The Beacon Outlook: California
Welcome to The Beacon Outlook
This succinct, quarterly outlook delivers up-to-date analysis of leading indicators driving the national and state economies, including GDP growth, employment, housing and commercial real estate markets, taxable sales, international trade, and more.
California’s Major Job Centers Recovered
Many of California’s regions now have lower unemployment rates than they did pre-pandemic. This includes all of the state’s major employment centers across southern, northern, and inland California. Bakersfield leads the pack with an unemployment rate of 6.2% – 2.1 percentage points lower than prior to the pandemic.
Inland California Boosted By Logistics
California’s labor market recovery has been stronger in the inland parts of the state, due in large part to the heavy presence of the Logistics sector. Employment in this sector is now 18% higher than pre-pandemic, fueled by the continued and accelerated transition to online consumption.
Labor Force Squeeze
California’s labor force – defined as the number of people either employed or seeking employment – is still 1.5% below pre-pandemic levels. But the squeeze is tighter in some regions: The Inland Empire, Sacramento, San Diego, and San Jose have completely recovered, while Ventura, Los Angeles, and San Francisco have the largest workforce deficits.
California Job Openings
The state currently has over one million job openings. Comparatively, in the five years prior to the pandemic, California had an average of 686,000 job openings.
California Population Loss
Since 2019, California’s population has contracted by 1.1% due to outmigration. In notoriously pricey San Francisco, the population has fallen by 5% since 2019.
Home Price Surge Keeps On Keepin’ On
In the first quarter of 2022, home prices in California averaged $685,000, an increase of 13% on a year-over-year basis.
California Labor Market
While there are still 1.4% fewer workers employed in California compared to the period prior to the pandemic, and although there are only 0.8% fewer workers employed nationally, these figures do not tell the full story of the state’s labor market recovery. Unemployment rates are lower than they were pre-pandemic in many regions across the state. The chart below illustrates the difference between the current unemployment rate and the pre-pandemic unemployment rate in California’s major regional economies. In all of these regions, which cover the state’s major employment centers, the unemployment rate is now below the pre-pandemic rate. These figures tell us that, despite there being fewer workers employed in the state than prior to the pandemic, for those seeking a job, there is ample work available.
This is reinforced by the current 1.2 million job openings in the state. To place this figure in context, in the five years prior to the pandemic, a period of economic expansion, there were an average of 686,000 job openings in the state. As is clear to anyone who visits a restaurant or retail store in California, where “now hiring” signs are abundant, the state is currently experiencing an acute labor shortage, a point discussed further below.
Employment has returned to pre-pandemic levels in a growing number of sectors, and in those sectors where employment still lags, growth has been especially strong over the past year. From April 2021 to April 2022, employment grew by 34% in Arts and Entertainment, 19% in Accommodation and Food Services, 11% in Other Services, which includes hair and nail salons. These sectors were the most affected by health-mandated restrictions put in place to curb the spread of the COVID-19 virus and have experienced especially fast growth as the state and local governments have eased restrictions in 2021 and 2022. Looking ahead, growth in these sectors will continue to outpace growth in other industries throughout the year, as their employment returns to pre-pandemic levels. Labor availability will be a clear constraint, however.
In some regions within the state, the number of jobs has returned to pre-pandemic levels. In the Inland Empire, Sacramento, and Fresno, there are more jobs today than there were prior to the pandemic, while Bakersfield has had the next strongest recovery, along this measure. As these figures suggest, the labor market recovery has been stronger in the inland parts of the state. Employment growth in the Inland Empire has been especially boosted by the presence of the Logistics sector. In California, employment in this sector of the economy is now 18% higher than pre-pandemic, fueled by the continued and accelerated transition to online consumption.
California Workforce and Population Growth
California’s labor force – defined as the number of people either employed or seeking employment – is 1.5% below pre-pandemic levels, although there is variation in labor market performance across the state’s regions. There has been a complete labor force recovery in the Inland Empire, Sacramento, San Diego, and San Jose, while the biggest labor force declines have been in Ventura, Los Angeles, and San Francisco. In the short-term, this situation has been driven by net outmigration. Since 2019, the state’s population has contracted by 1.1% and in some regions the drop has been especially pronounced. In San Francisco, the population has fallen by 5% since 2019. Such contractions are normally seen in regions in economic decline or in places that have experienced a natural disaster that has destroyed housing. Since San Francisco remains one of the most dynamic and innovative economic regions in the nation, these declines are likely to be temporary and have been driven by the area’s notoriously expensive housing market. The figures reinforce the impact that the state’s housing affordability and housing shortage crises are having.
Labor supply constraints have translated into higher nominal wages for workers as employers are paying more in search of supply. This said, inflation has meant that real wages – wages adjusted for the cost of living – have been falling in the state. Since their recent peak in February 2021, real hourly wages in the state have declined around 5%. Despite nominal wage growth, inflation has meant that real hourly wages are still at the level they were just prior to the pandemic.
Home Price Escalation Continues
In the first quarter of 2022, house prices in California averaged $685,000, an increase of 13% on a year-over-year basis. This compares to a 16% year-over-year increase nationally. The supply fundamentals that have driven strong price growth since the outset of the pandemic have not changed, although today’s elevated mortgage rates will constrain future demand. Home building permits have been relatively flat since 2019, while new listings are comparable to levels in the pre-pandemic years. Continued constraints on supply will act as a buttress to home prices in the presence of more limited demand.
In rental markets, an interesting dichotomhy has emerged between coastal and inland apartment rents. While rents in coastal communities fell at the outset of the pandemic, inland rents increased. Coastal rents have fully recovered since the pandemic lows, and have increased by around 3% since the first quarter of 2021. Over the same period, apartment rents in inland communities have increased by 16%. The spike in inland rents is likely being driven by the ability of workers to work remotely during the pandemic and therefore move to more affordable markets. Limited inventory in these markets has led to significant price increases. As workers return to offices, this should place upward pressure on coastal rents in 2022.
Overall, 2022 should represent a continued return to normality along many social and economic dimensions in California, from housing to labor markets to business and consumer behavior.
California State Budget
As has been widely reported, California’s state budget surplus stands at close to $100 billion – a truly astonishing figure. The reasons for the surplus are widely understood. The state’s budget relies heavily on income taxes, and in normal times income taxes account for around 25% of California’s revenues. But in Fiscal Year 2022-23, revenues from income taxes will account for two-thirds of the state’s budget. Incomes have been greatly aided by the performance of the stock market, with the S&P 500 increasing by 27% in 2021, boosting capital gains tax revenues. Increases of such magnitudes typically follow major market contractions. The surge in the market in 2021 was extraordinary because the market started the year, not at lows, but at all-time highs. Still, the state’s temporary budget windfall should be treated with caution. It’s not a signal for the legislature to permanently expand programs that it will not be able to finance as revenues return to normalcy in coming years. So far in 2022, the S&P 500 is down close to 20%, which will render lower state revenues in the next fiscal year. The best thing for California to do is preserve the current surplus for a rainy day.
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