Vol. 1, No. 4, Published August 6, 2015
California Enjoys a Strong and Broad-Based Job Market
By Esmael Adibi
California showed the seventh fastest job growth in the nation and led all other states in terms of the total number of new jobs in 2014, according to revised data released by the State of California.
More importantly, the Golden State�s employment growth in 2014 was broad-based. Every sector of the economy experienced job gains.
March benchmark data released by the Employment Development Department (EDD) revised 2014 California job growth estimates upward. Payroll job growth increased to 3.0 percent, up from the preliminary growth rate of 2.2 percent. With this revision, California job growth came in just behind Texas, which had a growth rate of 3.1 percent. When it came to new employment, California led other states, generating 462,000 jobs in 2014.
The construction sector -- at 6.0 percent job growth -- was the fastest growing sector, followed by the leisure and hospitality sector at 4.8 percent, the professional and business services sector at 3.9 percent and the education and health services sector at 3.8 percent.
With strong job growth, the unemployment rate dropped to 7.1 percent in December of 2014, down from a peak of 12.2 percent in the first quarter of 2010.
High unemployment rates and the resulting increase in the pool of available workers placed downward pressure on wage increases over the 2010-2014 period. But unemployment rates are reaching a point that will gradually place upward pressure on overall wages and salaries in late 2015 and 2016.
A pickup in wage growth, positive wealth effects, lower debt services along with lower gas prices will improve consumers� purchasing power. In fact, consumer spending will be the major economic engine during the 2015-2016 period. This trend should positively affect job growth in the leisure and hospitality, retail and wholesale sectors of the local economy.
In addition, real gross domestic product (GDP) growth is gaining momentum, with a projected growth rate of 2.5 percent in 2015 and 2.9 percent in 2016.
On the construction side, a tight inventory of resale homes and higher home prices induced a higher level of permit activity in 2013 and 2014. As for 2015 and 2016, the number of permits will remain strong. But after sharp increases in 2013 and 2014, the rate of increase will be moderate. On the nonresidential side, the vacancy rates for all types of properties are declining and that, in turn, is supporting stable to higher lease rates and prices. With prices firming up, new commercial real estate projects are becoming more economically viable.
With positive growth in real GDP, exports and construction spending, the California economy will show relatively strong growth in job formation. On an annual basis, California�s payroll employment is projected to increase by 2.9 percent in 2015, virtually unchanged from the growth rate of 3.0 percent in 2014. As for 2016, California is forecasted to show continued job growth, albeit at a slower pace, adding 402,000 payroll jobs. (See Figure 18.)
Over the two-year forecast horizon, we project most of the new jobs to be generated in these sectors: professional and business, education and health, leisure and hospitality and construction.
Since job growth is a proxy for housing demand in our model, continuing job gains through our forecast period will positively impact household formations and housing demand. But there are other variables such as income, mortgage rates, housing affordability and supply of new and resale housing units that are incorporated in our housing price model.
Trends in nominal and real income growth are positive, but a projected increase in mortgage rates will more than offset the gain in income, resulting in lower housing affordability.
On the supply side, the resale housing inventory is tight. But there has been a steady increase in the supply of new housing units. Hence, as for the direction of home prices, there are countervailing forces at work. Job growth and tight resale inventory suggest upward pressure on prices, but that will be somewhat offset by lower housing affordability and a larger supply of new homes. On balance, our forecast calls for California median home prices to increase by 5.4 percent and 4.4 percent in 2015 and 2016, respectively.
Esmael Adibi, a member of Treasurer John Chiang’s Council of Economic Advisors, is director of the A. Gary Anderson Center for Economic Research at Chapman University. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.