February 24, 2015 Economics Group Special Commentary Mark Vitner, Senior Economist [email protected] ● (704) 410-3277 Michael T. Wolf, Economist [email protected] ● (704) 410-3286 Alex V. Moehring, Economic Analyst [email protected] ● (704) 410-3247 California Economic Outlook: February 2015 Executive Summary California’s economy continues to power forward, with many of the Golden State’s largest and most important industries gaining momentum over the course of 2014. High-tech employers have shown no sign of slowing their hiring. Employment in professional, scientific and technical services, the industry with the largest number of tech-related workers, grew 4.3 percent in 2014. San Francisco, San Jose and San Diego are all benefitting from the strong growth in this major industry group. Health services are also expanding rapidly and appear to have adjusted to the rollout of the Affordable Care Act with only minimal disruption. Construction has picked up to keep pace with the rapidly expanding economy and demand for apartments, warehouse and office space is rising solidly. Home sales remain sluggish but the trend seems to be somewhat more positive than what we have seen nationwide. Home price appreciation continues to run ahead of the national average, reflecting both stronger economic gains and a scarcity of developable land. Although we expect California’s economy to continue to grow, the state is not without its challenges. Growth has moderated recently, and the huge surge in tech-related hiring and associated construction projects is unlikely to be sustained longer term. Retailers and financial services firms are still posting only modest gains. In addition, labor disputes at West Coast ports could push importers to make more permanent adjustments to their supply chains away from Los Angeles and Long Beach. Lower oil prices are weighing on the energy producers in Kern County, and a lack of water remains a challenge for farmers and residents alike. In addition, the state’s high costs of living, combined with sluggish wage and salary growth for middle-income households, has exacerbated the out-migration of residents. Few of these problems are truly new, however, and California seems to continuously prove that none of them are insurmountable. Figure 1 Figure 2 California Technology Employment California Nonfarm Employment 3-Month Moving Averages 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -8% -10% 90 92 94 96 98 00 02 04 06 08 10 12 14 15% California: Dec @ 3.9% 12% 12% 9% 9% 6% 6% 3% 3% 0% 0% -3% -3% -8% -6% -6% -10% -9% -6% QCEW: Yr/Yr Pct. Change: Jun @ 2.9% Nonfarm: Yr/Yr Pct. Change: Dec @ 2.2% Household: Yr/Yr Pct. Change: Dec @ 2.8% Year-over-Year Percent Change 15% -9% 00 02 04 Source: U.S. Department of Labor and Wells Fargo Securities, LLC This report is available on wellsfargo.com/economics and on Bloomberg WFRE. 06 08 10 12 14 Few of these problems are truly new, however, and California seems to continuously prove that none of them are insurmountable. California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Facing Headwinds Head On So far, the state seems to be weathering its challenges rather gracefully. So far, the state seems to be weathering its challenges rather gracefully. The port dispute at the Port of Los Angeles and Port of Long Beach created some real hardship for businesses in southern California. While some of the total loss figures bandied about may be over the top, the losses for individual businesses are quite meaningful. Despite the ongoing dispute, which has left a flotilla of ships at sea waiting to unload, activity at Port of Los Angeles through the end of 2014 was actually 6.0 percent higher than the prior year and the Port of Long Beach also showed growth. Despite any bottlenecks that have occurred, those ports are busier than last year, though activity would certainly have been stronger had there been no disruptions. Estimating the impact from the work stoppage is difficult. Some traffic is being diverted to other ports and some firms had built precautionary stockpiles in anticipation of some sort of supply shock. Most firms, however, operate with extremely lean inventories and cuts in production at manufacturing facilities along the West Coast and elsewhere are expected. In addition, businesses involved with perishables, including seafood and produce, likely suffered some sizable losses. Moreover, the dispute makes it more likely that businesses in the Midwest and Northeast will look to alternative ports for future shipping needs as West Coast ports look less reliable. Drought is a major long-term challenge for California. Farmers have suffered as a result, but higher prices of key crops are partially offsetting low yields and farmers are moving toward more water-efficient crops. Almond and grape prices received in 2014 in California were both well above their year-ago levels. In addition, the scarcity of fresh water has spurred investment in much needed infrastructure improvements, including the desalination plant in Carlsbad and numerous smaller water storage and water treatment projects around the state. Another major challenge for the state is that more U.S. residents move out of California each year than move in. This domestic outmigration has long been a cause for concern and is frequently blamed on the state’s high housing costs. San Francisco and Oakland, however, actually have positive domestic net migration, which is somewhat surprising given how expensive the Bay Area is. Domestic net migration is strongest in Oakland, which offers relatively affordable housing when compared to San Francisco. A booming labor market is helping to draw more people to the area. Despite high housing costs, relatively few households spend more than 30 percent of their income on housing. In the San Francisco metro area, 39.3 percent of households spent 30 percent or more of their income on housing costs, while that share was 43.4 percent statewide and 52.8 percent in Los Angeles. Although these numbers are above the national average, they show there is more flexibility in the housing market than first appears. In addition, California does benefit from positive total net migration, thanks to international migrants. Figure 4 Figure 3 Domestic Net Migration California State Trade Year-over-Year Percent Change, 3-MMA 40% Share of Total Population, 2013 40% Import: Dec @ 8.9% Exports: Dec @ 0.2% 30% Oakland 30% 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% -30% San Francisco Riverside San Diego San Jose California Los Angeles -40% -40% 00 02 04 06 08 10 12 14 -0.4% -0.2% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 2 0.0% 0.2% 0.4% 0.6% California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Office Market Holds Strong in the Bay Area The office market in the state continues to flourish. Employment in the construction of nonresidential buildings is up a whopping 9.6 percent from a year ago. The office market is tightest in San Francisco where the vacancy rate is just 11.7 percent, considerably lower than the nation’s 16.7 percent. Demand remains strong in the San Francisco market, as the tech sector continues to snap up large swathes of space, with notable leases from Salesforce, Uber, Yelp and Pinterest. In addition to high rents, another threat to the San Francisco office market is Prop M, which limits the amount of office space that can be built in the city. There appears to be some ways to temporarily work around this cap, but the pace of building has been strong and the current limit of 875,000-square-feet per year is unlikely to allow for supply to keep up with demand and could push rents even higher and drive new construction toward Oakland and San Jose. With an office vacancy rate of 17.7 percent, San Jose has more supply than the markets along the Peninsula. Activity in Silicon Valley, however, is still quite high. About 3 million square feet of space is under construction in Santa Clara-Sunnyvale and another 1 million square feet in Cupertino. The new supply is doing little to alleviate demand. The vacancy rate has come down considerably from recent highs over the past couple of years. Although we remain constructive on the metro area, demand slipped some in the fourth quarter, which may point to some of the competition Silicon Valley is facing from San Francisco and elsewhere. The office market is tightest in San Francisco where the vacancy rate is just 11.7 percent. Demand for office space in southern California has been considerably softer. Los Angeles has only recently started to improve. Although there are some sizable projects under construction, including about 500,000 square feet in downtown and another 300,000 square feet in LAX/El Segundo and Long Beach. Los Angeles’s broader economic recovery has been more modest than in other parts of the state. While more modest than the Bay Area, the creative sector has been vibrant throughout southern California, particularly companies producing digital entertainment content. Some of that work is beginning to come downtown. The office vacancy rate in Los Angeles is slightly below the national average and rents are increasing, which could help spur some more construction. Moreover, there has been a great deal of activity in the hotel and apartment sectors. Similarly, San Diego’s office market is holding its own, with very little space currently under construction. Leasing remains steady and rents and resale prices continue to rise, benefitting from a lack of new supply and low interest rates. Considerably more projects are in the planning phases, however, though the physical construction still appears to be a ways off. Figure 5 Figure 6 San Francisco Office Supply & Demand Los Angeles Office Supply & Demand Percent, Thousands of Square Feet 20% 1,500 Office Completions: Q4 @ 367,000 SF (Right Axis) Office Net Absorption: Q4 @ 784,000 SF (Right Axis) Office Vacancy Rate: Q4 @ 11.7% (Left Axis) 18% 1,000 16% 500 14% 0 12% -500 10% -1,000 8% -1,500 Percent, Thousands of Square Feet 17% 2,000 16% 1,500 15% 1,000 14% 500 13% 0 12% -500 11% -1,000 10% -1,500 9% -2,000 Office Completions: Q4 @ 0 SF (Right Axis) Office Net Absorption: Q4 @ -523,000 SF (Right Axis) Office Vacancy Rate: Q4 @ 15.0% (Left Axis) 8% 6% -2,000 2007 2008 2009 2010 2011 2012 2013 2014 -2,500 7% -3,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Reis, Inc. and Wells Fargo Securities, LLC 3 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Home Sales Growth Struggles Home sales improved only modestly in 2014, with the single-family market up just 0.6 percent over the year and the condo and townhome market rising a paltry 0.2 percent. In the first month of 2015, however, sales worsened considerably, pushing single-family sales down 2.7 percent from a year earlier and condo and townhomes 4.6 percent lower over the same period. Some of the largest year-ago declines were felt in the Bay Area, which likely has more to do with the slim inventories than a lack of underlying demand in the rapidly improving economy. Indeed, San Francisco homes spend very little time on the market before being sold. The upshot is that weaker sales in the first month of the year means more inventory to lure potential buyers into the market. The pace of single-family construction has leveled off at fairly low levels but is showing signs of reviving in a handful of areas. The strongest markets have few developed lots available for singlefamily construction. The multifamily sector continues to strengthen, which comes somewhat in contrast to the slowdown we have seen nationwide. The apartment market is exceptionally strong in the Bay Area and San Diego. Vacancy rates in San Jose, San Diego, Los Angeles and San Francisco are all below the national average, which is encouraging more growth in those markets. Although home prices have moderated recently, they remain 7.0 percent higher than a year ago. Thanks to the faster-than-average appreciation, home prices are just 15.2 percent below their prerecession peak, not much further than the national average of 13.4 percent. Figure 7 Figure 8 California Housing Permits CoreLogic HPI: CA vs. U.S. Index, 2000=100, Not Seasonally Adjusted 240 240 Single-Family: Dec @ 39,456 Single-Family, 12-MMA: Dec @ 37,359 Multifamily, 12-MMA: Dec @ 45,244 200 200 Single-Family Average (1998-2003): 109,729 160 160 120 120 80 80 40 40 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Thousands Thousands Thousands of Permits, Seasonally Adjusted Annual Rate 260 260 United States: Dec @ 172.2 California: Dec @ 214.8 220 220 180 180 140 140 100 100 60 60 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC Conclusion & Outlook The longer-run prospects for the state are also favorable, as California is home to some of the most highlyskilled workers in the world. 4 California’s economy will continue to outperform the national average. The surge in technologyrelated industries has had huge spillover effects in the Bay Area and San Diego, with construction projects cropping up to meet rising demand. The state has proved to be much more than a onetrick pony, however, with gains seen in most industries. Life and health sciences also appear to be strengthening, while transportation & warehousing continue to pick up. The housing market continues to show improvement and rising home prices should help boost consumption in a state where numerous homeowners had seen sizable wealth declines during the housing bust. The state faces its fair share of challenges, but by most measures, they appear to be abating. Drought has plagued the state’s farmers and although water levels remain below normal, they have improved relative to a year ago. Furthermore, the port dispute has now been resolved, with workers rapidly removing the backlog of goods, which should provide a boost to the Inland Empire. The longerrun prospects for the state are also favorable, as California is home to some of the most highlyskilled workers in the world, a key driver of growth that is unlikely to change any time soon. Despite the high-cost environment, more people move into the state than move out of it, further reflecting the robust labor market and the abundance of high-paying jobs. (2.4) 306 43,716 25,693 18,023 14,210 (160) 12.4 37,336 375 12,406 192 1,924,438 0.9 1,578,553 2.7 2010 (4.7) 288 45,471 21,705 23,766 14,359 149 11.8 37,702 366 12,469 62 1,957,114 1.7 1,685,635 6.8 Actual 2011 13.5 321 58,549 27,736 30,813 14,706 347 10.4 38,063 361 12,553 84 2,009,936 2.7 1,805,194 7.1 2012 20.6 408 80,742 37,034 43,708 15,153 447 8.9 38,431 369 12,675 122 2,080,284 3.5 1,856,614 2.8 2013 7.0 448 82,925 38,599 44,326 15,566 412 7.6 38,803 371 12,800 125 2,148,933 3.3 1,953,158 5.2 2014 Sources: CoreLogic, California Association of Realtors, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC Forecast as of: February 24 2015 * Value in 2013 includes expected revisions 277 (2.6) 35,069 25,525 9,544 Total Housing Permits Single-Family Permits Multifamily Permits CoreLogic Home Price Index, Percent Change 14,370 (872) 11.4 Nonfarm Employment, Thousands Change, Thousands Unemployment Rate, Annual Average Existing Single-Family Home Sales, Thousands 36,961 357 12,215 38 1,906,376 (4.1) 1,537,095 (3.7) Population, Thousands Change, Thousands Households, Thousands* Change, Thousands Real Gross Domestic Product, Millions* Annual Rate Nominal Personal Income, Millions Percent Change 2009 California Economic Outlook 4.7 475 98,000 46,000 52,000 15,961 395 6.6 39,178 375 12,935 135 2,215,550 3.1 2,070,348 6.0 Forecast 2015 4.5 498 105,000 51,000 54,000 16,336 374 5.5 39,548 370 13,085 150 2,284,232 3.1 2,194,568 6.0 2016 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP 5 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP San Francisco DMSA Nonfarm Employment San Francisco 6 San Francisco is in an enviable position, with strong employment gains being made in highpaying industries. A concentration of highlyskilled workers makes its long-term prospects favorable. The rising costs of doing business will limit growth, but the metro area has still seen positive domestic net migration, which is in stark contrast to the state as a whole. 8% 8% 4% 4% 0% 0% -4% -4% -8% -8% -12% -12% -16% -16% Office Employment: Dec @ 5.7% Non-office Employment: Dec @ 2.7% -20% -20% 91 93 95 97 99 01 03 05 07 09 11 13 San Francisco DMSA Employment Growth By Industry Office-using employment is up 5.7 percent, which has contributed to the growing demand for office space. Relatively few new projects were completed in 2014, but plenty are in the pipeline, including the 61-story Salesforce tower, which should be completed in 2017. Office vacancy rates have fallen to a low 11.7 percent. Despite all the new construction, more downward pressure on vacancy rates and upward pressure on rents is likely. San Francisco limits the amount of new space each year to 875,000 square feet, which can be rolled over to subsequent years if left unused. That cap should be reached this year, which means demand will continue to outstrip supply. Construction has not been confined to the commercial sector. Homebuilding has surged recently, and although multifamily permits have come down from recent highs, they remain roughly in line with past peaks. Strong population and employment gains are fueling the building spree. After decent gains in 2014, home sales plummeted in January, down nearly 20 percent from a year earlier. Home prices, however, continue to rise and are well above their prerecession peak, while nationwide they are still 13 percent lower. 12% Year-over-Year Percent Change, 3-MMA Total Nonfarm Prof. & Bus. Svcs. Trade, Trans. & Utilities More Leisure and Hospitality Government Number of Employees Educ. & Health Services Financial Activities Less Information Other Services Construction December 2014 Manufacturing -2% 0% 2% 4% 6% 8% 10% San Francisco DMSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 6 6 Single-Family: Dec @ 480 Single-Family, 12-MMA: Dec @ 594 Multifamily, 12-MMA: Dec @ 4,145 5 5 Single-Family Average (1998-2003): 1,490 4 4 3 3 2 2 1 1 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC Thousands After moderating during the first half of 2014, employment growth in San Francisco is accelerating again, with nonfarm payrolls 3.7 percent higher than a year ago. The techheavy professional and business services and information sectors continue to lead the metro area’s job growth, while construction projects continue to ramp up to accommodate the surge of new businesses and residents. Retail trade, hospitality and personal services have followed suit and tourism has strengthened further. The one industry still struggling, however, is financial services, which shed jobs in 2014. Thousands Year-over-Year Percent Change 12% California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP San Jose MSA Employment Growth By Industry San Jose Prof. & Bus. Svcs. Home sales in Santa Clara County were 4.4 percent lower than a year ago in January. Despite the weaker home sales, prices were still 10.7 percent higher. The pace of single-family construction has started to level off, but the multifamily sector continues to surge higher. Even with the building boom, apartment vacancy rates continue to inch lower. The long-run trajectory remains bright. Many of the world’s largest tech firms are based in Silicon Valley, and startups continued to be drawn there to capitalize on the region’s depth of intellectual and financial capital. High costs and congestion remain hurdles and may lead to a retracement whenever this boom ends. Number of Employees Trade, Trans. & Utilities Educ. & Health Services Less Government Leisure and Hospitality Information Construction Financial Activities December 2014 Other Services The amount of investment in San Jose is staggering. More than 5 million square feet of office space are under construction, much of which is by tech behemoths, such as Apple and Facebook. Facebook recently bought another 56 acres in Menlo Park, making way for additional growth. Palo Alto is considering placing a cap on office development, similar to the one that was implemented in San Francisco. Such caps will push rents higher and move new construction to nearby areas where such limits are not imposed. Financial activities have been a welcome bright spot in the metro area, while they have been a slight negative throughout the state. Some of the growth is due to the booming real estate market, the rental portion of which is included in this industry group. Even stronger growth was seen in the more traditional finance and insurance services, with employment up 5.9 percent from a year earlier. In addition, confidence among venture capitalists in Silicon Valley remained high in the fourth quarter of 2014. More Manufacturing -3% 0% 3% 6% 9% 12% 15% San Jose MSA Population Growth In Thousands 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 80 84 88 92 96 00 04 08 12 San Jose MSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 9 9 Single-Family: Dec @ 2,016 Single-Family, 12-MMA: Dec @ 1,933 Multifamily, 12-MMA: Dec @ 7,666 8 8 Thousands Total Nonfarm While the growth in San Francisco’s tech sector has made great headlines the past few years, activity remains brisk all along the San Francisco Peninsula and into Santa Clara County. Employment in San Jose’s information sector, which includes internet publishing and web search portals, was 13.7 percent higher than a year ago in December. However, almost every major industry group posted solid year-overyear job gains in 2014. Population growth is nearly twice the national rate. Thousands Year-over-Year Percent Change, 3-MMA Single-Family Average (1998-2003): 2,990 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce, and Wells Fargo Securities, LLC 7 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Sacramento MSA Nonfarm Employment Sacramento 8 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% QCEW: Yr/Yr Pct. Change: Jun @ 2.6% Nonfarm: Yr/Yr Pct. Change: Dec @ 2.3% Household: Yr/Yr Pct. Change: Dec @ 2.7% -6% -8% -8% 91 95 97 99 01 03 05 07 09 11 13 Year-over-Year Percent Change, 3-MMA Total Nonfarm Government More Trade, Trans. & Utilities Prof. & Bus. Svcs. Number of Employees Educ. & Health Services Leisure and Hospitality Less Financial Activities State government employment is expanding rapidly in the state capital, with payrolls up 2.8 percent from a year ago. The California budget is in considerably better shape than it was earlier in the recovery. Local governments, however, have not bounced back as quickly. Local government employment is still lower than a year ago, though it looks to be firming. The large share of public sector employment is likely to limit future growth in Sacramento, but it should also help insulate the area from future downturns. Recent gains in manufacturing look set to continue in the near term and should help bolster growth in warehousing and transportation industries. The region’s agriculture sector continues to struggle with the drought but is managing modest gains. 93 Sacramento MSA Employment Growth By Industry Construction is booming in the state’s capital. Part of the huge gain in related employment is likely due to the construction of the new arena for the Sacramento Kings. More development is likely, as restaurants, retailers and hotels are attracted to the surrounding area. The recent slowdown in retail may partially reflect the closings and relocations from Downtown Plaza. The housing market in Sacramento bounced back at the end of 2014 before weakening again in January, with sales falling 5.8 percent from a year ago. Home price growth moderated to a still strong 6.7 percent year-over-year pace. So far in the recovery, residential construction has been notably weak, with only very modest improvements in the single-family sector and virtually no new multifamily development. -6% Manufacturing Construction Other Services December 2014 Information -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% Sacramento MSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 28 28 Single-Family: Dec @ 2,688 Single-Family, 12-MMA: Dec @ 3,589 Multifamily, 12-MMA: Dec @ 326 24 24 Thousands Sacramento has been posting average gains as the metro area still works to catch up to its prerecession employment peak. As the state’s capital and with a preponderance of government workers, it was always unlikely that growth was going to come back more strongly. Fortunately, the public sector has turned modestly positive, while the highly-paid professional, scientific and technical services added 6.1 percent more workers over the past year. Two notable weak spots come from the retail and leisure & hospitality sectors, which had posted sizable gains earlier in the recovery but have since stalled. Thousands 3-Month Moving Averages 8% Single-Family Average (1998-2003): 14,169 20 20 16 16 12 12 8 8 4 4 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Los Angeles DMSA Employment Los Angeles The moderation in growth should stabilize as soon as manufacturers and governments stop shedding workers. Infrastructure spending, if fully approved should help boost construction employment further, while providing an incentive for more residential and commercial building along proposed rail lines. 150 150 140 140 130 130 120 120 110 110 100 100 90 90 Motion Picture and Sound Recording: Dec @ 134.9 80 80 91 93 95 97 99 01 03 05 07 09 11 13 15 Los Angeles DMSA Employment Growth By Industry Manufacturing has been the biggest weight on overall employment, with the number of factory jobs falling 1.6 percent over the past year. Although port access gives Los Angeles-based manufacturers some advantage, high costs and limited space are clear negatives and have pushed more labor-intensive work elsewhere. More weakness is likely coming, as Boeing lays off more workers when production of the C-17 Globemaster ends. Some relief may be on the way, with the proposed budget from the Pentagon increasing demand for the F-35 parts made throughout the state and a new bomber that is being developed in Palmdale. The Los Angeles housing market, like those throughout the nation, has struggled, with home sales still below year-ago levels. The shortfall in home sales worsened in January, with sales falling 11.6 percent lower on a year-over-year basis. Home prices rose a much stronger 6.5 percent over the same period. Although single-family construction remains weak, like many other urban areas, multifamily construction has filled the void. With belowaverage population gains and out-migration, a huge surge in residential construction is unlikely. 160 Year-over-Year Percent Change, 3-MMA December 2014 Total Nonfarm Trade, Trans. & Utilities Prof. & Bus. Svcs. More Educ. & Health Services Government Number of Employees Leisure and Hospitality Manufacturing Less Financial Activities Information Other Services Construction -4% -2% 0% 2% 4% 6% 8% Los Angeles DMSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 30 Single-Family: Dec @ 4,080 Single-Family, 12-MMA: Dec @ 4,439 Multifamily, 12-MMA: Dec @ 13,764 25 Single-Family Average (1998-2003): 8,265 30 25 20 20 15 15 10 10 5 Thousands Employment growth in Los Angeles has steadily moderated over the past two years. The factory and public sectors weakened in 2014, but other industries continue to move ahead. After more than a decade of little employment growth coming from the motion picture and sound recording industry, the entertainment business is finally posting solid gains. Professional & business services are also expanding solidly, though the bulk of the gains appear to be concentrated in the lower-paid administrative & waste management services. Transportationrelated projects are also moving forward, which have added to the growth in construction. Thousands 3-Month Moving Average, Thousands 160 5 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC 9 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Santa Ana DMSA Employment Growth By Industry Orange County Year-over-Year Percent Change, 3-MMA Total Nonfarm 10 Trade, Trans. & Utilities Leisure and Hospitality Orange County will continue to benefit from a strengthening economy that fuels demand for tourism in the area. Replacing high-paying jobs lost in defense and aerospace remains a challenge, particularly with the region’s large financial services industry still struggling. Building activity remains a bright spot. Number of Employees Educ. & Health Services Manufacturing Less Government Financial Activities Construction Other Services December 2014 Information -4% -2% 0% 2% 4% 6% 8% 10% Santa Ana DMSA Nonfarm Employment Education services are booming in the metro area, with private education employment rising 14.5 percent from a year ago. Chapman University opened a school of pharmacy this year. In addition, the state recently approved 15 community colleges to offer four-year baccalaureate degrees. Cypress College and Santa Ana College were among those on the approved list. All of these developments should keep growth moving in the right direction for education services in the area. The housing market in Orange County remains weak, with sales still falling on a year-over-year basis. The area remains one of the most expensive places to live, but has not shared in the same economic gains seen in other expensive areas, such as the Bay Area. Price appreciation has been muted as a result, with prices up just 3.8 percent from a year earlier. The one silver lining here is that despite a 30.6 percent monthly loss in January, sales were only 4.3 percent lower than a year ago. The apartment market, however, remains much stronger, with the vacancy rate well below the national average. Plenty of construction remains in the pipeline, as multifamily permits have recently breached their prerecession peak. More Prof. & Bus. Svcs. Year-over-Year Percent Change 15% 15% 12% 12% 9% 9% 6% 6% 3% 3% 0% 0% -3% -3% -6% -6% -9% -9% Office Employment: Dec @ 2.3% Non-office Employment: Dec @ 2.3% -12% 91 93 95 97 99 01 03 05 -12% 07 09 11 13 15 Santa Ana DMSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 15 Single-Family: Dec @ 3,096 Single-Family, 12-MMA: Dec @ 3,444 Multifamily, 12-MMA: Dec @ 6,130 12 Single-Family Average (1998-2003): 6,749 15 12 9 9 6 6 3 3 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC Thousands Orange County continues to post solid gains, with nonfarm payrolls rising 2.3 percent from a year earlier. Tourism still looks reasonably strong, with solid gains in the leisure & hospitality industry and another gain in passengers moving through John Wayne Airport. Education & health services are also performing well and construction is booming. Manufacturing is a clear weight on the area, with the decline in payrolls exacerbated by the most recent layoff at Boeing’s Huntington Beach location. In addition, the metro area still has room to grow as employment remains below its prerecession peak. Thousands California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Riverside MSA Employment Growth By Industry Inland Empire Year-over-Year Percent Change, 3-MMA December 2014 Total Nonfarm Government Leisure and Hospitality The Inland Empire’s positive growth trajectory will continue in the near future as an accelerating U.S. economy brings more goods through West Coast ports and through the area. The longer-run prospects are less certain. Although it is a welcome sign that professional & business services firms are hiring quickly, the metro area relies too heavily on the production and distribution of goods, which exposes the region to the vagaries of the global economy and makes the region vulnerable to disruptions at the Port of Los Angeles and Port of Long Beach. Number of Employees Prof. & Bus. Svcs. Manufacturing Less Construction Financial Activities Other Services Information -6% Riverside and San Bernardino counties are now growing solidly again. The local PMI posted its fourth straight month of expansion territory readings in January. Employment in manufacturing also picked up quite a bit at the end of the year. In the PMI survey from Cal State San Bernardino, growing orders stemmed from the hospitality and aerospace industries. Concerns about the stronger dollar and port disruptions, however, were also evident. The improving factory sector has helped transportation and warehousing employment surge 6.8 percent from a year earlier. Home sales growth has been strong in San Bernardino County, although sales plummeted in Riverside. Home prices are appreciating faster than the state and national averages. Although conditions are mostly improving, the area was one of the hardest hit housing markets in the nation and new construction remains quite soft. There has been some modest growth in housing permits, but they are still a long way off from a pace of construction that would be consistent with historical norms. More Educ. & Health Services -4% -2% 0% 2% 4% 6% Riverside MSA Nonfarm Employment 3-Month Moving Averages 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% QCEW: Yr/Yr Pct. Change: Jun @ 4.3% Nonfarm: Yr/Yr Pct. Change: Dec @ 2.1% Household: Yr/Yr Pct. Change: Dec @ 2.5% -6% -8% 91 93 95 97 99 01 03 05 07 -6% -8% 09 11 13 Riverside MSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 60 60 Single-Family: Dec @ 9,972 Single-Family, 12-MMA: Dec @ 6,757 Multifamily, 12-MMA: Dec @ 3,484 50 Thousands The Inland Empire’s recovery slowed toward the end of 2014, though year-ago gains remain just below the national average. The bread and butter of the region, transportation and warehousing, continued to show exceptionally strong growth despite issues at west coast ports. Professional, scientific and technical services firms are also expanding rapidly in the area. The moderation in headline growth comes from weaker construction numbers and a relatively abrupt slowdown in the leisure & hospitality sector. Thousands Trade, Trans. & Utilities 50 Single-Family Average (1998-2003): 23,457 40 40 30 30 20 20 10 10 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC 11 California Economic Outlook: February 2015 February 24, 2015 WELLS FARGO SECURITIES, LLC ECONOMICS GROUP San Diego MSA Employment Growth By Industry San Diego Year-over-Year Percent Change, 3-MMA December 2014 Total Nonfarm 12 Prof. & Bus. Svcs. Leisure and Hospitality Manufacturing Financial Activities Construction Less Other Services Information -2% 0% 2% 4% 6% 8% San Diego MSA Nonfarm Employment Year-over-Year Percent Change, 3-MMA Government is the largest employer in the area. Fortunately, it is expanding at the state and local level. Some of this growth is likely coming from the rapidly expanding population in the area demanding more public services. The downside is that federal payrolls continue to slide lower as more costs savings are sought to reduce the deficit. The rapidly improving economy coupled with strong population growth will fuel more demand for housing and should result in more residential construction. The large public sector should be a stabilizing force in the area, while technology and health services firms continue to lead the metro area’s economic expansion. Number of Employees Educ. & Health Services Professional, scientific and technical services employment is up 9.0 percent from a year ago. Although much of the industry is composed of defense contractors, there are plenty of other tech employers, including a whole host of life sciences firms. The other source of sizable growth has come from health services, with related employment up 3.1 percent from a year ago. Two of the largest employers in the metro area are Sharp Healthcare and Scripps Health. A strong university system and concentration of engineers should help keep the industry moving in the right direction. Demand for homes ended 2014 on a high note but slipped some in January of 2015 as home sales weakened across the state. Growing demand has pushed home prices up 4.5 percent year over year. Single-family construction is barely above what it was at the worst of the housing crisis, and although the multifamily sector had performed better, permits have recently started retreating. More Trade, Trans. & Utilities 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% Professional, Scientific & Technical: Dec @ 7.1% Health Care & Social Assistance: Dec @ 3.9% -6% -8% -6% -8% 91 93 95 97 99 01 03 05 07 09 11 13 San Diego MSA Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate 20 Single-Family: Dec @ 2,400 Single-Family, 12-MMA: Dec @ 2,441 Multifamily, 12-MMA: Dec @ 4,160 Single-Family Average (1998-2003): 9,297 15 10 20 15 10 5 5 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce Wells Fargo Securities, LLC Thousands San Diego’s economic expansion is gaining steam, with nonfarm payrolls up 3.3 percent from a year ago, and employment gains evident across a broad assortment of industries. Communications, information technology, life sciences and health-related employers are leading growth. Even the outsized public sector has been expanding. The one remaining weight is financial services, which, like elsewhere in the country, have seen their payrolls decline. Thousands Government Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (704) 410-1801 (212) 214-5070 [email protected] John E. Silvia, Ph.D. Chief Economist (704) 410-3275 [email protected] Mark Vitner Senior Economist (704) 410-3277 [email protected] Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 [email protected] Sam Bullard Senior Economist (704) 410-3280 [email protected] Nick Bennenbroek Currency Strategist (212) 214-5636 [email protected] Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 [email protected] Anika R. Khan Senior Economist (704) 410-3271 [email protected] Azhar Iqbal Econometrician (704) 410-3270 [email protected] Tim Quinlan Economist (704) 410-3283 [email protected] Eric Viloria, CFA Currency Strategist (212) 214-5637 [email protected] Sarah Watt House Economist (704) 410-3282 [email protected] Michael A. Brown Economist (704) 410-3278 [email protected] Michael T. Wolf Economist (704) 410-3286 [email protected] Zachary Griffiths Economic Analyst (704) 410-3284 [email protected] Mackenzie Miller Economic Analyst (704) 410-3358 [email protected] Erik Nelson Economic Analyst (704) 410-3267 [email protected] Alex Moehring Economic Analyst (704) 410-3247 [email protected] Donna LaFleur Executive Assistant (704) 410-3279 [email protected] Cyndi Burris Senior Admin. 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