Guest Column: The Economy Looks Healthier
By Esmael Adibi
The year 2012 marked the first year since the beginning of the Great Recession that the payroll job growth in California (at 2.4 percent) surpassed U.S. job growth (1.7 percent). The pace of job creation gained momentum in 2013 when California employment grew at 3.0 percent, significantly higher than the U.S. job growth of 1.7 percent.
The culprit for the region’s underperformance during the recession and early stages of the recovery was mainly construction spending. During the recession, the total value of building permit valuation in California, both residential and nonresidential, declined from a peak level of $59.2 billion in 2006 to $22.9 billion in 2009. Over the 2009-2011 period, California’s building permit valuation showed a gradual improvement but rebounded sharply in 2012 to $32.5 billion, increasing by 18.6 percent.
Hence, our measure of construction spending in California, which is derived from the lagged moving average of total permit valuation, grew by 23.5 percent in 2013. It is not surprising, therefore, that construction payroll employment was one of the fastest growing job categories in California in 2013.
The upward trend in construction spending will continue well into 2014. We are projecting the total value of building permit valuation to increase by about 16.0 percent in California in 2014. Clearly, construction spending not only directly affects construction jobs but indirectly creates jobs in construction-related industries.
U.S. economic growth as well as the growth of California’s major international trading partners also are important factors influencing the state and local economies and payroll job growth.
Real GDP is projected to increase 2.8 percent in 2014, following a paltry growth rate of 1.9 percent in 2013.
On the international front, California’s merchandise exports increased at a rapid pace since the first quarter of 2009 and reached a peak level of $45.2 billion in the fourth quarter of 2013. Although China and Japan are expected to experience slower growth rates in 2014 compared to 2013, Canada and Mexico, our largest trading partners, are expected to show stronger growth rates in the coming year. And the largest economies of Europe, Germany, U.K., and France are coming out of recession. This trend suggests that real merchandise exports from California to the rest of the world should increase by about 5.0 percent in 2014, more than double the estimated growth rate of 2.0 percent in 2013.
The combination of strong construction spending, a pickup in U.S. real GDP growth and the rising California export growth point to an improved job outlook in California in 2014.
Overall, we forecast employment to increase by 2.6 percent in California in 2014. This translates to total payroll job creation of about 394,000. Job growth in construction, education and health, professional and business services, and leisure and hospitality are forecasted to outperform all the other sectors.
With strong employment growth, home prices increased at double-digit rates across the state in 2013. This begs the question: Are we headed toward another housing bubble?
Job growth in our model is an important proxy for housing demand. Job growth, income growth, mortgage rates, and new and resale housing inventory are the key variables used in forecasting home prices.
On the demand side, continued job growth will be a positive factor. But, facing higher home prices, real estate investors who made large purchases in 2012 and 2013 will not be active participants in the marketplace. In addition, mortgage rates are headed higher. Stagnate family/household income, higher mortgage rates and higher home prices are making home purchase less affordable.
A potential home buyer earning a median family income in 2013 and buying a median priced single-family home needed to allocate about 19.0 percent of his gross income to pay for interest, principal and property taxes. This ratio was computed after taking into account the tax savings of deducting mortgage interest and property taxes from taxable income. The 19.0 percent was significantly lower than 45.9 percent of gross income needed in 2006. With projected higher mortgage rates, this ratio will increase to 26.8 percent making housing relatively less affordable, thereby negatively impacting demand.
On the supply side, two factors are at work. The supply of new housing units, both multiple and single-family units, is increasing in California. The supply of resale units, which declined sharply through late 2012 and 2013, is also expected to rise. With the rebound in home prices, many underwater homeowners are recapturing lost equity. Some will take this as an opportunity to either downsize their financial obligation or consider relocating. There is already some evidence of increasing supply of resale units and this trend should continue.
Hence, in spite of continued payroll job growth, the decline in investor pools, lower housing affordability and increasing supply of new and resale housing units point to a significant slowdown in home price appreciation in California.
By the end of the fourth quarter of 2014, year-over-year percentage changes in single-family home prices are forecasted to trend down to 3.6 percent in California. On an annual basis, median resale single-family home prices, as measured by the California Association of Realtors, are forecasted to increase by 4.9 percent in California, significantly lower than the double-digit increases in 2013.
Esmael Adibi, Director of the Anderson Center for Economic Research at Chapman University, is also a member of the Controller's Council of Economic Advisors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Controller or his office.
Figure 3: Payroll Job Growth in California
