Mixed Bag Recovery Remains in Place
The current economic recovery remains confounding. Overall growth continues to be disappointing, even though parts of the economy appear to be roaring back to life. Real gross domestic product (GDP) has averaged just a 2.2 percent pace during the first four years of this economic recovery and has risen just 1.6 percent over the last year.
By contrast, economic growth averaged a 3.3 percent pace in the 25 years prior to the Great Recession. Job growth has also lagged behind previous recoveries, but the unemployment rate has declined anyway, as many potential job seekers have left the workforce, which has pulled the employment population ratio down to the lowest levels seen in more than 30 years.
Not only has growth been slower, but it also has been uneven. Parts of the economy have come roaring back to life, most notably the stock market, home prices and the technology and energy sectors. Other areas have faced a more difficult road to recovery. The fundamentals have improved much less than asset prices have.
Overall job growth remains weak, with nonfarm employment averaging a gain of just 179,000 jobs a month over the last three years. Moreover, a disproportionate share of the jobs added over the last three years has been in lower-paying industries, many of which traditionally employ a large proportion of part-time workers.
The result has been exceptionally meager income growth, which has restrained consumer spending and limited the impact of the Fed’s exceptionally easy monetary policy. Income growth has been supplemented by extended unemployment benefits and expanded food stamp payments, both of which were reined in toward the end of 2013.
Economic conditions are expected to improve modestly in 2014, as the recovery in homebuilding gains momentum and the drag from cutbacks in federal spending ebbs. Consumer spending and business fixed investment should both grow more solidly than they did in 2013, but the recovery will remain constrained relative to past experience.
Real GDP is expected to rise at a 2.4 percent annual rate and the unemployment rate should dip to just below 7 percent by the end of 2014. The Federal Reserve is expected to begin to scale back its monthly securities purchases during the spring, which will result in modestly higher mortgage rates, but not so high as to undermine the housing recovery.
The uneven nature of the recovery is evident across California, with the coastal areas largely enjoying stronger job gains, reduced unemployment and soaring home prices.
The interior parts of the state have by and large been not so lucky, with meager job gains, stubbornly high unemployment and less of a rebound in home prices.
Other splits are evident, with newer industries such as mobile devices, social media, search and cloud computing taking off, while old mainstays like agriculture, manufacturing and construction have taken longer to gain traction. Tourism, international trade, and the media and entertainment industry have come back solidly, as has health care and life sciences.
Even with a bifurcated recovery, California has been able to put up some impressive numbers. Real GDP grew 3.5 percent in 2012 and personal income has risen 3 percent over the past year. Nonfarm employment has reportedly slowed, with the latest year-to-year growth coming in at 1.4 percent.
The Quarterly Census of Employment and Wages data show that job growth through March, which is the latest data available, is nearly twice that strong, at 2.9 percent. Moreover, every metropolitan area has seen employment increase over the past year.
Although all major California metropolitan areas have seen year-over-year employment gains, the strongest job growth has clearly been along the coast. Santa Cruz, San Jose, San Francisco and Orange Country have consistently seen some of the strongest nonfarm employment gains. The Bay Area has long been at the center of California’s recovery, although Southern California also has shown significant improvement recently.
Areas of the San Joaquin Valley, including Vallejo and Stockton, are finally beginning to show signs of marked improvement as well. The Inland Empire continues to be a notable laggard along with the state’s capital, Sacramento.
The split is even more evident in terms of the unemployment rate. Of course the lowest unemployment rates are in the Bay Area, but unemployment rates are generally lower along the coast. The picture changes dramatically when you move to the interior of the state, with jobless rates still stuck in the double digits throughout much of the Central Valley and topping out at nearly 23 percent in El Centro, located in Imperial County.
While geography and the distinctly different industry mix are responsible for much of the split economic performance in California, the Fed’s unconventional monetary policy also has played a major role. Low interest rates and the Fed’s continued securities purchases have helped fuel the stock market rally, which has disproportionately benefitted the wealthier areas of the state and funneled billions of dollars into the state’s technology sector.
The influx of dollars has ignited a boom in the Bay Area’s real estate market. The tidal wave of money also has made its way into the housing market, as big institutional investors have bought up distressed properties and sent housing prices soaring.
Housing prices have rebounded solidly across the state. According to the California Association of Realtors, the median price of an existing single-family home has risen 24.4 percent over the last year and home prices have now retraced around half of their nearly 60 percent peak-to-trough decline from the housing bust.
The run-up in prices has helped reduce the proportion of underwater homeowners in the state to 15.4 percent from 29 percent a year ago.
The improvement in housing values has provided a major boost to communities along the coast, where housing values are the highest. The rise in housing wealth has helped support consumer spending and opened the door to trade-up activity.
Housing affordability, however, has become a major issue to watch. Typically when housing values run up along the coast, homebuyers refocus their attention to the state’s interior areas. This affordability migration has been upended by the massive influx of investor purchases, which have pushed home prices sharply higher and severely reduced housing affordability.
The California Association of Realtors First-Time Homebuyers and Traditional Housing Affordability Index have both fallen significantly over the past year. Housing affordability is lowest in the Bay Area, but it has fallen markedly throughout the state. Southern California and the Central Coast have seen rapid home price increases, which has put a damper on housing affordability.
The Central Valley remains relatively affordable, but prices have still increased. Conditions were made worse by the sudden jump in mortgage rates that accompanied the Fed’s taper talk that began back in May.
We suspect there will be some moderation in home price appreciation over the next year, but overall, California’s housing market should remain solid.
Source: California Chamber of Commerce, Alert
Mixed Bag Recovery Remains in Place
- CMSA Communicator