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State economy should continue strong growth

Good performances comes despite uncertain policy environment, market volatility
Feb 9, 2018

The California economy continues to perform well and should maintain strong growth despite an uncertain policy environment and financial market volatility, according to the latest projection from Pacific's Center for Business and Policy Research.

The recent tax cut and spending deal in Washington provide federal fiscal stimulus that will provide a modest boost to growth in 2018 and 2019, but create long-term challenges and add considerable risk and uncertainty to the forecast for 2020 and beyond.

This policy outlook, combined with strong job growth data in California in recent months, results in a forecast that real Gross State Product will sustain growth at or near 3 percent for 2018 and 2019.  Nonfarm payrolls are projected to grow 1.8 percent in 2018 and 1.2 percent in 2019, as the state unemployment rate stabilizes around 4.5 percent.  Beyond 2020, the pace of growth will decline and unemployment should creep higher. The risk of recession will grow as the economic expansion reaches record duration, and the costs of current and potential policy decisions become more apparent and the near-term stimulus fades.

The regional outlook predicts the strongest 2018 employment growth will occur in the Stockton and Sacramento metro areas at 3 percent.  All areas of the Northern California Megaregion are projected to have unemployment rates stabilize at or near record lows for the next two years. Job growth in the Bay Area will gradually decline from its current pace of 2 percent in the face of large physical constraints to housing and transportation systems that prevent labor force growth. These challenges of labor availability and housing costs are spreading into interior markets, and contribute to slower growth projected in Central Valley regions as we move past 2018.

California Annual Forecast Summary

 

2016 2017 2018 2019 2020 2021
Real Gross State Product (% change) 2.9 2.7 2.9 3.0 2.4 2.0
Non-Farm Payroll Employment (% change) 2.7 1.8 1.8 1.2 0.9 0.6
Unemployment Rate (%) 5.4 4.8 4.4 4.5 4.7 4.8
Housing Starts (thousands) 96.3 104.7 121.5 132.8 136.6 140.3

 

Central Valley Metro Forecast Summary

Metro Area

Nonfarm Payroll Employment Unemployment Rate (%)
(% change)
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Sacramento 3.5 1.8 3.0 1.6 1.3 5.2 4.6 3.6 3.7 3.9
Stockton 3.4 1.9 3.0 2.1 1.3 8.1 7.2 6.1 6.0 6.2
Modesto 3.3 2.8 1.9 0.9 0.7 8.5 7.5 6.5 6.6 6.9
Merced 2.6 1.8 1.6 1.9 1.8 10.5 9.5 8.1 7.8 7.7
Fresno 3.5 2.3 2.4 1.4 0.9 9.4 8.6 7.4 7.3 7.6
California 2.7 1.8 1.8 1.2 0.9 5.4 4.8 4.4 4.5 4.7

Sacramento MSA includes Sacramento, El Dorado, Placer, and Yolo counties.  Stockton, Merced, Fresno and Modesto MSAs correspond to San Joaquin, Merced, Fresno and Stanislaus counties.

Bay Area Metro Forecast Summary

Metro Area

Nonfarm Payroll Employment Unemployment Rate (%)
(% change)
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
San Francisco 4.1 2.3 2.3 1.7 1.1 3.1 3.0 2.8 2.7 2.5
San Jose 3.1 1.7 1.9 1.4 1.2 3.9 3.5 3.3 3.1 3.1 
Oakland 3.3 2.1 1.9 1.4 1.1 4.3 3.9 3.7 3.4 3.4
California 2.7 1.8 1.8 1.2 0.9 5.4 4.8 4.4 4.5 4.7

San Francisco MSA includes San Francisco and San Mateo counties.  Oakland MSA includes Contra Costa and Alameda counties.  San Jose MSA includes Santa Clara and San Benito counties.

Highlights of the February 2018 California Forecast

  • Over the next 12 months, real gross state product is forecast to grow 2.7 percent and the risk of recession is low despite recent stock market volatility.
  • The California unemployment rate is forecast to stabilize at about 4.5 percent for the next two years before gradually increasing to 4.8 percent by the end of 2020.
  • Nonfarm payroll jobs will grow 1.3 percent over the next 12 months, about half the pace of the previous four years when job growth was between 2.5 percent and 3 percent.  Payroll growth will slowly decline to drop below 1 percent by late 2020, which is to be expected for an economy at full employment after a long expansion.
  • Health Services has become the largest employment sector in the state, and is projected to add about 45,000 positions over the next 12 months, less than the 65,000 jobs added in recent years. Professional Scientific and Technical Services is a high-paying sector that has fueled the recovery. This sector will add over 40,000 jobs over the next year after a brief slow- down in this dynamic sector.
  • Growing tourism and a gradual shift in consumer spending from retail to restaurants has fueled rapid growth in Leisure and Hospitality sector. While this sector has added as many as 50,000 jobs in recent years, we project it will fall below 20,000 over the next year and stagnate by 2020 as a higher minimum wage affects hiring.
  • State and local government employment has experienced solid 2 percent employment growth in the past year, but the pace of public hiring will decline to 0.5 percent growth for the next several years as state and local governments grapple with rising pension costs.
  • Construction activity continues to grow with about 35,000 new jobs anticipated in each of the next three years, about a 4 percent annual growth rate.
  • Single family housing starts are picking up, growing from 50,000 units in 2016 to a projected 58,000 in 2017 and 77,000 by 2020.  Multi-family production is projected to exceed 50,000 units this year, and exceed 60,000 units by 2021. With this increase, housing production will finally be sufficient to keep up with modest 0.7 percent projected annual population growth, but will not be enough to provide relief to California's housing crisis.
  • California's population growth rate has declined to 0.7 percent and is projected to remain at this level through the 5 year forecast due to lower birth rates, immigration, and housing costs.  The state will add about 280,000 residents in each of the next few years, notably fewer than in the past.


Pacific's Center for Business and Policy Research was founded in 2004 and was known as the Business Forecasting Center until March 2015. The Center is a joint program of the Eberhardt School of Business and the McGeorge School of Law programs in public policy 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. For more information, visit Go.Pacific.edu/CBPR.  

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