November 2018 CA Economic Outlook

November 9, 2018 by Robert A. Dye, Ph.D., Daniel Sanabria

Risk Factors Increase for California’s Economic Outlook

The California economy lost some momentum in 2018 and we expect to see a cooler state economy in 2019. As the current economic cycle matures, downside risk factors are increasing for California. October saw steep declines in major U.S. stock indices as volatility in financial markets spiked. Leading the way down were heavy losses in major technology stocks. The Dow Jones Technology Index was down 15.3 percent from peak to trough in October. Companies continue to benefit from corporate tax cuts, however rising operating and borrowing costs may squeeze corporate profits in 2019. California housing markets cooled in late 2018. According to the California Association of Realtors, single-family home sales were down 12.4 percent from a year ago in September. The supply of unsold single-family homes increased to 4.2 months worth in September. We expect to see weaker demand for housing in 2019, primarily due to declining affordability. This will translate into cooler house price appreciation going forward. The Case-Shiller Home Price Index for San Diego posted two consecutive monthly declines in July and August. Lastly, the trade outlook remains mixed. The new U.S.-Mexico-Canada Agreement, which still needs to be ratified by each country, is a positive for state trade activity. However, trade tensions with China ramped up in the third quarter as the U.S. implemented additional tariffs. The results of the recent mid-term election do not appear to impact either the USMCA or U.S.-China trade negotiations. President Trump is expected to meet with China General Secretary Xi Jinping later in November.

For a PDF version of this report, click here: November 2018 CA Economic Outlook

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

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August 2018 CA Economic Outlook

August 13, 2018 by Robert A. Dye, Ph.D., Daniel Sanabria

California Economy Feels Cooler in 2018

    California was a growth leader for the U.S. economy coming out of the Great Recession. As the economic cycle matures, the state is running into some limits to growth. Strong job growth, supported by a vibrant high-tech sector has been a mainstay for the California economy. However, the state averaged a net of just 14,850 jobs gained per month through the first half of 2018, the slowest pace of hiring since 2011. With the state’s unemployment rate at a historical low of 4.2 percent in June, it will be difficult to re-accelerate the pace of hiring to that seen in recent years for two reasons. First, the pool of unemployed job candidates is small. Second, transferring an existing worker to a new job within the state would not result in a net job gain. California’s housing sector has also moderated in recent months. According to the California Association of Realtors, existing single-family home sales were 410,800 in June, down 7.3 percent from a year earlier. The supply of single-family homes for sale was at a tight 3.0 months’ worth. Declining affordability, due to rising mortgage rates and home prices, will also be a limiting factor on new home sales. With constraints on single-family housing, we expect multifamily projects to remain in demand. Trade data has also weakened. California’s exports and imports declined 7.0 and 5.2 percent, respectively, in June. Trade-related industries will feel the drag from tensions with China, California’s most important trading partner. The U.S. imposed a 25 percent tariff on $34 billion worth of goods from China on July 6 and will expand that to an additional $16 billion on August 23, with further expansion possible.

For a PDF version of this article, please click here: August 2018 CA Economic Outlook

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

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California Weathers Increased Volatility | May 2018

May 14, 2018 by Robert A. Dye, Ph.D., Daniel Sanabria

The California economy posted another year of solid growth in 2017. California real gross domestic product was up 3.0 percent last year supported by solid job growth and sustained gains in the state’s key technology sector. That momentum has slowed a bit and there are signs of increased volatility in the early part of 2018. After a strong January job gain of 48,900 jobs, California job gains were muted in February and turned negative in March. This was the first monthly net job loss in the state since June 2016. Tech sector financials have also been volatile this year as the Dow Jones Technology Stock Index has seen two cycles of 10 percent declines from peak to trough in daily closing prices, followed by periods of above 10 percent rebound in prices. From an economic perspective, this becomes an issue if the uncertainty in financial markets begins to impact business confidence and investment. We expect California job growth to stabilize in the coming months and be a driver of economic activity this year, but we expect volatility in the major financial indices to remain in the near-term.

The state’s housing sector continued to improve through the start of 2018, supported by more single-family construction. Permits for new single-family units were up to a 62,000 unit annual rate, or 16.5 percent from a year ago in March, according to the California Department of Finance. This is a positive development for the state’s tight housing market which is seeing home prices climb again. The Case-Shiller Home Price Index was up 8.2 percent in L.A., 10 percent in San Francisco and 7.6 percent in San Diego from a year ago in February.

For a PDF version of this report click here: CA-Outlook-0518.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

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Labor Shortages Weigh on California Metro Areas

February 13, 2018 by Robert A. Dye, Ph.D., Daniel Sanabria

The California economy accelerated into the end of 2017 with state real GDP growth expected to come in above 3 percent in Q4. Along with solid GDP growth came higher than expected job growth in the final months of the year. We expect the strong job growth at the end of 2017 to fade by 2019. Looking ahead, labor scarcity will be an increasing drag on job growth, particularly in Northern California. The state’s major metropolitan areas are experiencing the tightest labor markets in decades. The Bay Area, which was the job growth leader following the recession of 2008-2009, has seen annual job growth slow near the U.S. average since peaking in 2015. The unemployment rate for the San Francisco MSA fell to 2.9 percent in December 2017, indicating very little available labor for business expansion. In Southern California, job growth dipped below the U.S. average for the Los Angeles and San Diego metro areas last year. L.A.’s unemployment rate fell to 4.1 percent in December 2017, the lowest in recent history since 1990. San Diego’s unemployment rate fell to 3.5 percent in December, approaching its historical low of 2.9 percent from August 1999. The Inland Empire is an outlier for the state, with job growth almost twice the national average at the end of 2017. Recent trends in net migration show no relief in sight for California’s tight labor markets. In-migration appears to have moderated through 2015 and 2016. This will keep population, and importantly, labor force growth, constrained. We expect the negative component of net migration, out-migration away from the state, to increase as retirees and others relocate to areas of higher affordability. 

For a PDF version of this report click here: CA_Outlook_0218

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

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Tax Reform and the California Economy

November 14, 2017 by Robert A. Dye, Ph.D., Daniel Sanabria

It looks like the policy uncertainty coming out of Washington will continue into year end. At the start of 2017 we were talking about the possibility of disruptions to complex supply chains for state manufacturers from changes in U.S. trade policy. Then we discussed the impact of immigration policy on a substantial portion of the California population. Now a new uncertainty looming for Californians heading into 2018 is the tax reform bill. The 429 page Tax Cuts and Jobs Act bill released by House Republicans and the corresponding package by Senate Republicans may increase the cost of living in high tax states, like California. As proposed, the House bill seeks to repeal the state and local income and sales tax deductions, while the Senate is eyeing the state property tax de-duction. Also, the mortgage interest deduction may be phased out on new mortgages ranging between $500,000-$1,000,000. This would disproportionately impact California, which had a median sale price of an existing single-family home of $555,410 in September, according to the California Association of Realtors. There may be some relief on the individual tax side with the proposed increase in the standard deduction and raising of income thresholds for other tax credits. State businesses might also benefit from lower federal tax rates. We expect tax reform to be passed before the end of 2017, but the details are not final. Even with tax policy uncertainty, the California economy remains anchored by moderate job growth. After a spring lull, the state saw a net gain of 129,000 jobs from July to September. We expect to see sustained job growth in California into 2018.

For a PDF version of this report click here: CA_Outlook_1117

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

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