The California economy should continue to expand faster than the nation’s over the next five years, but the rising cost of housing in the Golden State is going to keep some of that growth in check.
A forecast released this week by Beacon Economics says virtually every key economic indicator in the state is on the right track, including gross domestic product, incomes, consumer and business spending, and employment.
“Although the jobs and broader economic recovery has been more robust in some areas of the state than in others, the overall numbers are indicative of real, sustained improvement statewide,” said Jordan Levine, economist at Beacon.
The forecast says California should see job growth at about 2.5 percent by 2016, and that the unemployment rate should drop below 6 percent by mid-2017. It says California’s growth is being led by strategic infrastructure that supports exports, a highly educated workforce employed in leading edge fields such as biotech and computer sciences, and venture capital funding, which exceeded its pre-recession peak in the first quarter of this year. It also says that the tourism industry is driving the state’s economy forward, with hotel occupancy at 73.4 percent. That’s 10 percent higher than the national average.
Hindering economic growth, however, is the rising cost of housing, which Beacon economist Chris Thornberg said is largely due to a lack of supply. Housing inventory statewide is at about 3.7 months, the California Association of Realtors reported in June, about half the level of a normal market, putting upward pressure on prices. Statewide prices have grown by double digit percentages since June 2012, the forecast says.
“You can’t add jobs if there is no growth in the labor force because people are leaving because they can’t afford housing,” Thornberg said.
The forecast says California’s least expensive housing areas are priced like the most expensive areas in Texas, with medians in some exclusive areas approaching $1 million.
“That is well beyond the reach of the average Californian, and as a result, the state has experienced more out-migration among lower and mid-income than among high income workers,” the forecast says. “This worrisome trend deprives businesses of a strong mid-skilled workforce and makes it difficult to recruit talent because businesses can’t afford to pay wages that would offer a desired quality of life.”
Alan Gin, economist at the University of San Diego, who did not co-author the forecast, said housing costs are a big problem in California, where there are geographical barriers in desirable places to live.
“They’re not making any more land,” he said. “Increased density is I think what we need. The problem is most people think it’s a good idea as long as they do it someplace else.”
Levine said regulations and fees across California inhibit construction, with any replacement tax revenue limited by Proposition 13. He said the housing issue wouldn’t keep California’s economy from growing, just by not as much as it should be to keep up with population growth, a decades old problem.
California’s unemployed rate peaked at 12.4 percent in October 2010. In June, the state’s unemployment rate was 7.4 percent. Annual job growth was at 2.4 percent, compared to the nation’s 1.8 percent.
Nationwide, the forecast says the U.S. economy should grow at slightly more than 3 percent for the next two quarters, which is a bit slower than the 4 percent estimated growth in the second quarter. Thornberg said the culprit for the slow down was the widening of the trade deficit, as there was more demand for imports and declining foreign demand for exports. Overall, national growth will be driven by increased construction and better economic growth worldwide.