Bay Area Economic Pulse
by Michael Dardia
The Fall 2003 Bay Area Economic Pulse noted that signs of recovery at the national level were beginning to appear (“Clues to Bay Area Recovery Lie in National Trends”). Three months later, signs of a national recovery are far more evident, raising hope that improvement may soon come to the battered Bay Area economy. Third-quarter national GDP growth was a surprisingly strong 8.2 percent and, even more importantly for Bay Area firms, business equipment investment surged by 15 percent.
The Semiconductor Industry Association recently forecast that 2003 sales would be 16 percent higher than last year and that 2004 sales would increase an additional 19 percent over this year. Year-to-date orders for computer and electronics equipment (excluding semiconductors) are 7 percent higher than last year. Overall, these are encouraging signs for a regional economy that is particularly dependent on business equipment investment.
Nationwide employment grew by 126,000 jobs in October, much faster than anticipated. Combined with an upward revision for September, the nation added almost 300,000 jobs in the past three months. Even this pace of job growth is still low by historical standards and is not quite large enough to absorb the natural growth of the workforce; nonetheless, it is an encouraging sign that businesses are starting to hire again.
Some less encouraging signs for Silicon Valley temper the generally good signs for the national economy. National employment in manufacturing, a key sector of the local economy, continued its three-year decline. Third quarter venture capital investments at the national level were unchanged from second quarter levels, but local venture capital investments fell slightly.
There has also been a growing shift in Bay Area venture capital funding, with a greater share going to health care and biotech ventures at the expense of software. This trend should strengthen the important biotech and health care industries, which are considered promising growth industries for the Bay Area. However, this shift in venture capital funding, should it persist, may present a challenge for Silicon Valley software firms.
The Bay Area labor market remained relatively flat in the third quarter. Bay Area employment, measured by the household survey method, increased slightly over the second quarter on a seasonally adjusted basis. At the same time, the labor force also shrank slightly and, as a result, the unemployment rate fell sharply, from 6.4 percent to 5.8 percent. The unemployment rate also fell in California and nationally, although by smaller amounts.
Bay Area employment, measured by the employer payroll survey method (a different estimation method from household surveys), was essentially unchanged in the past three months. This contrasts sharply with the return of job growth at the national level. However, just as employment declines tend to be underestimated early in recessions, employment gains are often misrepresented as low numbers early in recoveries. As more complete data becomes available, there may be additional upward revisions in third quarter employment numbers.
In the recession of the early 1990s, job growth in the Bay Area and Los Angeles lagged national gains by about a full year. One measure to watch is the Bay Area labor force. Until 2003 net migration data are released in January, the labor force figures are the only indication of whether discouraged local job seekers are leaving the region for better job markets elsewhere.
Within the region, employment was essentially unchanged in all metro areas. The sector distribution of employment changes in the Bay Area mirrors the national pattern, in that manufacturing continues to shed jobs while sectors that serve the local population—retail trade, finance, leisure and hospitality—are adding jobs (Figure A). Employment in computer and electronic product manufacturing continued to fall as did other manufacturing employment, which probably contributed to declines in transportation and warehousing as well. More encouraging was the fact that the information sector—which primarily includes computer software, database and networking jobs—added several hundred jobs and has had stable employment levels since the beginning of the year. Professional and business services continued to shed jobs while health care and government employment were unchanged during the quarter.
Construction employment remained steady in the third quarter, with strong residential construction helping to offset weak commercial construction—down almost 60 percent from 2000 (Figure B). Bay Area residential markets that have remained firm due to pent-up demand were also strengthened by the sharp decline in mortgage interest rates over the summer. Median California home sale prices continue to rise more rapidly than Bay Area prices, but Bay Area housing prices still remain unusually high given the magnitude of regional job losses.
The relative strength of local housing markets does correlate with local job market conditions: the counties with the greatest job losses—San Francisco, San Mateo, Santa Clara—showed the smallest increase in median prices. Mortgage rates have risen a bit since the summer lows, and some observers continue to be concerned about how well the Bay Area housing market will hold up if the growing national economy causes mortgage interest rates to rise significantly.
Overall, these signs present a guardedly optimistic outlook for the regional economy. National trends improved significantly this quarter and the surge in business investment bodes well for local firms. Regional business executives have experienced improvements in their industries and have grown more confident in the region’s prospects. Weighing on that improved outlook is the fact that almost two-thirds of executives in the survey rate the business climate in both California and the Bay Area as worse than average. Business climate improvement—an avowed top priority of the new administration in Sacramento—has become a very timely issue as California and the Bay Area wait to either join the national economic recovery or fall further behind.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. 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. Copyright © 2004.