Bay Area Economic Pulse

by Michael Dardia

The Bay Area economy grew very slightly during the third quarter of 2004, with a small net gain in employment, according to the Bureau of Labor Statistics’ Current Employment Statistics Survey (commonly called the payroll survey). Meanwhile, as has been the case for most of the past several years, the household survey shows a moderate level of job growth that implies a more optimistic picture of the labor market. Watching these two employment series creates a glass half-full/glass half-empty tension. Although the payroll survey is generally regarded as more reliable, the household survey appears to track more closely by using positive economic signs such as the robust housing market, reports of increased hiring activity, steadily declining commercial vacancy rates, and increased income-tax collections.

Sluggish Job Creation
The national Gross Domestic Product (GDP) grew at a brisk 4% pace in the third quarter, but national job gains remained weak and below the growth rate of the labor force. Despite the sharp rise in oil prices, interest rates have continued to ease, something that has undoubtedly helped to keep housing prices strong. Most economic forecasters assume only moderate increases in 10-year Treasury yields in the coming quarters, which should continue to support home prices and other consumer spending.

Corporate reluctance to hire additional workers, even in the face of rising profits, may explain why job-growth figures are at odds with other measures of economic activity. Some analysts blame the lag in job growth on rising productivity, enabling firms to produce more output without adding workers; others blame economic uncertainty and the rapid rise in health-benefit costs. Should oil prices ease and corporate profits remain strong, job growth will likely accelerate at some point. Another factor to watch will be the exchange rate: the decline of the dollar should help many U.S. manufacturers, although they may face higher prices for imported components.

In California, there appears to be the same disconnect between recent economic indicators and job creation: corporate income-tax receipts were up a very strong 31% over the third quarter of 2003, while personal income-tax receipts rose 9%. The Federal Reserve reported “strong tourism activity” in San Francisco in the third quarter as well as solid auto sales; and regional business executives largely rated economic conditions as the same or better than six months ago.

According to the household survey, both the labor force and employment expanded in the third quarter, and employment expanded by enough (just under 20,000 jobs) to lower the unemployment rate to 4.8% from 5.2%. That decline put Bay Area unemployment a full percentage point below the statewide average and more than half a percentage below the nation. Although this relatively rosy picture is consistent with some of the anecdotal reports of increased hiring on the part of local firms, it is still in
conflict with the gains reported in the business establishment surveys.

Total establishment employment was up by less than a thousand seasonally adjusted jobs during the quarter. There was, however, an increase in Computer and Electronic Manufacturing, a sector that has suffered massive job losses. After being supported by health care and government employment over the past several years, the regional economy has been increasingly aided by broader-based industries such as Wholesale Trade; Finance, Insurance & Real Estate (FIRE); and Leisure & Hospitality (Figure A). Despite the slow rate of job growth, the fact that such a broad set of sectors is showing some strength may mean that the region will be able to weather the long-anticipated slowdown in consumer spending.

North Bay Employment Remains Strongest
Employment slipped in the San Francisco and San Jose metro areas in the third quarter of 2004 and remained unchanged in the Oakland metro area. Job growth in the North Bay was more energetic, with an annualized quarterly growth rate of 2.7% in Santa Rosa and 0.3% in the Vallejo-Fairfield-Napa area (Figure B). Home prices continued their ascent, with the region’s median price rising 2.6% over the previous quarter. As reported in earlier issues, however, the rate of housing-price appreciation is clearly related to the employment situation in each county. Those counties with the weakest job markets—Marin, San Francisco, San Mateo, Santa Clara—have had much smaller gains in home prices since 2001 than those with more robust economies (Figure C). How well these local housing markets fare in the face of rising interest rates will depend at least partly on how many residents have left each subregion for greener pastures. This past year’s net migration figures should be available soon and will provide another important hint at the economic and housing outlook for the next few years.