Revised Estimates, 1000s)
Source:
CA EDD, UCLA Anderson Forecast
Figure 6: Change in San Jose MSA Payroll
Employment, Dec ’06 to Dec ’07 (Old Estimates
vs. Revised Estimates, 1000s)
Source:
CA EDD, UCLA Anderson Forecast
While a lot of the discussion of these revisions often feels as interesting as a trip to dentist, in some cases we find that the revisions force us to alter our story of what’s been driving growth in the local economy. We’ve known for some time that East Bay economy has slowed significantly in the past year, but we now find out it’s for different reasons than we thought. Real estate has taken a big bite out of local job growth, but we now see that most of the casualties have come from the financial side instead of Construction. And instead of our image of a tug-of-war between real estate weakness and continued growth in non-real estate sectors, we now see that several East Bay staples like Education / Health Care seem to have their own reasons for weakness.
Our remaining task is to figure out what these changes mean for the East Bay outlook in 2008. Obviously, the first question we’ll have to face is how real estate related sectors will fare, and in particular how the East Bay’s odd combination of big losses in Financial Activities but small losses in Construction will play out. For some help in figuring this out, we’ll look back at the last big construction slump in the East Bay, and we’ll look across California today to see if there are any other regions with a similar combination of symptoms. After that, we’ll need to also explore what we’re likely to see in the non-real estate industries.
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