Spring 2023
SOUTH BAY
Presented by Beacon Economics
Welcome to The Regional Outlook, a forecast for five of the state’s largest metropolitan economies. Each quarter, find updated analysis that goes beyond the state and national level to present a snapshot of employment, home prices, consumer spending, personal income, and other leading economic indicators within key areas of the state. Visit your region of interest and subscribe for email delivery.
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Labor Market: As Good As Expected
The San Jose MSA, which comprises San Jose and San Benito Counties (the South Bay) closed out 2022 with job growth remaining at the same rate as previously estimated. In March, the California Employment Development Department (EDD) released annual benchmark revisions to their monthly employment survey estimates. These revisions did not change the original estimates of the South Bay’s labor market.
Every year, the EDD revises its monthly survey estimates with the Quarterly Census of Employment and Wages (QCEW), which covers roughly 97% of all wage and salary employees in the nation. Prior to this revision, employment in the South Bay was estimated to have increased by 4.1% from December 2021 to December 2022 – that remained unchanged. While the topline figures were unaffected by the revisions, one industry that saw significant downward revision was the Professional, Scientific, and Technical Services sector, which includes many of the businesses that make up the ‘tech’ sector. Although employment growth came in slower than initially expected, the long-term trend for tech employment is still quite strong.
Despite some headwinds, Beacon Economics is maintaining its slow growth/no recession outlook, both nationally and locally. While the labor market provides important insight into the local economy, business and consumer spending is also crucial. When businesses spend money locally, they create jobs, generate income for residents, and contribute to the overall economic growth of a region. This can result in a multiplier effect, as the money spent by businesses circulates throughout the local economy, creating further opportunities for growth. Similarly, when consumers spend money at local businesses, they keep money circulating throughout the community, which can lead to increased employment and business growth.
Sales tax receipts data from HdL Companies shows that business and consumer spending continues trending above pre-pandemic levels. Since the first quarter of 2020, sales tax receipts in Santa Clara County have increased by 17.6%. This is marginally slower than San Benito County, which rose by 29%, matching the state-level increase. A more detailed breakdown of spending in the South Bay shows that nearly every category has increased, especially Fuel and Service Stations, which increased by 37.9%. This jump is unsurprising given the rising cost of oil and the relatively inelastic demand for travel (not as price sensitive).
The weakest category for spending was Food & Drugs, which declined by 3.3%. This category primarily evaluates grocery stores, and the decline might not come as a surprise given the decrease in Santa Clara County’s population. Travel to the South Bay has also been limited, as indicated by total passenger counts through San Jose International Airport. However, that hasn’t slowed down discretionary spending for residents and visitors alike, with sales tax receipts for Restaurants and Hotels increasing by more than 25% over the first quarter of 2020.
Despite headlines about tech layoffs and bank runs, Beacon Economics expects the consumer to keep the economy afloat in the near term, in line with the improvements seen in the labor market. Steady gains in payrolls in the local economy over the last year have driven the unemployment rate below 3% in the region, a -1% decrease from last year. With the unemployment rate back to its pre-pandemic level, and non-farm employment inching toward all-time highs, Beacon Economics is forecasting South Bay employment levels to continue expanding throughout 2023. Non-farm employment is projected to grow at a steady pace of around 2% for the year, while unemployment will likely hover around the 3% mark.
A ‘Synchronized’ Decline In Home Price Growth
Unlike the labor market, housing continues showing signs of weakness. Rising interest rates have taken a toll on the market, making mortgages more expensive and sidelining would-be homeowners. As a result, home price growth has decelerated, and there has been little relief in terms of new housing production or new inventory of homes on the market. Higher frequency data from Zillow shows a synchronized decline in home price growth, with many markets in California starting to see negative year-over-year growth in home prices.
In February 2023, Santa Clara County home prices had decreased by 0.3% compared to a year ago. Steeper declines were observed in San Benito County, where home prices fell more than 5% year-over-year. At the same time last year, home price appreciation was in double-digit territory. As it stands, however, there is a very limited supply of homes for purchase on the market. Many homeowners opted to refinance when mortgage rates ticked down to all-time lows during the onset of the pandemic. Since then, the cost of owning a home has risen rapidly, shrinking the number of buyers that can afford to enter the homeownership market and likely keeping many who already own from considering a move – even in high-income Santa Clara County. As a result, Beacon Economics is forecasting further, although moderate, price declines in San Jose’s housing market in 2023.
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