Economic outlook: State, local economies to keep humming along

Lately, nearly constant attention has been focused on the nation’s capital, as Donald Trump’s administration promises to revamp immigration policy, renegotiate trade agreements, reduce regulations, cut taxes, invest in infrastructure, and of course, revamp health care in America.

President Trump asserted that these measures would energize the underperforming U.S. economy and make the country great again. Even before Trump assumed office in late January, the financial markets took off in anticipation of faster growth brought on by the new administration’s promised policy changes.

But let’s look at the numbers. Both the U.S. and California economies have been growing for several years running, and have stayed on track in early 2017.

The U.S. labor market began the year on an impressive note by adding 200,000 jobs month over month in both January and February. In yearly terms, both the nation and the state have experienced a slower pace of job creation compared to last year, but California is still outpacing the U.S. as a whole (1.9 percent vs. 1.6 percent) as it has over the past five years.

The statewide unemployment rate was 5 percent in February, its lowest in 10 years and fractionally above the U.S. rate. Both the state and nation are effectively at full-employment, meaning that the labor markets are tight and further growth will also mean wage gains for workers. Indeed, from the third quarter of 2015 to the same quarter in 2016, the average weekly wage in California jumped by 7.1 percent compared a 5.7 percent gain nationally.

Beacon Kleinhenz
Robert Kleinhenz is an economist and executive director of research at Beacon Economics and the UC Riverside School of Business Center for Economic Forecasting and Development. Courtesy photo

In a nutshell, while it took longer than usual to recover from the largest economic downturn in 70 years, and there have surely been some structural changes in the economy along the way, the economy is still humming along in 2017 and should continue to do so over the foreseeable future. And being at full-employment, it’s hard to imagine how the changes advocated by the Trump administration would enable the economy to double its growth rate, as promised.

The story is pretty much the same in San Luis Obispo County. The local unemployment rate fell to 4.3 percent in February, the lowest in 10 years. Wage and salary jobs grew by 2.5 percent year-to-year in February, well ahead of both the nation and the state.

In recent years, most sectors of the local economy added jobs, with most of the gains occurring in health care, leisure and hospitality, professional and business services, construction and the government sector. Through the first three quarters of last year, taxable sales rose by 2.4 percent, roughly on par with the state as a whole, and there is every reason to expect that trend to continue.

What does it all mean for real estate? At the state level, there are high hopes for a good year.

On the demand side, positive factors include continued job and wage gains, favorable demographics, and low but rising interest rates that should get prospective buyers off the fence. But affordability is a growing concern and strict underwriting standards don’t help.

On the supply side, existing home sales have seen steady improvement in California, but new home construction has room for improvement. Meanwhile, with the state’s homeownership rate at its lowest level in decades, high demand for rental units has driven rents up and rental vacancy rates down.

Many of these same considerations enter the picture when looking at the housing market in San Luis Obispo County, but there are a few local wrinkles to the story.

First, new home construction has been constrained in recent years by water conservation policies that have emerged in response to long-standing drought conditions.

Second, the region is an attractive place for buyers of second and vacation homes. Limited supply and heightened competition for homes mean one thing: low affordability.

So, if you’re in the market for a home, jump on it in 2017 before prices and interest rates climb even higher. You won’t be alone, though; buyers will pay a pretty penny and will need to have their planning and financing in order ahead of time to succeed.

Robert Kleinhenz is an economist and executive director of research at Beacon Economics and the UC Riverside School of Business Center for Economic Forecasting and Development. He has a Ph.D in economics from the University of Southern California with a specialty in urban and regional economics.