Bay Area Economic Pulse

Bay Area Employment Starts to Grow As Pace of National Recovery Slows

by Michael Dardia

After a series of disappointing quarterly economic results, the second quarter of 2004 finally began to show a few positive signs. Seasonally adjusted second quarter Bay Area employment rose at a 2.1 percent annualized rate, the first positive growth since the first quarter of 2001. Preliminary estimates from July show flat seasonally adjusted employment for the month, but they also reveal employment growth in regional high-technology hardware and software industries. These job gains are partly tied to the strong performance of business investment (which grew at a 9 percent annual rate), and new orders continue to outpace shipments in semiconductors and other technology equipment.

Local venture capital funding rose 31 percent in the second quarter, with biotech drawing more investment than software for the first time. According to the Bay Area Council’s Business Confidence Survey, business leaders remain confident that the regional economy will continue to improve. Despite this overall confidence, concern about the cost of doing business in the region remains pervasive, and a significant fraction of regional firms have considered moving some or all of their operations out of the region.

Is the Economy Out of Steam?
The national economy had a stronger first quarter than originally estimated, with gross domestic product (GDP) growing at a 4.6 percent rate versus a preliminary estimate of 3.9 percent. However, the second quarter was a clear disappointment, with GDP growth of only 2.8 percent, falling well below the consensus forecast of 3.7 percent. Slower second quarter GDP growth, combined with July’s national job gain of only 32,000, has led some analysts to worry that the national expansion may be running out of steam.

The UCLA Anderson Forecast has been predicting for some time that the peculiar nature of the recent recession—fueled by a decline in business spending—implies that consumer demand will not accelerate during the recovery. Instead, the stimulus from low interest rates and tax cuts is believed to have accelerated discretionary purchases—meaning that some current consumer purchases have been “stolen” from future quarters. Some evidence for this view is provided by the slowdown of consumer spending in the second quarter of 2004.

Viewed alongside increases in interest rates and fuel prices, the consumer spending slowdown has led some forecasters to lower GDP growth forecasts for the remainder of 2004 and 2005, and the UCLA Anderson Forecast has even mentioned the possibility of a recession in 2005. Should national GDP growth slow markedly later this year, the emerging Bay Area recovery could be short-lived. On the other hand, the Federal Reserve Board raised short-term rates another quarter point, noting that the current slowing of the growth rate is likely to be temporary and that the recovery should continue at a healthy pace.

Some economic data support a view that the recovery is on track: auto sales rebounded in July along with other retail sales; home sales remain at very high levels; business investment remains strong; demand for many raw materials has created tight supply and higher prices; and consumer confidence is still fairly high.

Bay Area Employment
Employment in the Bay Area grew at a 2.1 percent annualized rate in the second quarter of 2004. Combined with a slight contraction of the labor force, the Bay Area saw unemployment fall from 6.0 percent to 5.2 percent. Unemployment fell faster in the Bay Area than in California or the nation, but the continuing shrinkage of the regional workforce remains somewhat worrisome.

Anecdotal reports confirm that hiring activity is up, even if not robust, and most sectors showed an increase in employment. The strong performance of business investment in the past few quarters probably contributed to the healthy 3.6 percent annual growth rate for computer and electronics manufacturing (Figure A). Some technology-related employment lagged, however, as employment slipped slightly by an annualized rate of 1.4 percent in the information sector and by 1.1 percent in business services. Other sectors also showed relatively strong job growth, particularly wholesale trade and FIRE (finance, insurance and real estate); and the good performance in the leisure and hospitality industries implies that the broader economy is doing reasonably well. Most service industries are now showing year-to-year increases in employment.

Figure B illustrates how employment in the leading sectors of the regional economy has changed over the past year. Some industries that had been weak in the past few years have now improved (computer and electronic manufacturing, wholesale trade, FIRE and leisure), while those that had held up pretty well have cooled off (construction and health care). All local metro regions saw employment grow compared to last quarter, except for the Vallejo-Fairfield-Napa area (Figure C), and unemployment rates fell sharply everywhere. With the exception of San Jose, the rest of the region could well show year-over-year employment gains for the third quarter.

Commercial vacancy rates continued to fall in the second quarter, albeit slowly. Home prices continued to post remarkably strong gains as homebuyers were able to take advantage of the still-favorable interest rate environment. Bay Area median home prices rose by 10 percent in the second quarter, once again trailing California’s increase of 13 percent, and are up by almost 19 percent over the second quarter of 2003. Although most of the increase in home prices is due to lower interest rates, prices are still approximately 10 percent above their 2001 levels even after correcting for the interest-rate effect.

Residential rents remain mixed as some local markets showed slight increases while others still registered declines. Some analysts expect rental markets to improve as interest-rate increases slow the movement from renting to ownership and as employment growth continues. As long as the national recovery does not stumble, the Bay Area’s recovery should continue to take root.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of 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. He prepares this column for the Bay Area Council, a public policy organization for the 275 largest employers in the region. More information is available online at www.bayareacouncil.org. Copyright © 2004 by the Bay Area Council. All rights reserved.