The East Bay has been the one strong point in an otherwise dismal Bay Area economy. Its diverse economic base, the relative lack of exposure to the high tech bust, and the fact that it is the most affordable place to do business in an area that is just starting to remember that the bottom line is important even in a new economy. Yet the recent weakness in the US economy, caused by a slowdown in consumer and state and local government spending, has caught up to the region. Payroll employment fell slightly over the past quarter and taxable sales have fallen relative to last year when consumers, still in low interest rate frenzy, bought cars and furniture at a rapid pace. Hotel occupancy rates have fallen as business traffic is again slowing down. The forecast for the national economy is the same as for the region—slow growth as we slowly move back towards normalcy
Real estate prices are starting to cool off some, as it looks like the era of falling mortgage rates may have finally reached bottom. Falling bond prices, if they stick, will lead to rising mortgage rates. Expect the market to lose a substantial portion of its liquidity if rates rise even half a point. Prices will soften and the building boom will likely slow down. How severe the backlash will be depends on how fast mortgage rates increase. As of now the forecast for slow growth will keep mortgage rates from rising rapidly, thus avoiding a potential crisis.
Nevertheless, the fundamentals of the local economy remain in place. The non-residential rental markets seem to have pulled out of their free-fall of just a year ago, and people continue to move into the East Bay, unlike the shrinking labor pools to the west and south. More important, business spending on technology is yet again on the rise, and that will help pull the entire region up. We feel that as the US economy slowly picks up speed over the next few quarters, the East Bay will follow quickly behind and remain the strong point of the Bay Area economy. Still, do not expect a return to the go-go years of the late nineties, only modest growth. And the potential downsides remain. When mortgage rates begin to rise, this will rapidly dampen the hot real estate market. In addition, the State budget situation will be a large drag on the economy.
The big news this week was that the National Bureau of Economic Research, the official arbiters of business cycles, finally announced that the recession of 2001 ended in November of that year, and that the US economy has been in an expansion since this time, albeit a very weak one. Quite a relief! Unfortunately the current expansion hit a soft patch in the second quarter of 2003 as seen in the various measures of economic performance. Purchases of non-defense capital goods slipped slightly after growing through most of 2002, and retail sales have flattened out, especially for automobiles. The only strong sector in the US economy continues to be the housing sector. Unemployment, after remaining stable at 5.8% for nearly a full year, has risen by nearly half a percentage point. Payroll employment also continued its slow steady decline, with an additional 150,000 jobs lost since March to add to the 175,000 lost over the first quarter. Annualized, this represents a pace of job loss of around .5% annually, not large but certainly not good
(Click here for the National Economy analysis and forecast)
While the US economy remains in a slow growth mode, things are starting to look somewhat better for the information technology industry—good news for the beleaguered Bay Area economy. On the consumption side, private investment in information technology capital goods got back on track after a weak fourth quarter of last year. Seasonally adjusted purchases topped $412 billion in the first quarter of 2003...
(Click here for the Technology Industry analysis and forecast)
Not surprisingly, California's economy is still in a slump. Like the US overall, non-farm employment declined through the first two quarters of the year, but the total job loss was over 1%, considerably higher than the losses in the US overall. The patterns of weakness within the state have shifted somewhat, spreading throughout the State. San Jose and San Francisco both continued to lose jobs, but at a slower pace than before. However formerly expanding payroll employment bases in San Diego, the East Bay, Sacramento, and Orange County have all seen negative growth rates in the past few months. The ongoing weakness in the US economy overall, and the budget situation are in part to blame for this problem. Workers’ compensation issues and higher energy prices may also be playing a role, but disentangling the various effects is nearly impossible..
(Click here for the California economic analysis and forecast)
As the weakness in the US economy shifts from technology to a more general economic malaise, the patterns of weakness in the Bay Area have begun to even out. Silicon Valley and San Francisco are still suffering, but are on a positive path. In contrast the relatively strong East Bay has seen some key indicators of business activity in the area begin to fall..
(Click here for the East Bay Business analysis and forecast)
The Bay Area, like most of the US, hit another soft patch over the past quarter. For the East Bay this soft patch represented the first net loss of payroll jobs since 2001. For San Francisco and San Jose it implied a delay in the slowdown of job losses that we had initially forecasted in the last East Bay Quarterly Forecast. San Francisco’s employment base dropped to 973,000, while San Jose continued its precipitous drop with payroll numbers falling to 870,000, a level not seen since 1995...
(Click here for the East Bay Employment analysis and forecast)
The real estate market in the Bay Area has continued it’s up and down pattern of the past three years. The market softened considerably at the beginning of the 2001 downturn throughout the region, but particularly so in San Jose and San Francisco. However the historically tight housing market combined with record low mortgage rates created a new surge in prices in early 2002, surprising many economists who expected a dramatic crash in prices in the area as the full extent of the tech bust revealed itself. The market has continued to follow an up and down pattern since then. The last few months have see another flattening in prices. San Mateo saw median prices rise to almost $600,000 before the market softened. Prices in Santa Clara have leveled off below $500,000. Prices in Alameda Have again reached the peak set in 2002 at $425,000. Contra Costa continues to catch up to its relatively more affluent neighbor, and the median price of houses sold there hit a new high of $375,000 over the past few months...
(Click here for the Residential Real Estate analysis and forecast)
