Russell Goldsmith


California outperformed the U.S. economy again in the third quarter of 2014, in terms of job creation, declines in unemployment and growth in output.

High-tech/high-skill industries led the charge – so it should be little surprise that San Francisco was the hottest economy around, adding nearly one-fifth of all jobs in the state. The City by the Bay has the economy everyone wants – with unemployment at 4.2%, incomes up 30% over the past five years and a flood of new investment.

Yet it also represents some of what is most wrong in the state, as home prices have skyrocketed out of reach for many who live in the region. Indeed, only half of the 80,000 jobs added to the three-county economy over the last two years have been filled by people living in the area – the rest are commuters coming in from outside the region.

– Dr. Christopher Thornberg
Founding Partner, Beacon Economics


  • Jump in Growth: In the first nine months of 2014, California’s economy grew 5.3%, putting the state on track to surpass last year’s growth of 2.0%. The jump in growth can be attributed primarily to a turnaround in durable goods manufacturing and strong growth in the professional and business services industry.
  • Business Investment: The professional and business services industry was the primary driver of both output and employment gains in the third quarter of 2014. Business investment appears to be on the rise, and venture capital funding has risen sharply and is at post-recession high levels.
  • S.F. Boom: The San Francisco Bay Area is one of the fastest growing labor markets in the U.S. It was responsible for 19% of the net increase to statewide employment in the third quarter. San Francisco posted the second-largest increase in jobs over the quarter, second only to L.A. County, a labor market nearly four times as large.


“California’s economy continues to gain momentum and add more jobs, thanks largely to the broad-based growth of its manufacturing and service industries. Increased consumer spending and bank lending, especially here at City National, also signal growing confidence by consumers, businesses and entrepreneurs in this state’s economy that continues to outperform the national economy, which is also continuing to improve and create jobs.”

Russell Goldsmith, Chairman and CEO, City National

CALIFORNIA: Real Output Increases at a Healthy Pace

After swings to the downside and then the upside in the first half of the year, the California economy is settling back into steady growth mode. Beacon Economics estimates that real gross state product in the third quarter totaled $2.134 trillion, a 5.3% annual rate of increase over the second quarter and slightly higher than the 5.0% growth for the nation overall.

This solid performance in the third quarter puts year-to-date growth at 3.3% for the California economy, on track to surpass the subdued 2.0% growth for the state over all of 2013. Although the year-to-date increase in growth can be attributed primarily to a turnaround in durable goods manufacturing as well as strong growth in the professional and business services industry, overall industry growth was broad based in the third quarter, with almost all sectors posting quarterly gains.

The professional and business services industry was the primary driver of growth for the state and contributed 1.5 percentage points to the 5.3% headline number, as business investment has been strong over the last year. Venture capital funding in California has surged to new post-recession highs during the first three quarters and is up 75% over the same year-to-date period in 2013.
Furthermore, the finance and insurance industry finally posted positive output growth after three consecutive quarters of contraction. Bank lending in the state has begun to pick up the pace; for the first half of the year, total loans at FDIC-insured institutions in California were up by 12.6% from the same time last year.

The public sector has also appeared to turn the corner and become a contributor to economic growth instead of dragging it down as it has these last few quarters. Government balance sheets across the state are returning to the black as the growing economy expands the tax base, allowing government to increase expenditures.

CALIFORNIA LABOR MARKETS:Job Creation Slow but Still on Track

Job creation in the Golden State maintained an upward trajectory in the third quarter of 2014, though the pace of growth slowed somewhat from the previous quarter. Average nonfarm employment in the third quarter increased at a 1.9% annual rate, lower than the 2.9% rate in the second quarter. Nonfarm employment growth in the United States was also slower in the third quarter – 1.9% versus 2.1% in the second quarter.

Furthermore, California payrolls expanded by 73,200 nonfarm jobs in the third quarter on a seasonally adjusted basis, which represented 11.2% of the net job gains for the nation overall. The unemployment rate declined by 0.2 percentage points to 7.4%, the lowest level since the third quarter of 2008. The drop in unemployment, however, was due primarily to the labor force contracting at a 1.2% annual rate.

Despite this somewhat mixed news, many of the state’s labor market indicators continue to trend in the right direction. The number of long-term unemployed – those without a job for six months or more – declined from 2.7% of the labor force in the second quarter to 2.5% and is approaching the long-run average of 2.2%. The number of discouraged workers – those who have dropped out of the labor force and are no longer looking for work – also continues to decline and is at the lowest level since the first quarter of 2009.


The San Francisco Metropolitan Division (MD) takes the spotlight this quarter as a major contributor to statewide job creation. Consisting of San Francisco, San Mateo and Marin counties, the San Francisco MD labor market created 14,000 new payroll jobs, or 19% of the net increase to statewide payrolls during the third quarter. This was the second-largest contribution to job gains for the quarter behind Los Angeles County, a labor market nearly four times as large, and was the fastest pace of job creation for a major metropolitan area in the state.

The concentration of highly skilled labor, coupled with the shortage of housing in the area, has driven home prices in the San Francisco MD to the highest levels in the state. As of the third quarter, the median price for an existing home in the region was $940,000 on a seasonally adjusted basis, significantly higher than the $761,000 median price in the San Jose metropolitan area that includes Silicon Valley. San Francisco is one of the few areas where median home prices have surpassed their pre-recession peak.


In the short term, we expect the steady pace of growth in the third quarter to carry over to the fourth. A stronger dollar will curb export growth slightly, but consumer spending, which makes up the bulk of economic growth in the United States and California, remains on solid footing as employment growth continues to move forward. Beacon Economics is currently forecasting the U.S. economy to grow in the 2.5% to 3% range in the fourth quarter, ending the year roughly 2% over 2013 GDP. The California economy is expected to end the year with 3.5% annualized growth from the third quarter to the fourth quarter, yielding a 3.2% year-over-year growth rate for all of 2014 compared to 2013.


“We import fresh caviar and fine foods, and our business is up, with more and larger orders for our traditional high-end clientele and our new middle-class patrons. We see this as a positive sign for the economy.”
– Mark Bolourchi, President, Pacific Plaza Imports

In the longer term, the state still faces challenges that need to be addressed to facilitate growth in the years to come. Over the next five years, we are forecasting nonfarm employment in California to grow by 2.3% annually, and population growth is expected to grow by 1% annually. But in order for the state to see its economy continue to move forward at a healthy pace, there must be investment in infrastructure, including roads, bridges, housing and education.

Recent voter approval of two state ballot propositions was a step in the right direction. Proposition 1 begins to address some of the infrastructure needs by authorizing $7.5 billion for state water supply infrastructure projects, and Proposition 2 will set up a rainy-day fund to help mitigate the downside risks of the business cycle, which will help prevent cuts to government expenditures relevant to long-term growth, such as education. However, more needs to be done.

Housing is another long-term challenge in the state. The high cost of living in California is ultimately indicative of a housing supply shortage. Regulations, such as the California Environmental Quality Act, have created challenges for builders that have kept some construction from moving forward and adding to the current stock of residential units.

We are keeping a close watch on the state’s housing market recovery, which has stalled somewhat in the last few quarters. Residential permitting has been trending sideways, but home sales have ticked up in the second and third quarters. As home price appreciation moderates, we expect sales and construction to pick up again as higher employment and wages stimulate demand in the market. Beacon Economics is currently forecasting home price growth to average 5.6% in 2015, and then around 5% for the next few years.


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.


City National Corporation has $32 billion in assets. The company’s wholly owned subsidiary, 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. City National and its investment affiliates manage or administer $61.2 billion in client investment assets, including $49.1 billion under direct management. For more information about City National, visit the company’s Website at


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