Our current estimates indicate that California is continuing to grow at a strong pace, even in the face of a national “slowdown.” This is partly related to the demonstrated resiliency of California’s economy but also because the national numbers are not reflective of the true health of the U.S. economy. Blue skies remain bright in the state’s current outlook.
– Dr. Christopher Thornberg, Founding Partner, Beacon Economics
OUR TOP FINDINGS
California Leads the Nation: In the third quarter, California’s economy grew substantially faster than nation’s economy overall. California’s growth represented 29.1% of the net increase in U.S. GDP in the third quarter.
Above Its Weight: Led by tourism and one of the largest biotechnology industry clusters in the nation, the San Diego regional economy has been a steady contributor to statewide growth over the last year.
Sustained Job Growth: Nonfarm payrolls in the Golden State grew by 3.0% over the last year, outpacing the nation overall for the 14th consecutive quarter.
“With national unemployment now at 5% and the U.S. economy growing 2 – 2.5%, the country continues to make steady progress in private sector job creation, including here in California. As a result, we expect to see short-term interest rates rise gradually in the year ahead. Importantly, California’s robust economy continues to make a disproportionately large contribution to the United States as a whole – a trend we expect will continue for some time to come.”
- Russell Goldsmith, Chairman and CEO, City National
CALIFORNIA: Growth Makes Up Nearly One-Third of National Output Gains
California’s economy grew substantially faster than the nation overall in the third quarter. According to estimates by Beacon Economics, California’s real gross state product totaled $2.23 trillion in the third quarter of 2015, a 3.2% annualized increase over the second quarter. Notably, this is a slower pace of state growth than it was in the prior quarter. In contrast, U.S. economic growth came in at 2.1% over the same time period. California’s economic growth in the third quarter represented 29.1% of the increase in real economic output nationwide.
The state’s tech sector made the largest contribution to economic growth in the third quarter. The professional and business services sector, which contains the professional, scientific and technical services subsector, contributed 0.84 percentage points to the headline number. Meanwhile, the information sector, which includes software, Internet publishing and data processing services, contributed 0.65 percentage points to overall growth.
Manufacturing output has also trended favorably, with both the durable goods and nondurable goods manufacturing subsectors posting quarter-over-quarter gains, and bucking the downtrend in employment for these sectors. Overall, the manufacturing sector contributed 0.32 percentage points to statewide growth. California makes up just over 12% of real manufacturing output nationwide, and manufacturing in general has done quite well. Nationwide industrial production by manufacturing industries increased at a 2.7% annual rate in the third quarter, up from 1.2% in the second quarter.
CALIFORNIA LABOR MARKETS: Employment Growth Outpaces Nation for 14th Consecutive Quarter
California’s robust third-quarter employment gains outpaced the nation’s labor market by a wide margin. Total nonfarm employment increased 3.0% over the third quarter of last year. This marked the 14th consecutive quarter in which California’s job growth was faster than the nation’s overall. Nonfarm payrolls in the United States increased by 2.0% year-over-year in the third quarter.
On the other hand, the unemployment rate in California remains higher than the U.S. rate. The state’s unemployment rate averaged 6.1%, a full percentage point higher than the national average. However, California had more ground to make up in the wake of the recession. At the peak of unemployment in the first quarter of 2010, the state’s unemployment rate was 12.2%, which was 2.3 percentage points higher than the national average. The unemployment rate in California has also been falling for the right reasons. Over the last year the labor force has expanded by 0.9%, indicating that the drop in unemployment is due to residents in the state moving from unemployed to employed status as opposed to dropping out of the labor force.
The professional and business services sector has remained a stalwart of growth and made up 30.2% of the net job gains across all nonfarm industries in the state from the third quarter of 2014 to the third quarter of 2015. This sector also posted the second-highest year-over-year growth rate, 5.8%, coming in behind the construction sector, which grew 6.8% over the same period. What’s more, most of the job gains came from the highpaying professional, scientific and technical services subsector. This will have positive effects in the larger economy as higher wages lead to increased spending activity.
The leisure and hospitality sector made the second-largest contribution to year-over-year growth in the third quarter, making up 15.4% of the net increase to total nonfarm employment. The state’s tourism sector remains strong, as spending at hotels and restaurants surged 9.5% during the first half of the year. And despite a strong dollar, overseas visitors continue to frequent the state. During the first three months of 2015, the latest data available, total international arrivals at California ports of entry were 4.2% higher than they were for the same period in 2014.
REGION OF INTEREST: San Diego
The San Diego metropolitan statistical area (MSA), consisting of San Diego County, does not make economic headlines as much as some areas of the state, but the region has been a steady contributor to the state economy’s upward momentum. San Diego’s total nonfarm employment in the third quarter increased by 3.3% over the same time one year prior, outpacing the statewide growth rate of 3.0%. Year-to-date growth has been on par as well, increasing by 3.1% over the first three quarters of 2014.
As previously mentioned, the leisure and hospitality sector has been a strong source of job creation in California – much of that thanks to the San Diego region. Of the 72,800 new jobs in the sector statewide, 7,600, or 10.4% year-over-year, were located in the San Diego MSA alone. This is roughly in line with the region’s share of statewide leisure and hospitality services employment, which was 10.0% in the third quarter. The region’s tourism sector has benefited from the relatively strong state and national economies.
The biotechnology sector in San Diego has also been a strong source of growth. A recent report by real estate services firm Jones Lang LaSalle ranked San Diego as the third-largest biotech center in the nation, behind Boston and the San Francisco Bay Area. During the first half of 2015, venture capital funding to San Diego’s biotech industry totaled $204 million, more than half of the region’s $400 million venture capital inflows over the period and 13.7% of California’s total biotech funding.
A BUSINESS VIEWPOINT
“As a global company that sells uniforms and apparel in the hospitality, culinary and food industries in 64 countries, we strive to meet the changing economy by constantly introducing innovative garments and implementing truly scalable technologies so our customers can easily manage their programs and inventory levels – and reduce their overall costs. We are looking forward to 2016.”
- Neil Gross, CEO, Chef Works
WHAT ’S NEXT?
Recent turbulence in the financial markets has reaffirmed the ongoing fragility of the current economic expansion. While all eyes have been focused on global equity markets, a slew of new economic data has pointed to a healthier U.S. economy despite the third quarter’s 2.1% GDP growth rate.
The U.S. Bureau of Economic Analysis revised second quarter growth to a 3.9% annualized rate, substantially higher than the initial 2.3% reading. Consumer spending grew at a 3.2% annualized pace from the second to the third quarter – stronger than the average 2.2% growth since the recovery began in the middle of 2009. Despite the gloomy global outlook, net exports only detracted 0.2 percentage points from GDP growth in the third quarter. Indeed, the U.S. economy is on track to surpass its 2.4% growth for all of 2014.
Given this source of optimism for the national economy, it should come as no surprise that the current outlook for California is also bright. California leads the nation in job growth and, according to Beacon Economics’ estimates of real output, is one of the primary drivers of output growth for the nation. However, slow growth in Europe and a downgraded outlook in China could impact the state’s exports.
The road ahead will not be without bumps, but the overall trend is positive. California is adding jobs at a healthy pace, with many new positions in high-wage industries. The real estate market is moving forward as home sales have finally turned around, and spending levels, as measured by taxable sales, continue to set record highs each quarter. Add it all up, and Beacon Economics expects the state’s economy to grow by more than 4.0% for all of 2015.
ABOUT THE CITY 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 $35.6 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. The company and its investment affiliates manage or administer $59.4 billion in client investment assets.
City National is a subsidiary of Royal Bank of Canada, which operates in more than 40 countries and has assets of more than $1 trillion.
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.|