“Worries about oil, worries about the markets, worries about China, worries about the drought – so many worries that seem to matter little for California’s booming economy. The final quarter of 2015 illustrates how the state has continued to exceed national trends for growth on almost all fronts. The area of focus in our current report is the Central Coast, which is a hot spot for the state economy.”
– Dr. Christopher Thornberg, Founding Partner, Beacon Economics
OUR TOP FINDINGS
- Tech Leads the Way: The technology industry powers California’s economy and made up the lion’s share of new output growth in the fourth quarter.
- Hiring Strengthens: Job growth remained robust as companies added to their payrolls at the second-fastest rate since the first quarter of 2001.
- Central Coast Grows: The Central Coast is a steady source of growth for California’s tourism industry, and the latest data show that travel and tourism activity remains quite healthy in the state.
“Despite global headwinds, the U.S. economy continues to perform well. Conditions are especially strong in California. We’re seeing positive signs and a fair amount of optimism among clients in a broad array of industries, and their confidence is reflected in today’s growing demand for business and real estate loans. Financial markets got off to a rough start this year, but lately it has been reassuring to see them make a comeback, as our wealth advisors predicted they would.”
– Russell Goldsmith, Chairman and CEO, City National
CALIFORNIA: Tech Sector Makes Outsized Contribution to State Output Growth
California’s economy grew at a solid pace in the fourth quarter – despite headwinds from the national and global economies –thanks in large part to the state’s booming technology industry. According to Beacon Economics’ latest estimates, real gross state product increased at a 1.9% annual rate in the fourth quarter of 2015 to $2.204 billion, a new record high. In contrast, the U.S. economy grew at a 1.4% annual rate in the fourth quarter.
One advantage California has is the technology industry, which has been responsible for much of its economic growth these last few years. In the fourth quarter of 2015, the Professional and Business Services industry and the Information industry, the two broad industries under which most technology companies are classified, contributed 0.88 percentage points to the 1.9% headline figure.
Buoyed by steady investment in software development, Technology has been doing well nationwide. During the fourth quarter, software output increased at a 1.6% annual rate – a figure that becomes even more impressive given that overall domestic investment declined by 0.7% in the same period. California had a lot to do with these gains, as the state accounts for 17.2% of software publishing employment nationwide.
The Real Estate and Rental Leasing industry, as well as the Education and Health Care industry, were also strong contributors to overall output growth. With a resurgent housing market and a steadily growing population, these industries are expected to be a steady source of continued growth in 2016.
On the downside, the Natural Resources and Mining industry was the largest detractor to overall output growth, shaving 0.23 percentage points off the 1.9% net increase. Much of this is due to an oversupplied oil market and slowing global demand growth. The California economy does not have as much exposure to the oil market as some other states – California only accounts for 5.9% of U.S. crude production – but the local industry has suffered nonetheless. California crude oil production was down 3.2% in the fourth quarter of 2015 compared to the same period one year prior, and average annual employment in the Mining and Logging industry plummeted 8.3% from 2014 to 2015.
CALIFORNIA LABOR MARKETS: Employment Growth Ends Year on High Note
The California labor market ended the year on a strong note as companies added payroll jobs at one of the fastest rates in over a decade. In the fourth quarter of 2015, total nonfarm employment in the state averaged 16.2 million, a 3.0% increase over the fourth quarter of 2014. This comes on top of the 3.3% year-over-year growth in the third quarter of 2015. The fourth quarter had the second-fastest year-over-year employment growth on a quarterly basis since the first quarter of 2001.
Along with strong job gains across the state, the unemployment rate has continued to decline in California – and for the right reasons. The average unemployment rate in the fourth quarter of 2015 was 5.9%, down from 7.0% one year prior and at its lowest level since 2007. Over the same year-over-year period, the labor force increased 0.5%, indicating that the drop in unemployment was the result of state residents finding employment, as opposed to dropping out of the work force.
Over the last year, the same industries that made major contributions to output have also been major sources of job growth. The Education and Health Care Services and the Professional and Business Services industries made the largest contributions to overall employment growth, adding 99,000 and 76,000 new jobs, respectively, from the fourth quarter of 2014 to the fourth quarter of 2015. The Construction industry in particular performed spectacularly, adding 55,000 new jobs to company payrolls, an 8.1% increase and the fastest pace of job creation across all the state’s industries over the time period.
REGION OF INTEREST: Central Coast
The Central Coast is renowned for its picturesque coastlines, world-class wineries, a variety of national and state parks, and classic small-town feel. Given that the region is a sought-after destination for travelers from all over the world, it is not surprising that the Central Coast benefits from strong tourism activity. As of 2014, the latest data available, the Leisure and Hospitality industry in the region grew by a solid 5.3% over the prior year in terms of economic output. This is even more impressive considering the overall regional economy grew by just 0.8% during the same time period.
Recent employment data shows that the Central Coast’s Tourism industry is still running strongly and is one of the leaders in the state. Leisure and Hospitality employment grew 4.4% from the fourth quarter of 2014 to the fourth quarter of 2015, faster than the 4.1% growth in the state. Spending at restaurants and hotels has been somewhat behind the statewide total, but robust nonetheless. From the third quarter of 2014 to the third quarter of 2015 (the latest data available) taxable receipts data from the HdL Companies shows that restaurant and hotel spending was up 5.5% in the Central Coast and 6.7% statewide.
With the economic expansion continuing across the state and the nation, the Central Coast is expected to continue benefiting from tourism activity. Much of that benefit is expected to come from domestic travelers as the dollar’s surge over the last few years has made visiting the region much more expensive for international tourists. According to the Federal Reserve’s real trade weighted dollar index, the greenback has surged 25.0% in value since its post-recession low in July of 2011.
WHAT ’S NEXT?
Over the last few months, recessionary fears have been front and center in the media and on many people’s minds. The latest economic expansion, however, is on track to be one of the longest in history. The U.S. Bureau of Labor Statistics (BLS) jobs report released at the beginning of March showed that the national labor market added 242,000 jobs in February, and the Bureau of Economic Analysis (BEA) revised its initial 0.7% GDP growth for the fourth quarter of 2015 to 1.4%. These may not be the strongest numbers, but they are a far cry from an impending recession.
Slowing economic growth in China, as well as stagnant growth in major economies such as the European Union and Japan, have caused many to look to the United States to lead the global economy forward. Consumer spending in the nation remains strong, and with the dollar at post-recessions highs, export-oriented economies like China and Japan will have a steady market for their goods. On the other hand, the weak global economy has been a drag on U.S. GDP growth as demand for the nation’s exports has faltered.
Any way you look at it, 2016 is shaping up to be the year of data. With such a long running economic expansion, however subpar it has been, recessionary concerns have been prevalent. The next BLS jobs report will be closely watched and the direction of fourth quarter GDP will be a good indication of where the new underlying data is pointing. These and other key indicators, such as retail sales, manufacturing orders, and industrial production, will also be closely watched in the coming months to measure the pulse of the economy and ensure the engine of growth is running smoothly.
A BUSINESS VIEWPOINT
“As a Top 100 U.S. Insurance Broker and the largest in Ventura County, our clients and our firm are benefiting from the post-recession economic recovery and we are bullish on the future of this region. We see strength building across many industries as we help our clients become more effective and competitive in the marketplaces
– Greg Van Ness, CEO, Tolman & Wiker
ABOUT THE CIT Y NATIONAL ECONOMY & JOBS REPORT
The City National Economy & Jobs Report was created and developed for City National Bank by Beacon Economics, LLC. Unlike many other estimations of current economic activity that are available today, the City National Economy & Jobs Report provides a current estimate of real economic output in the state of California across key industries.
ABOUT BEACON ECONOMICS
Beacon Economics, LLC is a leading provider of economic research, forecasting, industry analysis, and data services. By delivering independent, rigorous analysis, we give our clients the knowledge they need to make the right strategic decisions about investment, growth, revenue, and policy. Learn more at www.BeaconEcon.com.
ABOUT CITY NATIONAL BANK
With $36.4 billion in assets, City National Bank provides banking, investment and trust services through 75 offices, including 16 full-service regional centers, in Southern California, the San Francisco Bay Area, Nevada, New York City, Nashville and Atlanta. In addition, the company and its investment affiliates manage or administer $53.9 billion in client investment assets.
City National is a subsidiary of Royal Bank of Canada (RBC), one of North America’s leading diversified financial services companies. RBC serves more than 16 million personal, business, public sector and institutional clients through offices in Canada, the United States and 38 other countries.
For more information about City National, visit the company’s website at cnb.com.
|This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed, or further published by any person without the written consent of City National Bank. Please cite source when quoting. Copyright 2015, City National Bank.|