Presented by Beacon Economics
Welcome to The Regional Outlook, a forecast for five of California’s largest regional 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.
As of this writing, Beacon Economics has only marginally adjusted its California regional outlooks due to the COVID-19 pandemic. Currently, no data exists regarding the coronavirus’s macroeconomic impacts that can be used to feed the forecast models. Beacon Economics is monitoring the situation carefully and will update its regional outlooks as soon as data or information becomes available. Please see our national and state forecast for more about the broad economic fallout expected as result of the COVID-19 outbreak and halt in economic activity.
Fueled by the Information and Computer Manufacturing industries, the South Bay’s employment growth outshines much of the state, including San Francisco. A sharp rebound in home price appreciation continues to present a challenge to potential homeowners, and a lack of residential construction provides no relief.
Information A Growing Powerhouse Industry in the South Bay
With the smallest employment base compared to California’s other major metro areas, the South Bay experienced the strongest growth in total nonfarm employment from December 2018 to December 2019, increasing by 2.9%. In absolute terms, the region’s addition of 33,200 jobs over this period trailed only Los Angeles (66,500 jobs) and San Diego (34,500 jobs).
While labor force growth in the South Bay remains well above other metro regions in the state, the 1.3% annual growth in the labor force continues to trail job growth. As a result, the unemployment rate continues to fall as the increase in the number of jobs outpaces the increase in the labor supply. In fact, at 2.4%, the South Bay had the second lowest unemployment rate in December 2019, trailing only San Francisco.
Employment gains in 2019 were robust in nearly every industry in the South Bay. Leading the charge in terms of percent growth was the Information industry, which increased employment 6.8% (6,500 jobs) year-over-year in December 2019. Manufacturing, which accounts for 16% of employment in the region, the second largest sector, experienced employment growth of 4.5% (7,800 jobs), continuing a trend that began in early 2018.
The region’s largest employment sector, Professional and Business Services, saw job gains of 2.8% or 6,600 jobs in December 2019. However, this marks a considerable slowdown in the pace of job growth in this industry compared to the early years of the post-recession recovery. Accounting for only 1% of the South Bay labor market, the Logistics industry recorded a decline of 7.3% in employment from December 2018 to December 2019, a loss of 1,200 jobs. This trend of negative employment growth in the Logistics industry began in May 2019 and has accelerated since then.
Beacon Economics is forecasting the unemployment rate in the South Bay to remain in a narrow range around its current reading through 2020. Total nonfarm employment in the region is expected to grow in the low 2% range over the year. Due to the COVID-19 pandemic, this forecast was adjusted down marginally, using a baseline scenario that the first two quarters of 2020 will experience muted employment growth, but containment of the outbreak by this summer will result in a rebound in the second half of the year. The unknowns surrounding the extent and duration of the pandemic continue to be enormous and Beacon Economics will monitor and update its forecast accordingly.
Home Price Growth Inches Out of the Red
While After recording significant declines in home sales from late 2018 through the first three quarters of 2019, year-over-year home sales growth rebounded and increased 2.5% in the fourth quarter of 2019. This puts home sales growth well above its post-recession average annual rate (-1.9%). Despite outpacing San Francisco (-0.3%) and the East Bay (-1.4%), home sales across Southern California experienced a much more robust rebound. After tracking into negative territory for the first three quarters of 2019, home price appreciation inched out of the red and increased 0.5% from the fourth quarter of 2018 to the fourth quarter of 2019. The sharp turnaround was likely a result of a rebound in home sales fueled by lower interest rates. Increased home sales indicate more demand for single-family housing, driving up prices as potential homebuyers compete for the limited supply.
Much like the trend afflicting the state as a whole, single-family permitting activity in the South Bay has remained stagnant, with far fewer housing permits issued than is required to meet the demands of a growing labor market. In 2019, the South Bay issued 400 more single-family permits than the previous year. However, this comes off the back of a 700-unit decline from 2017 to 2018. In short, single-family construction activity in the South Bay, while trending in the right direction overall, has not reached the level needed to address gains in the region’s growing labor market.
In terms of multifamily housing, the South Bay recorded declines of 1,900 and 2,600 in 2018 and 2019 respectively. As a result of this lackluster performance, the South Bay is falling considerably short of its state mandated housing goals, established under the Regional Housing Needs Assessment.
San Benito County is on track to meet its goal for state mandated housing at the above moderate-income level. Unfortunately, it has failed to keep pace with its low- and very low-income housing goals. In fact, the County did not issue permits for a single housing unit in either of these categories between 2015 and 2019. Santa Clara County has followed suit, issuing the required number of above moderate-income housing permits, while falling significantly behind in permitting low- and very low-income housing.
** The South Bay refers to the San Jose-Sunnyvale-Santa Clara Metropolitan Area, covering Santa Clara and San Benito Counties.