California’s economy appears to be maintaining strong momentum through the first few months of 2015, even though the state’s economy continues to be impacted by a whole host of challenges, ranging from the unending drought to the work stoppages at major port facilities earlier this year, according to the latest report from the California Chamber of Commerce Economic Advisory Council.
The Golden State has added close to half a million net new jobs over the last year and the unemployment rate has tumbled 1.4 percentage points to 6.5%. Income growth also has picked up, with personal income climbing 4.8% in 2014 and state tax receipts running well ahead of expectations.
California’s strong economic performance comes as a surprise to much of the nation, which continues to be fed a seemingly endless stream of negative feedback on the state. While California faces considerable challenges, businesses have been adding jobs at a faster pace in the state than they have nationwide for the last 36 months. New business startups have also continued to trend higher and venture capital continues to flow into the state in greater quantities than anyplace else on Earth.
The port shutdown over President’s Day weekend, and the slowdown that preceded it, also took a toll on growth earlier this year. The volume of containers loaded through the San Pedro Port Complex was down 18.2% on a year-to-date basis through February.
Fortunately, the labor dispute was resolved and activity at the port surged back in March.
The rebound in port traffic has reverberated throughout port-related businesses, leading to a spurt in hiring in transportation and warehousing. The bulk of the impact has been felt in the Inland Empire, where many of the goods imported through Southern California ports are resorted and shipped. While the port stoppage is behind us, a smaller strike at independent trucking firms has slowed the processing of some items and kept the issue of labor disputes in the spotlight.
Hiring Remains on Fast Track
California continues to add jobs at a rapid clip.
As has been the case throughout the recovery, employment growth is being led by hiring in California’s technology sector.
Hiring also has risen sharply in other areas of the tech sector, including data processing, software publishing and Internet search. Job growth in the tech sector directly, and indirectly, supports employment gains in other areas, including administrative and support positions, construction, and wholesale trade and distribution.
Construction payrolls also posted a large gain in March, climbing a full percentage point or 7,300 positions.
Transportation and warehousing also posted a sizable job gain, with payrolls rising a full percentage point in March, when 5,300 net new jobs were created.
California’s unemployment rate fell 0.2 percentage points to 6.5% in March, marking a new cycle low.
The Golden State’s unemployment rate has fallen 1.4 percentage points over the past year, compared to a 1.1 percentage point drop nationwide. The larger drop in California is primarily due to stronger job growth.
San Francisco Bay Area
Among metropolitan areas, the lowest unemployment rates continue to be found in the San Francisco Bay Area, where years of strong employment growth have driven the jobless rate in San Francisco to below 4%. San Mateo County had the lowest unemployment rate in March at just 3.4%, followed closely by Marin County at 3.5%.
Although Southern California has not quite matched the Bay Area’s gains, employment conditions have improved considerably.
Orange County also has seen strong gains and the unemployment rate has tumbled 1.4 percentage points over the past year to just 4.4%
San Diego continues to see strong gains, with nonfarm payrolls rising 3.1% over the past year and 40,900 net new jobs created across the metro area.
Surge in Tax Revenue
The Franchise Tax Board provided preliminary reports for April personal income tax (PIT) and corporate tax collections (CT), which both show strong growth. Combined, the two taxes are running $1.8 billion above projections, with most of the upside surprise coming from personal income tax collection.
The PIT ended April more than $1.7 billion above the most recent administration projections, while the CT topped expectations by $86 million. PIT withholdings increased 15.3% year-over-year, which suggests that employment, hours worked and wages have also risen solidly over the last year.
Payments on 2014 final returns were up 20.7% from last April, while 2014 extension payments exceeded $5 billion, a 23% gain from the prior year.
This year’s large increase in final returns likely reflects increased capital gains, bonus, and option income. Gains are being fueled by the strength in the state’s technology and life sciences industries, the influx of venture capital and private equity and a strong stock market in general.
California exports rose 3.6% in 2014 to $174.1 billion.
Mexico remains California’s largest export market, with $25.4 billion of the state’s merchandise exports headed there.
Canada ranks as California’s second largest market, with shipments of $18.2 billion, followed by China, $16.1 billion; Japan, $12.3 billion; and Korea, $8.6 billion.
Return of Bubble Talk
The question of whether social media, life sciences and California’s housing market are back in bubble territory has seen renewed emphasis in recent months. The common thread weaving these industries together is low interest rates, both in the U.S. and around the world.
The hunt for yield has led to a surge in demand for alternative assets, which has fueled a private equity boom and enabled many start-ups to rapidly achieve stratospheric valuations. The housing market also has been impacted, as institutional investors and private investors have bought up many of the lower-priced homes in California and converted them to rental properties.
Strengthening Home Sales
Home sales picked up solidly in March and rising pending home sales data suggests that sales will strengthen further this spring.
Travel and leisure continues to show strong growth from a demand standpoint. Airline passenger traffic through major California airports continues to rise solidly.
California’s agriculture sector continues to struggle with drought, sluggish global economic growth and fluctuations in the value of the dollar. Farmers continue to get squeezed by higher operating costs and low prices.
Fruit and Nuts
Fruit and nut producers are holding up well considering the pressures they face from the drought. There was relatively little freeze damage in the Central Valley this past year. The sizing of citrus fruit has generally been smaller, however, likely due to the drought. Citrus and stone fruit growers on the east side of the San Joaquin Valley are especially concerned about water supplies and the performance of their wells closer to the foothills.
California’s wine grape sector has seen good harvest the last few years.
Demand remains strong, however, which has help growers secure contracts for 2015 and will reduce the risks to wineries