This past quarter has finally seen the bottoming out of the Bay Area economic crash that began in 2001 and technology spending has finally seen two quarters of positive growth, albeit at very small levels. For the first time in three years, San Francisco saw payroll jobs actually stay level, while jobs in San Jose fell by a relatively small amount. The East Bay economy had weathered the initial economic downturn very well but began to lose jobs in late 2002 as a result of the overall economic doldrums, the spillover of the continued problems of its neighbors and the State budget crisis. This shallow downturn has ended and job growth is currently flat.
This is good news in the short-run for the East Bay, but it needs to be kept in mind that there will only be a slow return to normal growth for the US overall despite Wall Street’s current optimism. The unusual business-led nature of the 2001 downturn implies that a return to solid growth must be driven by business spending which is not likely to rebound anytime soon. This implies that the East Bay economy will be seeing only modest payroll employment growth rates in the near future. We look for the East Bay to add 18,000 jobs in 2004 and another 22,000 in 2005, with growth rates of 1.6% and 2.1% respectively. The outlook for the other two economies is milder +1% for 2004 and a solid (but not recovery level), 2% growth rate in 2005.
Residential real estate has seen a dramatic increase in volume over the past few months as buyers rushed to lock in low mortgage rates. The panic was driven by a sharp increase in rates as Wall Street optimism spilled into the bond markets and pushed the price of 10-year notes down. It has become clearer that this optimism was largely misplaced and rates have since declined some. Still, rates will not be dropping to what they were only a few months ago and will likely slowly increase in 2004. Look for this to take some of the wind out of the residential markets. On the commercial side of the equation, the bottom has been reached and vacancies have fallen slightly across the region. Still, rents have fallen dramatically across the entire Bay Area including the East Bay - don't look for strong non-residential construction growth anytime in the near future, as the excess supply will continue to be a drag on rental prices.
Summary by Edward E. Leamer Director, UCLA/Anderson Forecast
Most Wall Street economists are predicting that the “recovery” period is finally here. This seems to make a lot of sense. Looking backward, recoveries have followed recessions as inevitably as spring has followed winter. But this time will be different. The downturn of 2001 was very unique and will not be followed by a recovery period.
A recovery is a period of exceptional economic growth, 4.5% to 5.5%, with a strong job market, declining unemployment and surging corporate profits. Normal growth is only 3-3.5%, which is good enough to maintain the unemployment rate but not to drive it down. We think that Wall Street is wrong about their view of the economy and that the optimistic outcome for the near future is normal growth, though weaknesses in key sectors are likely to hold growth to the 2.5-3.0% range...
(Click here for the national economy analysis and forecast)
In economic forecasting, much focus is put on the overall movement of the US or California economy. While looking at aggregate trends is clearly an important occupation, it often ends up obscuring the fact that there is a substantial amount of inter-regional variation in economic performance. This is true not just across the US but also dramatically so right here in California. Consider a cross section of 70 of the largest cities in the US, nine of which are here in California. These metropolises combined accounted for 76 million jobs in July of this year, well over half of total employment in the US. All together, these metropolises lost a total of 1.7% of their payroll jobs—basically the same as the US overall. Yet within this mix of cities is an enormous degree of variation. The change in payroll jobs between Q3 2000 and Q3 2003 ranges across these seventy cities from a positive 8% to a negative 17%...
(Click here for more analysis of the State economy and larger cities)
The Bay Area will ultimately recover with information technology, and signs are positive that the bottom has been reached and passed. Real purchases of information technology investments within the US grew at an annualized rate of 19% in the second quarter of this year, basically on par with the average rate of growth seen in the late nineties. Over the same period of time, nominal (non-inflation adjusted) spending increased by a bit over 15%. This is good news as it implies that the surge in business spending on real goods is not being offset by reduced prices as much as it has been in the past—important for cash strapped technology firms. This increase in investment occurred at the same time that US corporate profits increased sharply in the second quarter, for the first time putting the bottom lines of companies at a level higher than the previous peak hit in 1997. This implies that overall business spending will continue to rise, not just in information technology but also across all investment goods...
(Click here for more on the technology and manufacturing forecast)
While things look better on the technology-spending front, this has yet to be reflected in employment for the East Bay. Payroll employment continued to stay at 1.05 million, slightly below the 2001 peak. Still, keep in mind that employment is a lagging indicator; it moves behind the economy. Slightly “better” news comes from the East Bay’s two neighbors that have been experiencing the highest rates of job losses in the nation. In San Francisco, payroll employment has finally bottomed out and has actually begun to increase slightly. As the East Bay is in part a bedroom community for San Francisco, this is definitely very positive news. Santa Clara County has seen its annualized rate of payroll job loss drop from 6% two quarters ago to a mere 1% this quarter. At this pace, employment in that beleaguered economy will bottom out the last quarter of this year. Interestingly the East Bay has less of a linkage with San Jose than it does with San Francisco...
(Click here for the East Bay employment analysis and forecast)
While the employment situation is looking somewhat better for the Bay Area overall, and the East Bay in particular, other sectors of the economy have yet to show substantial improvements. Trade through the San Francisco customs district has fallen dramatically since the start of the tech-bust in mid-2000. Imports have stabilized at approximately $4 billion per month, down 35% from the 2000 peak.
Exports, one good indication of world demand for the information technology goods that are produced in the Bay Area, continue to slowly fall to $2.8 billion per month. The large majority of exports from the district head to Asia, and this is the market in which demand has been softening. It is unclear if this represents weak demand for information technology investments in the world overall, or whether it represents the outsourcing of production of information technology components to foreign countries, thus reducing the demand for goods produced in the Bay Area. In either case, we can expect that manufacturing employment in the area will remain flat until external demand begins to pick up.
Similarly, freight through the airports in the region - which can be destined for international or domestic locations - also remains down. San Jose’s and San Francisco’s freight traffic is down by 40% while Oakland International’s freight traffic remains stable...
(Click here for more on travel, trade and the hotel industry)
If there is any silver lining to the economic slowdown in the region (no matter how tarnished), it’s that price inflation in the Bay Area has slowed to a more normal level. Prices were growing by 4-6% per year in the late nineties, reflecting the boomtown mentality that drove up not just the price of housing, but also many other goods. Inflation has since slowed dramatically to a more reasonable 1% per year. Prices surged earlier this year, primarily on the back of rising energy prices that pushed gasoline prices to over $2.00 per gallon in the Bay Area. Look for excess capacity in the area to keep price inflation low for the next few years.
Preliminary estimates for taxable sales have been collected for the region for the 4th quarter of 2002 and the first quarter of this year. These results are down from the same period the previous year, not surprising given the general economic weakness of the US overall during the course of 2002. When the final numbers come in for fiscal year 2002-2003, we expect that taxable sales will be down by -1.2% for Alameda, -1.1% for Contra Costa and -7.4% for Santa Clara Counties over the previous fiscal year...
(Click here for the complete inflation and taxable sales analysis and forecast)
On the real estate side of the equation, the picture remains largely the same - it’s a renters market for commercial properties (including apartments) and a seller’s market for houses. Of the four major investment property types, retail has been the most stable. Rental prices for retail space declined only 10% in San Jose and San Francisco over the past 2 years, despite the economic woes of these two communities, and 6% in the East Bay.
In contrast, rental rates for apartments have fallen by nearly 30% for most of the Bay Area. Here the East Bay has been hit as hard as its two neighbors, hardly a surprise given the commuting patterns of the region.
Industrial properties in the East Bay, however, have seen rental prices per square foot drop by slightly more than 10%, while rates in the other two areas fell by more than 20%. Rental prices for industrial space have been slightly more stable than apartments...
(Click here for more on the real estate analysis and forecast, including housing)
