INTRODUCTION
These monthly reports are designed to augment the East Bay Quarterly Forecast by providing snapshot information about key indicators on a monthly basis. While the Quarterly Forecast will provide the expert analysis of the national, state and regional economists at the UCLA Anderson Forecast, the Monthly Report is prepared by EDAB staff with the intent of keeping you current on economic trends and emerging East Bay issues.
We have selected employment, construction, housing, commercial vacancy and inflation data as the primary indicators of the East Bay's economy. If you feel other indicators would be more enlightening or have suggestions on how to refine the content and format of either the Quarterly Forecast or the Monthly Report, we would be very interested in hearing from you.
GDP increased at an advance annual rate of 0.7% in the fourth quarter of 2002, down from a final rate of 4.0% in the third. The fall, not unexpected, was due predominantly to a rapid decrease in consumer spending driven by high levels of personal debt and the wide trade imbalance. Sales of durable goods, strong in the third quarter due to low interest rates and correspondingly attractive financing programs, were particularly hard hit in the fourth quarter. Interest rates are still low, but consumers may have finally spent themselves out. Spending on durables in some industries could be slow to recover, as we may have "borrowed" sales from 2003 via the attractive rates convincing consumers to move forward their buying schedules. Markets such as automobiles, which consumers enter only every several years, could be particularly affected. The UCLA Anderson Forecast expects a return to healthy growth in the 3% range when real business investment returns, currently expected in the second half of 2003.
Unemployment fell in December, due mostly to temporary hiring associated with the holiday season. Seasonally adjusted employment numbers reveal that the employment market was essentially flat. Note also that the local regions aren't yet consistently adding jobs, and that migration from the region and exits from local job markets are currently holding the unemployment rate down. The Bay Area labor market is currently going through a strong supply-side adjustment, with the East Bay experiencing a steady, continuing recovery, rather than the fast recovery the unadjusted numbers indicate.
Payroll employment in the East Bay has fallen by 1.9% since spring 2001, while unemployment has risen 3.3%. This inconsistency arises because the East Bay is a lender of labor to its neighboring regions. Payroll employment is a measure of employment at the workplace, while standard unemployment is measured at the residence. Hence, the percentage fall in San Francisco payroll employment is greater than its rise in unemployment, due to the many East Bay residents that used to commute to work in San Francisco. Likewise, job losses at firms in San Jose outstrip losses by San Jose residents. There are obvious municipal tax implications for this phenomenon. It also serves to illustrate why San Francisco has had such difficulty during the downturn despite a relatively mild rise in unemployment.
Hiring was slow over the winter season, though the Finance, Insurance, & Real Estate sector continues to add workers. The state budget shortfalls will likely result in the Government sector at the very least ceasing to add jobs, and will probably involve shrinking payrolls.
For industry specific employment data, please visit here.
November housing affordability for the state of California (the percent of households able to afford a single-family, medium-sized house) remained unchanged at 30% from the month before. Alameda County rose to 22% from 21%; Contra Costa to 14% from 13%. Both counties have risen 5 percentage points since summer as the combination of low mortgage rates (more than a percentage point lower than in November 2001), the slow economy, and the difficult labor market may be finally reigning in the cost of Bay Area housing. Still, local housing affordability is the lowest in the state.
Despite low affordability, local sales remain extremely high. After rising 13.3% between September and October, sales rose another 12.7% in November in the San Francisco Bay Area. The median single-family home sold in 28 days in November, compared to 26 days in October. The Unsold Inventory Index (indicating the number of months needed to deplete the supply of homes on the market at the current sales rate) fell to 2.6 months, compared to 3.0 months in October.
As of the fourth quarter of 2002, commercial vacancy rates in the Oakland Metro Area were at 20.4%, up from a low of 1.4% in the second quarter of 2000. Edward Del Beccaro of Colliers International reports that effective vacancy rates are actually higher, with sizeable amounts of commercial space still rented but not being used or subleased. This "shadow" or underutilized space is a drag on vacancy rates as it represents capacity that can be filled without lowering vacancy. Leases may also run out on shadow space, causing vacancy rates to jump even higher. In the Tri-Valley region (Dublin, Livermore, Pleasanton, and San Ramon), standard office vacancy is 7.5%. With shadow space included, the effective vacancy rate is 17.3%.
High commercial vacancy rates have also slowed construction in the East Bay. With years of business expansion in the late 90s, large-scale commercial construction projects were already underway when the economy started to cool in 2000. Shadow vacancy is also a drag on commercial construction, as shadow space represents additional capacity that can be filled before new construction is needed.
The East Bay added 8,887 family units in 2002 with a total permitted value of $2.5 billion. Residential construction tended toward house building, as 7,244 of all units permitted in 2002 were single-family dwellings. Brentwood alone issued 1,689 single-family permits as part of Contra Costa County's total of 4,999, with most building concentrated in the east. Nonresidential structures in the East Bay added another $1.1 billion in permits, with $0.49 billion coming as renovations to existing structures and $0.38 billion as new commercial and industrial properties.
For more information on construction, please visit here.
With the trade deficit continuing to widen, the recent strength of foreign currency against the dollar is something to keep an eye on. Factors such as consumer preference and fixed contracts could create a lagged response to a fall in the value of the dollar and lead to some level of inflation, though the likely effect is very small as foreign goods are generally priced to market. However, a rapid devaluation of the dollar could lead to a withdrawal of foreign capital and a corresponding dip in the stock market, though this outcome does not seem particularly likely.
Driven by declines in the prices of shelter, durable goods, and energy, Bay Area inflation retreated in December. Shelter prices are finally falling after a long period of increases. The correlation between falling shelter prices and the soft labor market is obvious.
