California Economic Outlook – December 2018

Scott Anderson
Chief Economist

Job growth in California has exceeded national job growth for the past 80 months through October, a testament to the continued strength of the state’s labor market.

Below is a top-level summary of the report, followed by a link to the full report.Palm-lined tree street in Southern California

  • California’s unemployment rate fell to an all-time low of 4.1% in September and was unchanged in October. This is slightly above the U.S. rate of 3.7% in October.
  • However, annual job growth peaked at 3.0% in 2015 and has decelerated each year since. California job growth is forecast to average 1.9% this year, and will slow to 1.2% in 2019 and just 0.5% in 2020. Higher interest rates, tighter financial conditions, a slowing global economy, high costs of living and doing business compared to surrounding states, net outmigration, and technology industry headwinds are all factors underpinning the slowdown forecast. The slowdown in job growth will drive the California unemployment rate up from 4.2% this year to 4.3% in 2019 and 4.6% in 2020.
  • The California housing market cooled off for the sixth consecutive month in October, with existing home sales down 7.9% from a year ago. Affordability continues to depress housing activity with only 27% of California households able to qualify for the median-price home in the third quarter, down from 56% in the first quarter of 2012. Housing starts are forecast to decline 4.0% in 2019 and 4.5% in 2020, after rising 12.5% this year.
  • Existing home prices were up 4.7% from a year ago in October, according to the California Association of Realtors. Higher mortgage rates, deteriorating affordability, and additional existing home inventory will keep home price gains in the 3.5% range over the next two years.
  • Net migration is forecast to turn negative in 2019 as more California residents leave the state due to the high cost of living – especially housing. This will persist through 2020 and weigh on growth.
  • The state of California over-relies on capital gains taxes to fund its government spending, leading to large budget deficits during downturns that end up exacerbating and prolonging the downturns as the state tries to close the gap between spending and tax revenues. The next downturn will be no different.
  • However, the state is projecting an almost $9 billion budget surplus in FY 2018/2019 and is increasing its rainy day fund to $16 billion. This money can be spent during severe revenue shortfalls and could help limit the impact of a capital gains tax shortfall in the next recession.

Read the full report.

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