July 2008 Quarterly Forecast
> Job Markets
By Ryan Ratcliff
For a long time, we’ve argued that the deepening slump in California’s housing market would take its toll on the wider economy. The slump in building activity would lead to substantial job loss in Construction, while the contraction of home sales and the tightening of lending standards would lead to weakness in real estate related Financial Activities. Qualitatively, this has turned out to be a fairly accurate description of the California labor market’s long, slow slide over the past two years. Quantitatively, the job loss in Financial Activities has far exceeded our expectations, losing almost as many jobs as Construction.
At the time of our last quarterly report, year-over-year non-farm payroll growth in California had turned negative, as weak-but-positive job growth in the Bay Area (San Francisco MSA) and Central Valley (Sacramento, Stockton, Modesto, Fresno, and Bakersfield MSAs) finally succumbed to the increased pace of job losses in Southern California (Figure 12). Since April, this situation has deteriorated even further, as both the Bay Area and Central Valley have seen year-over-year job growth grind to a halt in 2008Q2, while the contraction in Southern California employment has continued. In all three regions, non-farm payroll employment is below last June’s level.
Figure 12: Year-over-Year Growth in CA Non-Farm Payrolls by Region
Source: CA EDD, UCLA Anderson Forecast
Until recently, the Bay Area had largely been the sunny spot in this gloomy story: it had a lower than average exposure to the construction boom, and the high-tech sectors were finally starting to get back on their feet. This has made the recent slowdown in the Bay Area especially sharp, with year-over-year payroll employment growth moving from 1% in April to -0.2% in June. In the past two years, the East Bay (Oakland MD) has been the primary source of weakness, while the San Francisco MD and San Jose MSA have enjoyed some of the highest job growth in the state. However, this trend changed significantly in the second quarter, with all three Bay Area economies showing sharply lower job growth in 2008Q2 (Figure 13).
Figure 13: Year-over-Year Growth in Bay Area Non-Farm Payrolls
Source: CA EDD, UCLA Anderson Forecast
Figures 14-16 highlight the major trends in the Bay Area by showing year-over-year job growth in 5 groups of industries. Each of the three regions in the Bay Area is a variation on three themes: an asymmetric recovery in the high tech sectors, real-estate related job loss, and local idiosyncratic shocks.
Figure 14: Oakland MD Year-over-Year Employment Growth in Major Sectors
Source: CA EDD, UCLA Anderson Forecast
Figure 15: San Jose MSA Year-over-Year Employment Growth in Major Sectors
Source: CA EDD, UCLA Anderson Forecast
Figure 16: San Francisco MD Year-over-Year Employment Growth in Major Sectors
Source: CA EDD, UCLA Anderson Forecast
East Bay (Oakland MD)
Unfortunately, the East Bay has emerged as the weakest of the three job markets. It has experienced the worst real estate related job losses, it has experienced the shortest-lived recovery in high-tech, and has also been hit by some ill-timed shocks from the government sector.
Job growth in the East Bay peaked in 2006Q2 as both manufacturing and high-tech service employment (Information and Professional/Business Services) shook off the tech bust doldrums to post solid gains. Combined with solid growth in Retail/Wholesale Trade and continued steady growth in other service sectors like Health Care, this tech renaissance was enough to offset the weakness that was already starting to emerge in the real estate sensitive sectors. Unfortunately, the recovery of the high-tech sectors was short-lived: over the course of 2007, both manufacturing and high tech services crossed back into negative territory. At the same time, real estate related job losses leveled off at around -5% year over year for most of 2007: Construction employment was flat, while real-estate related Financial Activities continued to lose jobs.
Figure 17: Oakland MD Sectoral Employment Changes by Quarter (1000s)
Source: CA EDD, UCLA Anderson Forecast
In 2008Q2, seasonally adjusted non-farm payrolls declined by 7,000 jobs (-2.65% on an annual basis). Close to half of this decline came from the Construction sector, which lost 2,900 jobs over this period. In some sense, this represents the numbers catching up with reality: the East Bay’s decline in residential permit activity has made this correction inevitable. Unfortunately, Figure 18 suggests that these losses may be only the beginning. Looking back at the last big building slump in the East Bay, we see that in the 1990s, a 40% decline in building permit activity over a 16-24 month period led to a 25% decline in Construction employment in the three years following the peak of building permits. The coordination of the downturns in permits and Construction employment is obviously different this time around. But the relative magnitudes from the last building slump suggest that we’ve only seen the tip of the iceberg in East Bay Construction job losses: East Bay building permits are now down 60% relative to their peak. The lack of growth in Construction jobs has kept East Bay job growth weak for more than a year now; following the rest of the state into outright job losses in Construction has only made things worse.
Figure 18: Updated Index of Oakland MD Res. Building Permits (Smoothed, SA) and Construction Employment (SA)
Source: CIRB, CA EDD, UCLA Anderson Forecast
On the Financial Activities side, we continue to see steady job losses, averaging 1,200 jobs a quarter since the summer of 2007. Not surprisingly, these losses have concentrated in the mortgage-heavy Credit Intermediation sector, but the Insurance Carriers and Related sector has also seen mounting job losses in the last year. As we discussed in the last East Bay report, Contra Costa County has one of the highest concentrations of mortgage-related employment in the state – not quite as high as Orange County, but higher than San Diego. These financial jobs are some of the highest paying jobs for any given level of educational attainment, so the loss of these jobs leads to a disproportionate loss of local personal income and output.
While real estate related job loss is a familiar story line in the East Bay, the deterioration of the Retail Trade sector is something new in 2008. In the most recent twelve month period (since June 2007), the East Bay has lost 3,100 jobs. Retail Trade job loss in 2008Q2 accounts for nearly half that total at 1,500 jobs. Fully 2,200 of these 3,100 lost jobs fall into the unhelpfully labeled Residual category, which the Employment Development Department suggests is primarily a combination of the Furniture and Home Furnishings and Building Material/Garden Supply categories. Contra Costa County in particular has an above average concentration of Building Materials stores, which accounted for 1.4% of the county’s employment in 2006, compared to 1.04% for California as a whole. So most of the recent job loss in East Bay Retail employment is in sectors that are collateral damage in the housing slump: furniture stores suffer when home sales are low, and building supply stores suffer a double whammy from a slump in construction/remodeling and low home sales volumes. Outside of these housing-specific retail sectors, there is a trickle of job losses across the retail sectors, but not the catastrophe suggested by the aggregate numbers.
Figure 19: Oakland MD Food Service and Drinking Places Employment (1000s)
Source: CA EDD, UCLA Anderson Forecast
Last but not least, two of the biggest sources of recent weakness in the East Bay are just plain quirks. First is the loss of 1,750 Leisure and Hospitality jobs, with 1,000 of these jobs coming from restaurant related employment. In one sense, this is simply a continuation of the weakening that started in the summer of last year, and has been felt across the Bay Area. But part of this rather large drop comes from a break with seasonal trends: Food Service and Drinking Places employment has stayed flat at a time when we normally expect a summer hiring boom, leading to seasonally-adjusted job losses. This weakening in restaurant employment has occurred across California, but has been most noticeable in building boom regions like the East Bay, or in the Riverside and San Bernardino in Southern California. This suggests there are two forces behind this trend: a mild decrease in spending across the board, coupled with overextension of the restaurant industry in overbuilt areas. The second quirky source of East Bay job loss came from the State Government category. The most likely source of these losses is the one-off reorganization of the Lawrence Livermore National Laboratory. However, the budget crisis in Sacramento suggests that this sector is primed for further losses – just not from the same sources as 2008Q2.
San Jose MSA
San Jose represents the middle ground on our three themes: a strong recovery in high-tech sectors that has begun to slow a bit in recent months, moderate levels of real estate related job loss, and some weakening in Retail and Leisure/Hospitality.
San Jose was the center of the tech renaissance we discussed before, benefiting from a recovery in Professional / Technical Services and Information employment in 2006 and 2007, followed by a surprising but welcome recovery of high-tech manufacturing employment that continued through 2008Q1. This recovery lost a little bit of steam in the most recent quarter, but Manufacturing employment is still higher than last year in San Jose, which is at odds with just about every other economy in the state. Similarly, most other service sectors have slowed, but are still in positive territory for the last twelve months.
Just like the East Bay, Construction employment in San Jose in 2007 was showing a gradual trend of job loss, worsening in 2008. In 2008Q2, San Jose lost almost as many Construction jobs as the East Bay (2,000 versus 2,900), in a sector that is only two-thirds the size (46,500 Construction jobs in San Jose in March 2008, versus 69,500 in the East Bay). Real estate woes are taking just as big a bite out of the San Jose economy, but are concentrated in Construction rather than evenly split with Financial Activities. The slowdown in San Jose’s overall job growth in the most recent quarter is a familiar story: real estate weakness dragging down the rest of the economy, but no other obvious source of significant weakness.
San Francisco MD
As the part of the Bay Area that is least exposed to real estate troubles, the San Francisco MD continues to see the best job market in the region. Real estate related jobs have actually been a positive contribution, with small gains in Construction offsetting smaller losses in Financial Activities. High-tech service employment has been booming in the 3-4% a year range since the summer of 2007, but has slackened slightly in the most recent quarter, being the primary culprit in San Francisco’s overall slowdown this quarter. The metro has also benefited from a small but sustained spurt of growth in Manufacturing similar to what we’ve seen in San Jose. This makes the San Francisco and Oakland metros the polar opposites of today’s Bay Area economy. Both economies are slowing. But while the East Bay has seen real estate take a big bite out of local job growth, the San Francisco MD has largely been insulated from these problems, with little or no building boom and a Financial Sector that is not concentrated in real estate finance. San Francisco has also managed to maintain good growth in Professional/Business services, even as San Jose has started to see its recovery in this high tech sector falter a bit.
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