Feature
by Michael Dardia
After reading such headlines as “End of Recession in Sight in Bay Area” (Bay Area Economic Pulse, Summer 2002) and “Bay Area Employment Shows Signs of Life” (Bay Area Economic Pulse, Fall 2002), caution has firmly overtaken optimism about any imminent improvement in the regional economy.
Both Bay Area employment and the labor force shrank in the last quarter of 2002, and the unemployment rate jumped from 6 percent to 6.9 percent. Statewide, unemployment rose from 6.4 percent to 6.6 percent. Bay Area employment in December 2002 was 196,000 lower than in December 2000, and the cumulative losses remain highly concentrated in the San Jose and San Francisco metro areas. These two metro areas account for 28 percent and 31percent of total regional non-farm employment, respectively, but they suffered virtually all of the regional job losses in the past two years (96 percent). The San Jose metro area has experienced an 11 percent employment decline—a figure that rivals the losses seen in Los Angeles during the previous recession. The San Francisco metro area has experienced a 7 percent decline. The employment losses return San Jose to its December 1997 employment level and San Francisco to its December 1998 level. The Oakland metro area fared poorly in the past quarter as well, doubling the number of jobs lost during the past two years. Other Bay Area regions did not fare so poorly in the past quarter. Napa, Sonoma, and Solano counties have all gained from 1 percent to 3 percent in the past two years.
fig a: Bay area employment change by sector, 2001 and 2002
There were smaller rates in the decline of jobs in most sectors in 2002 than in 2001. This was most pronounced in the business services sector, comprised heavily of software and temporary workers, which lost 16 percent of its jobs in 2001 and a further 5 percent in 2002. This sign of a deceleration in job loss is tempered by the fact that the rate of job loss in high-tech manufacturing and business services picked up again in the fourth quarter of 2002. Health services and government continued to add jobs in 2002, but government jobs were flat in the fourth quarter and will likely decline in 2003 due to state and local budget cuts. Construction jobs fell by 3 percent in 2001 and 5 percent in 2002, while financial services saw their first net declines in 2002, and engineering and management doubled its losses in 2002, from 1 percent to 2 percent.
An obvious and worrying question is whether the Bay Area will repeat the deep and prolonged recession that Los Angeles experienced ten years ago. Employment in the Bay Area has fallen faster than it did in Los Angeles and Orange Counties, primarily due to the larger impact of the tech sector here compared to that of the aerospace sector in Southern California. Whether the Bay Area reprises the Los Angeles experience—48 months from employment peak to trough—partly depends on the pace of out migration and the condition of the housing market.
fig. b: Regional employment decline by month after pre-recession peak
When labor and housing markets declined in Los Angeles County, the region suffered out migration of over 100,000 people per year for four years in a row—over 5 percent of its 1990 population. This loss of residents led to further declines in the regional economy. Thus far, the Bay Area has only lost 11,000 people through net migration, with all losses concentrated in San Mateo and Santa Clara counties. Out migration tends to lag behind job losses by several years, however, as shown in the graph. If employment does not grow in 2003, the extremely small exodus from the Bay Area might possibly increase enough to put downward pressure on the housing market. The Association of Bay Area Governments forecasts a Bay Area job growth of only 12,000 jobs during 2003.
Fig.c: Bay Area Migration and Employment Changes, 1991-2002
So far, both national and regional consumer confidence has remained relatively steady; however, if interest rates rise from their historically low levels, housing prices would likely fall and consumer confidence could take a further hit. Rents have fallen almost 15 percent in the past year; combined with a flat labor market, this should weaken home prices even without an increase in rates. The median home price actually increased 7 percent from November 2001 to November 2002, and prices have shown similar year-over-year increases for most of 2002. The state budget crisis is another potential drag on the economy, and its estimated size has ballooned from $7 billion last year to $34 billion now. The combination of spending cuts and tax increases could subtract two percentage points off gross state product in the next eighteen months, although federal spending and tax cuts should offset some of that.
Despite the current gloom, the Bay Area
has many advantages for long-term growth. While venture
capital investment fell another 45 percent in 2002,
the region retained its one-third share of national
investment. More than 37 percent of adults in the region
have a bachelor’s degree or higher, and
another 23 percent have one or moreyearsofcollegeeducation.
Furthermore, as reported in *After the Bubble (January
2002), the region has a productivity advantage over
competing regions of 30 percent to 40 percent even after
correcting for high local prices and the Internet boom
effect. These factors should help the region avoid a
longer-term decline, but the return to growth is still
off the horizon.
*AftertheBubble:SustainingEconomic Prosperity is the third in a series of Bay Area Economic Profile reports, and may be viewed online.
Michael Dardia is Vice President of the SPHERE Institute, a nonprofit organization that provides analysis and advice for policy makers on a variety of issues, including welfare, health, education and labor programs on national, state and local levels (sphereinstitute.org). The opinions expressed in this article are those of the authors and do not necessarily reflect the view point of the SFAA or the San Francisco Apartment Magazine.