July 2008 Quarterly Forecast > California
By Jerry Nickelsburg
Labor Market Update: Flying Low Through the Slowdown
Let’s turn our attention to California by first taking a look at employment and unemployment for the first four months of 2008 as compared to the same period in 2007 and going through some of the numbers. California has been adding an average of 20,000 net new labor market participants per month over the last year but only creating about 3,500 new jobs per month. Unemployment has jumped from 5.25% in the first quarter of 2007 to 6.28% in the first quarter of 2008 and it has been at 6.2% since March. The current level is still substantially below the recession levels of near 7% experienced in 2002-2003, but a big jump nonetheless.
There has been virtually no growth in non-farm employment in the past three months. The principal culprits creating the drag in payrolls are construction and finance, and the housing sector related occupations, losing almost 120,000 jobs in the first quarter. With the exception of Retail; Trade, Transportation and Warehousing employment growth has slowed, but remained positive. Retail employment is down due in part to weak auto and department store sales. Manufacturing is still losing jobs, but at a rate no greater than in the boom days of 2004/2005. If we focus only on those sectors losing payroll employment, over 75% of the job loss is in our culprit sectors.
Did it Really Stay in Housing?
Our theme three months ago was “what happened in housing stayed in housing,” and it appears to be as true today as back in March. Comparing actual to forecast, we underestimated the declines due to housing on the one hand and underestimated the gains in employment in the services sectors on the other. This is good news because if California maintains its elevation slightly above water, is just overcoming the drag from construction and finance and there is no generalized spread of contraction to the rest of the economy, then when those sectors do hit bottom, California will be poised to take-off once again.
A Picture of California’s Regions
Slicing the numbers geographically yields an interesting picture of today’s California economy. The Inland Empire and Orange County are the biggest losers through the first four months of 2008. The Inland Empire was hard hit by the housing downturn and without growth in imports, the driver of the region’s logistics industry, the downturn has resulted in a net loss of 24,000 jobs.
Orange County is another story. It was the center of what was a boom and is now a shrinking industry: home mortgage finance. The industry was structured to handle the high volume of transactions experienced in 2004-2006 and must now adjust to the new and more sustainable level of activity. We will take a look at this later in the report to try to determine how long it will take Orange County to recover the jobs which have been lost by this structural transition. Ventura and San Diego have both experienced small declines in employment, again due to the housing downturn in the early part of this year.
On the positive side, the Bay Area and Los Angeles continue to carry the state with widespread job gains in the service and selected manufacturing sectors. Export oriented, diversified, and less exposed to the housing bubble, they continue to grow and benefit from both that growth which is taking place elsewhere in the U.S. and the boom in exports from the U.S. More surprising is the growth in jobs in the Central Valley and Central Coast. These two regions share three characteristics, they were both hit hard by the housing downturn, they are both major agricultural business centers, and they both continue to grow. This is a welcome surprise.
Structural Change: California and Orange County Employment
One striking characteristic of times of economic turbulence is that they often set into motion structural change processes which continue long after the turbulence has passed. It is important to distinguish the two, particularly as it appears that in California the Mortgage Finance Industry is undergoing structural adjustment which will play out quite differently than the slowing U.S. and California Economy.
The graph below tracks nonfarm employment rate for the nation and California since 1970. The recession periods are characterized by sharp drops in employment growth into the negative range and sharp increases back to normal. They are short-lived phenomenon and usually the U.S. and California move lock step together. The one exception is 1990 when California continued to shed jobs several years later than the U.S. This, of course, was the contraction in the aerospace industry.
Studying past instances of structural change in the nation’s regional economies enabled us to develop a basic structural change recovery model to better understand what to expect for Orange County and the state overall. Recent growth in Orange County has been fueled by the housing bubble. Orange County’s high recovery model score means that if the other sectors in Orange County don’t start growing faster, and we see no reason why they should in an otherwise sluggish 2008/2009 economy, then it will take longer for the regional economy to recover from this important, but now much smaller industry. This means it will be around 2012 or 2013 before Orange County has fully regained the employment it lost in the home mortgage implosion. Since the mortgage finance industry is too small in and of itself to pull California employment growth negative there is no recovery story per se here, but the time to recovery, just as with the Bay Area in 2001 will be a drag on California growth.
Forecast and Conclusions
Our forecast is not much changed from three months ago. We are predicting a very weak California economy in 2008. The strength in exports of both goods and services in the Bay Area, and Los Angeles and in agriculture in the Central and Salinas Valleys will probably keep California employment flat the first half of the year. Real income and real taxable sales will both show small losses in the first half of the year.
The cry of a crisis in public finance is real as the slowdown in growth and in important tax generating activities will hit the coming fiscal year hard. After the first two quarters we will begin to grow again and personal income overall will achieve a 1.5% growth rate for the year. This is a tad faster than the U.S. economy. The faster growth for California is a reflection of California being heavy in those things driving the U.S. recovery as well as a slightly faster than average growth in the labor force.
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