ARTICLE
Welcome to September, where the morning fog lifts early and the end of summer breeze cools the Central Coast in the afternoon. September kicks off the election cycle but I will first focus this eNews on economic issues that can impact the outcome of the November 5th election. Two prominent California economists provide a snapshot of where we are today, and where we might be headed in the months ahead. First, Mark Schniepp of the California Economic Forecast states in his September newsletter that the U.S. Economy has modestly expanded in the past year. He cites that inflation, while slowing in the past two months, Schniepp states, “The supply chain interruptions followed by the massive government spending bills were the causes of the highest surge of inflation in 40 years, peaking in the summer of 2022. Progress on inflation has been steady since, though with hiccups. This has led to a pessimistic American consumer kneecapped by general prices for goods and services that are 21 percent higher today than in early 2021.” He further states concerns about the lingering effect of the pandemic era on labor markets that forced parents (mostly women) to care for children and the sick. Adding to the mix was the accelerated retirements by older baby boomer members of the workforce. The net effect was a meaningful decline in the labor force. It took two years plus for us to get close to pre-pandemic levels, but we have not completely recovered. Beacon Economic’s founder, Christopher Thornberg, has a different spin and focuses his comments on California’s economy. He entitles his recent Summer 2024 Outlook on a “Crisis Caused by Concern About Crises.” His opening statement notes, “In March 2024, The Economist (https://www.economist.com/united-states/2024/03/31/california-is-gripped-by-interlocking-economic-problems-with-no-easy-solution) ran an article with the headline, “California is gripped by economic problems, with no easy fix. Rising unemployment, a growing deficit, and persistent outmigration are a painful trinity.” The article concludes that the state is a weak spot in the middle of an otherwise healthy U.S. economy. Although the picture is more complex than the headline implies, there is little doubt that California is not doing as well as it has in the past. The only substantial argument is over why the state is faring so poorly and the depth of the economy. The dominant narratives from the right and the left of the political spectrum obviously differ in their explanations. Those on the right confidently say that the state’s “socialist” policies and overregulation are strangling the business sector. The left, on the other hand, just as confidently claims that the problems are a function of inequality and the crushing burden of rising housing costs.” California is facing some critical challenges, but these two very standard narratives largely misinterpret the causes and consequences of the problems. According to Thornberg, “First, these issues are not a sign that California’s economy is bad, and certainly not as bad on a number of dimensions as headlines would suggest. The state’s economy is growing, just at a slower-than-typical rate. Second, a closer look at the issues highlighted by The Economist indicates that California’s problems relate to a number of unforced policy and fiscal errors, which have created a drag on the state’s ability to grow. A change in approach would serve California well, but this can only occur if we align the narrative about the state’s economy with reality.” California’s output and job growth data don’t show a state that has stumbled on hard times. Rather, the data reflects a state in which growth is shifting to a more intensive margin, as one might expect in a place that has seen no labor force growth in the last half-decade. This extensive-to-intensive shift in growth can be seen in the state’s per capita income data. California’s per capita personal income has been rising more rapidly than the nation overall for a full decade. Per capita personal income in California is currently 17.5% higher than national personal income, or about 5% in real terms once we control for relative costs in the state. A year ago, job growth in the state had stalled. But in the past year, we have seen a rebound to a 1.2% growth rate. This is slower than the national average, but given that California’s labor force declined slightly over the same period and is still below its 2019 level (19.2 million in May 2024 compared to 19.25 million in May 2019), it’s clear the issue is one of labor supply, not labor demand. California’s job opening rate is still higher than it was in 2019 despite lower job growth, according to the U.S. Bureau of Labor Statistics. The state is being held back primarily by a lack of new labor supply, not a lack of labor demand. The pattern of growth across the state reflects this basic issue: California’s economy is slowing because of a lack of workers. The regions that have added significant payroll jobs over the last two years, such as the Inland Empire, Sacramento, Fresno, and Stockton, are all located in less expensive inland parts of the state and can grow because of their expanding labor force. In contrast, the more expensive coastal markets have seen much less labor force growth and, hence, less payroll job growth. The differential impact on California’s coastal communities is a function of slower growth in our housing supply combined with a greater share of our labor market entering retirement. It has been noted that California’s population has been declining over the past decade. It’s what’s constraining California’s labor supply and, thus, preventing more rapid job growth and (likely) better revenue growth. California’s household population has fallen by 360,000 in the last five years, representing a slightly less than 1% decline. This drop is driven primarily by negative net migration, meaning more people have moved out of the state than in. However, California’s population size did hold steady from 2023 to 2024, suggesting the worst of the declines were in the past. Now, to the very point of continued discussion in Santa Cruz County and along our California coastline. We know that housing and affordability are the driving forces for labor and outmigration. Thornberg has blunt comments on the subject. He states, “But why are people leaving? Popular narratives about why Californians are fleeing the state vary across the political spectrum, with some claiming it is the rich trying to escape high taxes and others saying it is lower-income families fleeing high housing costs. These differences are irrelevant because people aren’t fleeing—they are being forced out. If people were voluntarily leaving, the housing vacancy rate would be rising. However, the vacancy rate in California is not rising; it’s falling, and it currently sits at or near a record low level, depending on which survey you use. For example, the state’s Department of Finance estimates the current housing vacancy rate to be 6.4%, one percentage point lower than a decade ago. How do we reconcile these seemingly contradictory trends of a declining population and vacancy rate? By recognizing that while the population has fallen, the number of households has increased. This, in turn, has been driven by a decline in the number of people per household.” We closely follow our housing market at all income levels and carefully watch how our cities are responding to the need for regional housing needs assessment (RHNA). Thornberg throws out the bold statement, "California’s economy is being held back by the state’s housing shortage, not by housing affordability.” While local elected officials and state officials may disagree with Thornberg’s statement, he does have a valid point: “The failure to address the actual unit shortage and instead focus only on affordability misses the point and fuels gentrification. As the lack of housing supply drives up home prices, higher income families who enjoy lower price sensitivity are moving in, pushing housing prices up even further, and pushing lower income families, who face greater price sensitivity, out of the state. Today’s market prices partly reflect the incomes of those moving in, which is why housing costs as a share of income have not really increased in the last decade. California’s higher housing costs reflect the higher incomes of both renters and owners.” Somewhere in between the State Legislature and the Governor’s effort to produce more affordable housing, we may find a solution. The state continues to produce slightly less than 10,000 housing permits per month, the same level as in 2017. Despite all of the changes to the Regional Housing Needs Allocation (RHNA) rules, despite Senate Bill 8 (a 2021 amendment to the Housing Crisis Act of 2019), Senate Bill 9 (The California HOME Act), changes in ADU rules, and so on, California has fallen short of addressing its housing shortage. This November election, please consider how each candidate is positioning themselves on the economy, job creation, and housing. Your vote can make a difference.
Welcome to September, where the morning fog lifts early and the end of summer breeze cools the Central Coast in the afternoon. September kicks off the election cycle but I will first focus this eNews on economic issues that can impact the outcome of the November 5th election. Two prominent California economists provide a snapshot of where we are today, and where we might be headed in the months ahead.
First, Mark Schniepp of the California Economic Forecast states in his September newsletter that the U.S. Economy has modestly expanded in the past year. He cites that inflation, while slowing in the past two months, Schniepp states, “The supply chain interruptions followed by the massive government spending bills were the causes of the highest surge of inflation in 40 years, peaking in the summer of 2022. Progress on inflation has been steady since, though with hiccups. This has led to a pessimistic American consumer kneecapped by general prices for goods and services that are 21 percent higher today than in early 2021.”
He further states concerns about the lingering effect of the pandemic era on labor markets that forced parents (mostly women) to care for children and the sick. Adding to the mix was the accelerated retirements by older baby boomer members of the workforce. The net effect was a meaningful decline in the labor force. It took two years plus for us to get close to pre-pandemic levels, but we have not completely recovered.
Beacon Economic’s founder, Christopher Thornberg, has a different spin and focuses his comments on California’s economy. He entitles his recent Summer 2024 Outlook on a “Crisis Caused by Concern About Crises.” His opening statement notes, “In March 2024, The Economist (https://www.economist.com/united-states/2024/03/31/california-is-gripped-by-interlocking-economic-problems-with-no-easy-solution) ran an article with the headline, “California is gripped by economic problems, with no easy fix. Rising unemployment, a growing deficit, and persistent outmigration are a painful trinity.”
The article concludes that the state is a weak spot in the middle of an otherwise healthy U.S. economy. Although the picture is more complex than the headline implies, there is little doubt that California is not doing as well as it has in the past. The only substantial argument is over why the state is faring so poorly and the depth of the economy. The dominant narratives from the right and the left of the political spectrum obviously differ in their explanations. Those on the right confidently say that the state’s “socialist” policies and overregulation are strangling the business sector. The left, on the other hand, just as confidently claims that the problems are a function of inequality and the crushing burden of rising housing costs.”
California is facing some critical challenges, but these two very standard narratives largely misinterpret the causes and consequences of the problems. According to Thornberg, “First, these issues are not a sign that California’s economy is bad, and certainly not as bad on a number of dimensions as headlines would suggest. The state’s economy is growing, just at a slower-than-typical rate. Second, a closer look at the issues highlighted by The Economist indicates that California’s problems relate to a number of unforced policy and fiscal errors, which have created a drag on the state’s ability to grow. A change in approach would serve California well, but this can only occur if we align the narrative about the state’s economy with reality.”
California’s output and job growth data don’t show a state that has stumbled on hard times. Rather, the data reflects a state in which growth is shifting to a more intensive margin, as one might expect in a place that has seen no labor force growth in the last half-decade. This extensive-to-intensive shift in growth can be seen in the state’s per capita income data. California’s per capita personal income has been rising more rapidly than the nation overall for a full decade. Per capita personal income in California is currently 17.5% higher than national personal income, or about 5% in real terms once we control for relative costs in the state.
A year ago, job growth in the state had stalled. But in the past year, we have seen a rebound to a 1.2% growth rate. This is slower than the national average, but given that California’s labor force declined slightly over the same period and is still below its 2019 level (19.2 million in May 2024 compared to 19.25 million in May 2019), it’s clear the issue is one of labor supply, not labor demand. California’s job opening rate is still higher than it was in 2019 despite lower job growth, according to the U.S. Bureau of Labor Statistics. The state is being held back primarily by a lack of new labor supply, not a lack of labor demand.
The pattern of growth across the state reflects this basic issue: California’s economy is slowing because of a lack of workers. The regions that have added significant payroll jobs over the last two years, such as the Inland Empire, Sacramento, Fresno, and Stockton, are all located in less expensive inland parts of the state and can grow because of their expanding labor force. In contrast, the more expensive coastal markets have seen much less labor force growth and, hence, less payroll job growth. The differential impact on California’s coastal communities is a function of slower growth in our housing supply combined with a greater share of our labor market entering retirement.
It has been noted that California’s population has been declining over the past decade. It’s what’s constraining California’s labor supply and, thus, preventing more rapid job growth and (likely) better revenue growth. California’s household population has fallen by 360,000 in the last five years, representing a slightly less than 1% decline. This drop is driven primarily by negative net migration, meaning more people have moved out of the state than in. However, California’s population size did hold steady from 2023 to 2024, suggesting the worst of the declines were in the past.
Now, to the very point of continued discussion in Santa Cruz County and along our California coastline. We know that housing and affordability are the driving forces for labor and outmigration. Thornberg has blunt comments on the subject. He states, “But why are people leaving? Popular narratives about why Californians are fleeing the state vary across the political spectrum, with some claiming it is the rich trying to escape high taxes and others saying it is lower-income families fleeing high housing costs. These differences are irrelevant because people aren’t fleeing—they are being forced out. If people were voluntarily leaving, the housing vacancy rate would be rising. However, the vacancy rate in California is not rising; it’s falling, and it currently sits at or near a record low level, depending on which survey you use. For example, the state’s Department of Finance estimates the current housing vacancy rate to be 6.4%, one percentage point lower than a decade ago. How do we reconcile these seemingly contradictory trends of a declining population and vacancy rate? By recognizing that while the population has fallen, the number of households has increased. This, in turn, has been driven by a decline in the number of people per household.”
We closely follow our housing market at all income levels and carefully watch how our cities are responding to the need for regional housing needs assessment (RHNA). Thornberg throws out the bold statement, "California’s economy is being held back by the state’s housing shortage, not by housing affordability.” While local elected officials and state officials may disagree with Thornberg’s statement, he does have a valid point: “The failure to address the actual unit shortage and instead focus only on affordability misses the point and fuels gentrification. As the lack of housing supply drives up home prices, higher income families who enjoy lower price sensitivity are moving in, pushing housing prices up even further, and pushing lower income families, who face greater price sensitivity, out of the state. Today’s market prices partly reflect the incomes of those moving in, which is why housing costs as a share of income have not really increased in the last decade. California’s higher housing costs reflect the higher incomes of both renters and owners.”
Somewhere in between the State Legislature and the Governor’s effort to produce more affordable housing, we may find a solution. The state continues to produce slightly less than 10,000 housing permits per month, the same level as in 2017. Despite all of the changes to the Regional Housing Needs Allocation (RHNA) rules, despite Senate Bill 8 (a 2021 amendment to the Housing Crisis Act of 2019), Senate Bill 9 (The California HOME Act), changes in ADU rules, and so on, California has fallen short of addressing its housing shortage.
This November election, please consider how each candidate is positioning themselves on the economy, job creation, and housing. Your vote can make a difference.