Econ and Jobs Third Quarter 2015

California’s economy continued to outpace the nation’s in the latest quarter of 2015. Some may think these results will soon start to reverse themselves given the potential impact of recent financial market volatility on the red-hot tech sector and of the slowing Chinese economy. But the broad based nature of California’s growth – both regionally and industrially – implies that current trends have the strength to muscle through what we see as a largely warrantless market panic.

– Dr. Christopher Thornberg, Founding Partner, Beacon Economics


California Accelerates: The California economy accelerated past first quarter output to post a new record high, maintaining higher growth than the nation overall. California’s economy has grown faster than the nation’s on an annual basis since 2012.

Good for Business: California is the third fastest-growing job market in the nation, and continues to make an outsized contribution to national
job growth.

Housing Rebounds: The state’s housing market is picking up the pace as home sales rebound in the second quarter. Home price growth is expected to pick up again, driven by historically low interest rates and inflation.


“A solid second quarter again demonstrated California’s economic strength, which outpaced the nation. We at  City National, and many of our clients, are optimistic about the prospects for continued, reasonable job and economic growth in California and America. While not always acknowledged, the U.S. economy and its financial markets have enjoyed a long period of overall growth and private sector job creation, even in the face of volatile international economic and political developments. While there are some restraints on a more robust expansion, our current outlook remains fairly positive, particularly in the communities we serve.”

Russell Goldsmith, Chairman and CEO, City National

CALIFORNIA: Second Quarter Growth Leads to Record Output

The Golden State’s economy moved into higher gear in the second quarter and reached record high levels as growth accelerated over the first quarter of the year. Beacon Economics estimates real gross state product came in at $2.18 trillion in the second quarter, the highest level on record, growing at a 4.4% annualized rate over the prior quarter. The national economy, in contrast, grew at a 3.7% annual rate during the second quarter.

Higher growth of the state’s economy relative to the nation has become the status quo during the economic recovery. In fact, California’s gross state product has increased at a higher rate than U.S. gross domestic product every year since 2012. 

Supported by San Francisco and Silicon Valley, the Professional and Business Services industry and the Information industry were among the largest contributors to overall output growth, representing 0.82 and 0.49 percentage points of the 4.4% headline growth figure. Venture capital funding in the second quarter of 2015 totaled $10.6 billion, up 32% from the first quarter, the bulk of which was invested in technology-related industries. 

The Real Estate and the Finance and Insurance industries, buoyed by the Golden State’s robust housing market, also made solid contributions to output growth. Sales volumes for existing homes in the second quarter increased by 13% over the same time last year, in stark contrast to the 8.7% decrease in sales volumes for all of 2014. The number of first mortgages ticked up in the second quarter as well. While relatively flat for commercial banks, first mortgage loans issued by credit unions were 11.5% higher in the second quarter of 2015 compared to the same time last year.

CALIFORNIA LABOR MARKETS: Holding Steady in Expansion Mode

Job growth in the state during the second quarter of 2015 remained in high gear and continued to build on the strong gains of the past few years.

Total nonfarm employment stood at 16.04 million, a 2.9% increase over the same time a year ago.

This rate of growth was in line with the 3.1% average growth the state has experienced since the beginning of 2013 and is substantially higher than the long-run average of 1% going back to 1990. California, home to the third fastest-growing job market in the country, represented 15.3% of all nonfarm jobs gains in the nation over the past year.

The Professional and Business Services industry made the  largest contribution to nonfarm job growth over the last year, adding 127,000 new positions to company payrolls - a 5.2% increase. The bulk of these new jobs were located in the San Francisco (17.3%), San Jose (16.9%), and Inland Empire (11.2%) regions.

The Construction industry, the fastest-growing industry over the past year, added 45,100 new jobs and made up 9.9% of new nonfarm jobs over that time period, which is quite impressive given that the industry as a whole makes up just 4.5% of all nonfarm jobs. The Education and Health Care industry and the Leisure and Hospitality industry also made strong contributions to overall job growth, adding 72,400 and 60,200 jobs, respectively. 

In addition to the industry gains, the remaining slack in the California labor market continues to diminish. The number of distressed workers (those working part-time for economic reasons, discouraged workers, and the long-term unemployed) continued to decline as a percentage of the labor force. The participation rate edged up in the second quarter to 63.5%, 0.8 percentage points higher than in the second quarter of 2014, and the unemployment rate dropped 1.3 percentage points to 6.3% during the same time period. 


The eastern portion of the San Francisco Bay Area, consisting of Alameda and Contra Costa Counties, has trailed the high-growth, tech-heavy San Francisco and San Jose regions. But the East Bay isn’t alone in this respect. After all, San Francisco and San Jose are among the fastest-growing regional economies in the nation. Given its relative affordability in both residential and commercial real estate, the East Bay is well situated to benefit from its high-growth neighbors to the west and south. 

East Bay housing offers a substantial discount, making it attractive to workers looking for more affordable housing. The median price for an existing home in the East Bay was $577,000 in the second quarter of 2015, nearly half the median home price in San Francisco and 32% lower than San Jose. The average monthly rent in the East Bay was $1,671 in the second quarter, compared to $2,392 in San Francisco and $2,014 in San Jose.

On the commercial side of the market, affordable office space will be a major draw for future businesses in the area. High-growth sectors such as the Professional, Scientific, and Technical Services and Information Services industries are the most likely to take advantage of the affordable East Bay as space becomes increasingly scarce elsewhere. During the second quarter of 2015, office rental rates were an average $27.45 per square foot, significantly lower than the $48.08 per square foot in San Francisco and $35.44 in San Jose.


“Our business is doing really well. We’re lucky we are in the middle of a change revolution when it comes to lighting. And there is no better place to be than in California, which is usually the first when it comes to adapting to new technology. Companies here are not only very open to new products but they are expanding and growing so they need new lighting.”

Jerry Mix, Chief Executive Officer, Finelite Inc., Union City

The East Bay, while affordable, also boosts a highly skilled workforce. In Alameda County, 24.7% of the residents age 25 and over have a bachelor’s degree, and 17.4% have a graduate or professional degree. In contrast, 19.5% of the statewide population age 25 and over have a bachelor degree, and 11.3% have a graduate or professional degree. Of those East Bay residents holding a bachelor’s degree, 38% have a STEM degree (science, technology, engineering, and math), compared to 33% statewide.


Despite the recent volatility in U.S. financial markets, the majority of economic indicators continue to head in the right direction. Acceleration in construction, industrial production and business investment highlights an expanding national economy. Coupled with solid consumer spending growth, Beacon Economics now forecasts 3% growth in U.S. gross domestic product for 2015. California is expected to remain the bright spot in the national economy with gross state product projected to grow 4% to 4.5% for the year overall.

One of the big questions for California’s economy is where home prices are going from here. Price growth in the state has slowed recently, but Beacon Economics expects growth to pick up again. The median price for an existing home in the second quarter was $395,000, a 5.2% increase over the second quarter of 2014. Although down from 11% annual growth in 2014, prices are currently forecasted to return to double-digit growth over the next two years.

While this may seem like excessive growth in the near term, the fundamentals are very different than they were during the last bubble. Mortgage rates are at historically low levels, and Beacon Economics doesn’t expect them to move much higher than 5% over the next two years. Additionally, overall inflation isn’t projected to trend much higher than 2%. Even with relatively strong price growth in the state, the inflation-adjusted annual cost of owning a home will not return to levels seen during the peak of the last housing bubble. 


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.


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


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