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Steady growth forecast for California economy

May 25, 2016

The California economy will maintain steady growth despite a slight slowdown at the beginning of the year according to the latest projection from the Center for Business and Policy Research at the University of the Pacific. Consumer spending and residential investment, which were expected to drive growth in 2016, have increased less than expected but remain well positioned to support future growth. After a weak first quarter to 2016, California job growth had a strong rebound in April and should maintain a pace of about 25,000 net new jobs each month over the next year. The forecast projects the unemployment rate will remain near its current level of 5.3% over the next few years.

The regional outlook makes note of the strong economic performance of the Stockton and Fresno MSAs in recent years. The Stockton MSA is in the process of posting its 4th consecutive year of job growth above 3%, led by a booming logistics sector attracted to its strategic location near the Bay Area. The Stockton MSA is projected to lead northern California job growth in 2016 and 2017. Despite the drought, the Fresno MSA experienced job growth over 3% in 2014 and 2015 as its unemployment rate dropped to single-digits for only the fourth time in the past 25 years. Increasing construction activity on high speed rail and improved drought conditions in the Fresno area and will help keep the expansion going in 2016 and 2017. Sacramento growth has been lagging other areas, but is projected to maintain more consistent job growth and lead the region in 2019 and 2020 as other areas slow. Bay Area growth will slow gradually as shortages of real estate and labor constrain growth and drive higher costs.

The forecast also includes a discussion of the impacts of the minimum wage on the Central Valley, and argues for a more gradual phase-in and smaller increase for the region. The Center for Business and Policy Research at the University of the Pacific was founded in 2004, and was known as the Business Forecasting Center until March 2015.

The Center is a jointly housed in the Eberhardt School of Business and the McGeorge School of Law, and has offices at the Sacramento and Stockton campuses. The Center produces economic forecasts of California and eight metropolitan areas in Northern and Central California, in depth studies of regional economic and policy issues, and conducts custom studies for public and private sector clients.

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Highlights of the May 2016 California Forecast

• California is forecast to maintain steady growth in real gross state product at approximately 3% through 2019.

• The California unemployment rate has fallen to 5.3% and it should stabilize near this level for the next two years.

• Nonfarm payroll jobs have grown at a strong 3% pace for the past three years, but we project more moderate 2.3% growth in 2016, 1.7% growth in 2017, and approximately 1% growth from 2018 through the end of the forecast in 2020.

• Health Services has become the largest employment sector in the state, and is projected to add an additional 55,000 positions over the next 12 months, slightly less than the 70,000 jobs added annually in recent years.

• Professional Scientific & Technical Services is a high-paying sector that has fueled the recovery. Growth in this sector will slow to about 30,000 jobs over the next year as Silicon Valley growth cools.

• Growing tourism and a gradual shift in consumer spending from retail to restaurants has led the Leisure and Hospitality sector to exceed 4% job growth in each of the past 4 years, and is projected to add more than 35,000 additional jobs over the next year.

• State and local government employment is one of the slowest growing sectors, projected to grow less than 1% over the next year. State and local government payrolls in California will finally regain their 2008 level in late 2017.

• Nearly 40,000 new Construction jobs are anticipated in each of the next three years, just below a 5% annual growth rate. Despite this expected growth, there will still be fewer Construction jobs in 2020 than before the recession.

• Single-family housing starts are beginning to increase, but fell short of 50,000 units in 2015 and are on track for a modest gain to 57,000 units in 2016. We project a substantial increase to 79,000 units in 2017, and 90,000 units in 2018.

• Multi-family housing starts have surpassed pre-recession levels, but growth has stalled in recent months and 2016 is on track to be similar to the 45,000 multi-family units produced in 2015. We expect multi-family growth to resume in 2017 and exceed 60,000 units by 2019.

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