Urban Growth Controls: Their Unintended Impacts

by Mark Schniepp
March 2016

There are many forms of growth controls in place in California counties, particularly along the coast. And there are many shapes and sizes of these controls but all have the expressed or unexpressed purpose of restricting population growth and urban sprawl to prevent a future for a region that includes more traffic and the loss of open space.

Examples of growth controls include containing development within specified urban boundaries, building permit restrictions, development impact fees, infrastructure requirements, MS4 regulations, and mandating inclusionary housing.

While the latter requirement might not overtly limit growth, it often reduces the density of housing and it leads to higher home prices on market rate housing which effectively limits the demand for housing.

These are typically the symptomatic costs of growth controls:

Higher housing prices and higher rents. Controls limit housing, but they do not (and cannot) deny new populations from moving into the controlled region. Demand for housing often exceeds supply and prices tend to rise faster in controlled regions as opposed to regions without controls. Certainly enough, the median price of homes is rising faster in the San Francisco Bay Area and Coastal Southern California than in the Inland Empire or Central Valley.

It’s a paradox, but traffic congestion, energy consumption and air pollution frequently increase in areas with growth controls. Why? Because commuting patterns of workers are inefficiently altered when firms in the controlled region need workers but there is an absence of housing. Commuters, forced by housing prices and the lack of supply to live far from where they work, clog California highways and choke side streets during peak drive times to work.

Ventura Age 2014.xlsAn exodus of big employers. Almost every business and government agency that remains in the controlled region struggles with recruiting and retaining workers who cannot afford to live nearby. Firms end up defecting from the region or downsizing and opening operations in uncontrolled areas where access to a larger labor force (and more available and affordable housing) is less challenging.

Altered communities. Poorer families are often forced to double- and triple-up in rental housing. Unable to buy homes, many middle-class families with children move away. We have observed this particularly disturbing phenomenon occur in Southern Santa Barbara County and Ventura County.

Other adjacent regions are impacted. Firms move to adjacent areas and workers move to adjacent areas where housing is more available and more affordable. The result is a downsizing economy in the controlled area, leading to lower economic growth, less prosperity, fewer jobs and high home prices. There will be fewer services offered to the resident population. This might be fine for the retired couple or individual, but it’s problematic for working households.

These are the unintended consequences of growth policies. The intended consequences of growth controls: less population, less housing, and more open space are realized, but at a cost that includes fewer jobs, a smaller middle class, expensive housing, fewer services, and more traffic on existing highways and roads.

Growth controls (SOAR) have been in effect for nearly 20 years in Ventura County and the number of vehicles traveling on interstate 101 and highway 23 are at record levels. The number of commuters to and from Ventura County to Los Angeles County is at record levels. The average commute time of workers in Thousand Oaks, Moorpark, and Simi Valley is above the state and federal average commute time and akin to workers who reside in the San Fernando Valley.


Upcoming Economic Forecast Conference

Orange County Economic Outlook 2016
In Partnership with the UCLA Anderson Forecast
April 28, 2016
Irvine, CA
Register Now

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

The Recent Stock Market Collapse: Is Another Recession Looming?

by Mark Schniepp
February 2016

Sorting Out the Stock Market Collapse . . .

Stock_Market.xlsOK, the market is now down 10 percent from where it stood at the turn of the year. This is a repeat of what happened in August. Why? Is this the early warning signs of the next recession?


The stock market is responding to the other collapse, like oil prices. And this is largely due to the slowing economy of China. But there’s more to it than just that.

Crude Oil Supply and Demand Fundamentals

Today it costs under $30 to buy a barrel of oil—the lowest level in 12 years. As recent as June 2014, the price of a barrel of oil was $108. What has caused oil prices to plummet?

There has been steady production from the OPEC countries, increased production from the United States, and declining demand from China. Between July 2014 and July 2015, U.S. weekly production increased by over 1 million barrels of oil.

Normally, OPEC would have reduced its production quotas to push oil prices higher but throughout 2015 they did nothing and the largest producing member of OPEC, Saudi Arabia, has kept its production at late 2014 levels. The world is now at an all time record high in oil production and the price has fallen to $29.75 as of February 12, 2016.

Total_World_Oil_supply.xlsThe oil price collapse is due simply to increased supply (mostly by the U.S.) and decreased demand forces. Demand for oil globally began tapering off, driven most importantly by a slowdown in China’s economy. Until 2010, China had maintained an average growth rate of more than 10 percent annually for over 30 years. This high growth scenario started to slow in 2010. Currently (2016) the current GDP growth target set out by Chinese authorities is 7 percent, and many have questioned how much further growth could slow in the second largest economy in the world.

So why are low oil prices affecting the financial markets? Cheap oil means cheap gasoline. So shouldn’t that generally help consumer spending and the domestic economy?

Ultimately, it will. But in the short term the decline in oil is damaging oil related industry stock prices. You see, oil prices and stock prices are positively correlated.

Furthermore, lower oil prices also cancel plans for capital spending. It is estimated that a decline in energy-related investment such as new drilling equipment has more of an impact than consumer savings. And equity prices usually rise with increased business spending, offsetting the positive effects on savings for the consumer.

Finally, though only 6 percent of the S&P 500 companies are directly exposed to energy, other sectors including industrials also affect the index, and they are impacted by oil prices.

02-2016 Gasoline price

The average price in California is now down to $2.41 per gallon. However, the average for the entire nation is $1.70. In Kansas City, it’s $1.32. Prices are down 24 cents from last month and 55 cents from a year ago.


02-2016 Red China ImageThe Chinese stock market is now in a bear market for the second time in 7 months. And U.S. investors are interpreting China’s problems as poison for the U.S. Why?

Well, because China has been an important source of global growth with significant spending power. China does carry some clout, being the second-largest economy in the world.

Second, there is an important psychological effect in the markets, especially as China is a big purchaser of U.S. treasuries and a big force in global currency markets.

Furthermore, a lack of clarity on the true health of China’s economy has added to recent market volatility. Investors don’t really know how strong or weak the underlying Chinese economy is. And a weaker yuan heightens worries that the slowdown in China’s economy is deeper than the official data suggests.

The underlying Chinese economy may not be robust enough to reach the 7 percent target set by the government for 2016. Growth is already down from 10 the percent growth reached over the last decade.

Meanwhile, just as China had been devaluing the yuan, it is now selling U.S. Treasuries to prop up its currency, which could put upward pressure on U.S. interest rates.

Uncertainty Over the Fed

I’ll address this more next time, but for now, what the Fed will do is an issue for the stock market because investors are concerned that the U.S. economy is not yet ready for additional rate increases throughout 2016.

Fed Chair Janet Yellen did emphasize during the December press conference that the committee’s decision will remain dependent on incoming economic data going forward. While some data has continued to improve (like the unemployment rate) there is worry about the domestic manufacturing sector, how long technology can keep fueling the U.S. economy, and the international setting including Europe and China.


Upcoming Economic Forecast Conference

Our next conference is scheduled for March 10, 2016 in Santa Clarita, California. We are speaking at the Santa Clarita Valley Economic Development Corporation’s annual Economic Forecast. The venue is the Hyatt Valencia. The time is 2 PM to 5 PM.

Register Now

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

The Year Ahead

by Mark Schniepp
January 2016

The Year AheadSource: LA Times, December 27, 2015, page C1

What you should know about 2016

Because world economic events have so much more influence on our own domestic growth, job creation, and the rise in income, monitoring the outlook for the principal economies in the world is a critical factor in predicting the probable performance of the U.S. economy in 2016.

The Panama Canal will be wider when a third set of locks opens in April. Ships twice the size of what traverse the canal today will be accommodated. U.S. Ports are now gearing up for the traffic. Will there be enough global demand to fill the canal this year?

Keep in mind that the presidential election occurs on November 8, 2016. There are also major elections in Japan, Germany, the United Kingdom, and China this year.

The Summer Olympics in Rio de Janeiro, Brazil begin on August 5th.

The United Kingdom votes on a referendum in October on whether to remain in the European Union. Leaving would free the U.K. to purse it’s own trade deals with faster growing economies than the sluggish European economy presently. It would also impose tariffs on 90 percent of its exports to the existing European Union. Staying gives the U.K. open access to the broader European market of 500 million people.

World economic growth is projected to be 3.5 percent in 2016, an improvement from the 3.0 percent recorded in 2015.[1] Other sources put world economic growth at 2.7 percent for 2016, stating that “2016 will be another year of repair, recovery, reform and risk for most countries.[2]

This latter view is supported by China’s sinking GDP growth, which will continue to decelerate. Consequently, global demand for goods and materials will remain soft. We therefore expect interest rates to remain low (despite the threat of tighter monetary policy by the Federal Reserve) along with the prices of oil and other commodities. World inflation will be less than 2.0 percent, and probably closer to one percent in Europe and Japan.

bloomberg_2016Source: Bloomberg

Bad weather is predicted around the Pacific Rim due to the strong El Nino that is present today. This could mean major disruptions from storms and floods. Major disruptions tend to produce sell-offs in world financial markets. The California coastline is also vulnerable to some degree of carnage this winter.

The U.S. economy will have very low unemployment and very low inflation in 2016. And while we have been predicting higher wage and salary growth this year, it’s not likely to accelerate beyond an average of about 3 percent.

American families have paid off debt since the Great Recession, and there is pent-up demand, particularly for housing. As millennials move out of their bedrooms at their parent’s homes, the housing market will be impacted. For now, it’s the apartment market with vacancy rates throughout the nation falling to record lows. Over the next 5 years, it will be the first time home buyer market. Interest rates will be a determining factor as to how robust the housing market will be in coming years.

Few economists expect a major slowdown in 2016, let alone a recession. There’s little reason to think the conventional wisdom is wrong this time around. The question is whether 2016 will be a true turning point in the world economy and the best year of the current economic cycle.

Risks in 2016

Most of the risks lie with the international economy, with the largest uncertainty resting on China and Europe.

For U.S. exports to contribute positively to overall domestic growth, both China and Europe need to be healthy. And for Europe to avoid risk of a further slowdown, emerging market growth needs to improve. Historically emerging market nations have been important for European exports. Weakness in these markets would produce more than proportional downside risks to the world economy.

Emerging GDP forecastSource: Economist Intelligence Unit, The Economist, December 30, 2015

Backed by lower oil prices, a weaker euro, and quantitative easing by the European Central Bank, Europe’s GDP growth is expected to reach 1.5 percent with inflation of around 1 percent during the year.

If European and global markets remain calm, Europe will continue its recovery. But any of a number of shocks, whether a hard landing in China, debt problems in Europe, El Nino disruptions, or terrorist disruptions, will create substantial pressure on policymakers at a time when the constraints on their ability to act are already intense.


[1] The International Monetary Fund, the World Bank, and Bloomberg, November 2015.
[2] The Economist Economic Intelligence Unit, December 30, 2015.


Upcoming Economic Forecast Conferences in 2016

2016 Ventura County
February 5, 2016
Westlake Hyatt
Register Now

2016 Santa Clarita Valley
March 10, 2016
Valencia Hyatt
Register Now

2016 Orange County (In Partnership with the UCLA Anderson Forecast)
April 2016
UC Irvine

2016 San Diego County (In Partnership with the UCLA Anderson Forecast)
Date TBD

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

The 2015 Review: How Good a Year?

by Mark Schniepp
December 2015

If you’ve been loyally following these monthly newsletters, then you’re pretty much aware that the U.S. and state had another year of better–than-expected economic growth. And the financial markets held up remarkably well despite the tumultuous stock market in China, the devaluation of the Yuan, and continued sluggish growth in the European communities.

There are a number of economic indicators that impact you directly that are making your life substantially better today:

  • Interest rates are at or near an all time low
  • Oil prices remain low and gasoline prices are cheap, saving you a bundle every week
  • Job opportunities continue to improve, especially if you have a skill or some experience
  • Inflation is virtually non-existent and that’s the way it’s been for most of 2015
  • Home prices continue to rise, increasing your equity and overall wealth position

There’s very little to worry about concerning the health of the economy as we close out 2015 and welcome in a new year. That said, here’s my annual review of the year.

Significant Events in 2015

A dubious play call by the Seahawks at the one yard line in the final moments of Superbowl XLVIIII resulted in a Patriot interception and victory. The final score was 28-24.

The 10 year U.S. Treasury Bond yield closed at 1.67 percent on February 2. This was the lowest level of the year and only 27 basis points from the all time record low of 1.40 percent set on July 24, 2012.

Leonard Nimoy, “Mr Spock” passed away in late February.

On April 25, a 7.8-magnitude earthquake struck Nepal, near Kathmandu, killing more than 8,000 people and injuring 17,866.

Apple hit an all time record high in stock price and market valuation on May 17. Its current market capitalization of $654 billion is greater than the GDP of Sweden, Poland, Argentina, Norway, Iran, Thailand, Denmark, Singapore, Hong Kong, or Isreal.

David Letterman called it quits after 33 years as a late-night TV show host. His last show was on May 20.

The Dow and S&P indices reached all time record highs in mid-May.

Stock_Market.xlsThe Nasdaq Composite index set an all time record high close on July 20. It is not far from that level today.

Domestic crude oil prices fell to $38.22 / bbl on August 24, the lowest level since January of 2009. Gasoline prices for regular grade are now well under $3/gallon for most areas of California.

The U.S. economy created 298,000 jobs in October and 211,000 jobs in November, and is now on pace to deliver more than 3 million new jobs during calendar 2015, the most since 1999.

On November 13, three teams of gun-wielding ISIS suicide bombers hit six locations around Paris, killing 130 people and wounding hundreds.

Kobe PictureKobe Bryant, playing in his 20th season as a Laker, announced on November 29 that he would retire after the 2015-2016 season.

How Good a Year Was 2015?

The wealth of American households climbed to a new peak in 2015, as rising home prices and record level stock market valuations were the principal contributors.

The unemployment rate has fallen to 5.0 percent in the nation. In California, its 5.7 percent and falling. Wage and salary increases are now occurring more regularly and exceed the rate of general price inflation by a factor of 2 or 3.

Consumers are the engine of growth in the U.S. economy. It’s the same for the California economy but also toss in technology sector growth and a strong tourism sector.

Stock_Market.xlsConsumer spending is being directed at Costco. Costco is currently at an all time record high in stock price. Wal-Mart however recently slipped to its lowest value per share since April of 2012.

The U.S. dollar is strengthening again, meaning you should plan that trip to France or Italy soon. Since you’re fully employed and your salary is rising again, you’ll have additional disposable income to throw around Europe.

In general, momentum accelerated in 2015. For the current economic cycle, it’s been the best year to date for American households, employed Americans, retail businesses including online commerce, and the financial markets.

New Expectations for 2016

Expect more rain. The current (December) predictions still have a huge El Nino raging between January and March. Stock up on a few new umbrellas now.

Interest rate hikes by the Federal Reserve are coming. If not in December than certainly in February. Rate hikes mean the economy is doing well.

It’ll be an election year. Next November, expect the lowest unemployment rate since the 2000 election.

GDP growth is forecast at between 2.5 and 3.2 percent next year, with a consensus of 2.8 percent.

U.S. economic momentum is likely to accelerate, and that raises our expectations of a sound and stable economy in 2016.


New Publications by the California Economic Forecast

The latest edition of the Ventura County Economic Outlook is available. The 88 page publication that accompanied our update conference in September 2015 can be downloaded from our website at www.californiaforecast.com/publications.

VC 2015 Cover Online 2

Upcoming Economic Forecast Conferences in 2016

2016 Ventura County
February 5, 2016
Westlake Hyatt
Register Now

2016 Santa Clarita Valley
March 10, 2016
Valencia Hyatt
Register Now

2016 Orange County (In Partnership with the UCLA Anderson Forecast)
April 2016
UC Irvine

2016 San Diego County (In Partnership with the UCLA Anderson Forecast)
Date TBD

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.


Job Growth, Housing, Traffic and Why Ventura County is Lagging

by Mark Schniepp
November 2015

How is YOUR local economy?

Comparing how the economy is growing across regions of Southern California, I noticed that there is considerable strength in the coastal areas and in the Inland Empire, although the increase jobs created has moderated over the last couple of months.

Nevertheless, unemployment rates are at full employment in Orange, San Diego, and Santa Barbara Counties, and close to full in Ventura and the Inland Empire Counties.

Northern Los Angeles County has demonstrated considerable improvement this year, mostly in the Santa Clarita Valley. And the Antelope Valley economy has evolved over the last two years with more job growth and rebounding home prices.


Ventura County Star, November 6, 2015, Page 8A

Recently, I gave a presentation at a Camarillo Chamber of Commerce meeting where I reported on the lagging progress of the Ventura County economy.

But the Ventura County economy is lagging other counties in California including Santa Barbara County. Lining up the counties in a comparison of a number of economic indicators such as office vacancy rates, job growth, new housing, new commercial and industrial investment, wage growth, home prices, and apartment vacancy rates, the conditions in Ventura County have not progressed like other areas.

Job Growth and Office Vacancy

Job growth (from September 2014 to September 2015) and the Office vacancy rate (as of September 30, 2015) by County:

County Job Growth (%) Office Vacancy (%)
Orange 2.9 10.2
San Francisco 4.3 5.5
San Diego 3.5 15.1
Los Angeles 2.1 15.1
Santa Clarita Valley 3.7 13.3
Santa Barbara 3.2 6.9
Santa Clara 4.7 9.5
Inland Empire 2.7 15.1
Fresno 3.2 12.5
Ventura 1.0 17.7

So why is Ventura County lagging other counties in the key economic indicators? In part, the answer includes the regulatory environment in the County. We believe there has been a stifling of new development of housing and that has pushed home prices and average rents higher, and vacancy rates for rental housing substantially lower, limiting housing affordability and availability for prospective employers.

Housing and Traffic

High home prices and extraordinarily tight rental vacancy is a clear symptom of demand exceeding supply for housing. It’s true in many areas of California, especially along the coast and in Silicon Valley. The lack of housing has ramped up traffic problems in many areas of California.

Job growth is suffering. Commuting continues to increase. More residents of Ventura County are working in Los Angeles or Santa Barbara Counties, and this is creating more traffic and frustration all along the 101, and particularly in some of the region’s principal corridors:

Ventura to Santa Barbara
• 101 NB: Muscle Shoals to Garden Street, Santa Barbara, 7 to 9 AM

Santa Barbara to Ventura
• 101 SB: Milpas Street to Muscle Shoals, 4 to 6 PM

Santa Barbara
• 101 SB: La Cumbre Road to Downtown exits

Oxnard to Camarillo
• 101 EB: Vineyard Avenue to Carmen Drive

Thousand Oaks
• 101 NB: Westlake Blvd to the 23 freeway
• 101 EB: top of Conejo Grade to the 23 freeway
• 23 NB: 101 North to Olsen Road (PM)
• 23 SB: Olsen Road to 101 North (AM)

Home prices in Ventura County are second to Orange County in highest median value among all Southern California Counties. Rental prices are third highest, in back of Los Angeles and Orange County, but the vacancy rate for apartments is the tightest in the region (tying Santa Barbara).

RERC Vac & Price by Area.xlsThe lack of housing is one of the principal problems affecting Southern Santa Barbara, Ventura, and many parts of Los Angeles and Orange Counties. But what sets Ventura County apart is the relatively high rate of business downsizing and defection, combined with the absence of new business relocation there. It appears that businesses have decidedly chosen other areas to relocate to than Ventura County.

Meanwhile, job growth is humming along in the Bay Area economies, in Orange County, and Los Angeles County, including the Santa Clarita Valley region of Northern LA County. Population growth is ramping up again in the Inland Empire and in the Sacramento Valley region. More new development projects are underway or scheduled to begin in the Bay Area, in Central California, in Orange and San Diego Counties and in the Inland Empire.

We should see more new housing under construction next year and more general growth in the regional economies because of it. However, the lagging status of the Ventura County economy is likely to persist until employment growth increases and more housing projects are started and built. How will this happen? A loosening of the regulatory environment and greater economic development efforts by the cities is a first step toward creating greater vibrancy in Ventura County.


Upcoming Conference


The Entrepreneur Economic Forecast Conference in Ventura County
February 5, 2016
Hyatt Westlake


Register Now

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Is a Stock Market Collapse Imminent?

by Mark Schniepp
October 2015

The October Reputation

The title of this month’s newsletter is most appropriate because Octobers tend to be notorious bear months for the stock market. The “Stock Traders Almanac” has labeled October a jinx because of the frequency of market crashes that have occurred in the month. The worst October ever was in 1987, when the stock market declined more than 23 percent on Monday, the 19th. The DJIA fell 508 points.

Stock_Market.xlsWhen the stock market crash of 1929 occurred, it took investors by surprise on October 24. Just weeks before, the market had reached a new high for the year. Nearly 25 percent of the market’s value was lost in two days.

The Panic of 1907 occurred during the last half of October when runs on banks culminated in a major sell-off on the New York Stock Exchange. By November 7, the DJIA had declined 50 percent from the previous year.

During the first 8 days of October 2008, the DJIA lost 2,380 points or 22 percent of its value. The actual decline in the market started in earnest in September of that year. September has, like October, been another especially weak month for stock market performance.

Investor emotions that turn negative when the calendar changes from summer to fall can influence stock market performance. In the fall months, after summer vacations are over and the sun sets earlier, investors get more gloomy. Consequently, any negative economic or market developments in these months can produce overreactions.

The Significance of a Decline

Consumer spending is vulnerable to swings in the stock market because stock holdings are concentrated among high-income households and these households are responsible for a disproportionate share of consumer spending.

10-2015 Great Stock Market Scare

CNN Money, August 25, 2015

The Dow eroded 11 percent between August 10 and August 25, 2015. The recent market correction was allegedly precipitated by the devaluation of the Chinese Yuan and the plunge in the Shanghai Stock Index in July and August of this year. The low point for the Dow this year occurred on August 25. It has since gained over 1,000 points and is near 16,800.

Consequently, we watch the various stock and bond markets carefully as a precursor to spending behavior in the U.S. In the event of a sharp and unexpected downturn in the market, consumer spending during the fourth quarter would likely be impacted which would slow down the growth of production, employment, income, and GDP.

Are Consumers Showing any Signs of Pull-Back?

US Monthly Indicators-D.xlsCore retail sales growth is positive though it has been lackluster during the summer months, likely influenced by concerns about increased market volatility. However, automobile and light truck sales soared during August and September.

Existing home sales have been running strong all year and August new home sales are at their high point for the current business cycle. Mortgage rates remain at very low levels which are expected to persist for the remainder of the year.

Furthermore, e-commerce sales have strengthened this year and continue to outpace in-store retail sales by large margins.


Is Another Market Correction Imminent?

If you monitor this topic on the internet, there is no shortage of content that suggests, warns, or flatly states that the bear market has started and a decline, collapse or crash is imminent.

US Quarterly IndicatorsHowever, the relatively positive collection of economic indicators would imply that another correction is not necessarily imminent. There is little evidence to suggest that consumer spending behavior is being impacted by the correction to date. So I guess they don’t think so either. Corporate profit readings would suggest that the market could, fundamentally, still go higher.

The October 2015 correction probably came early this year in August and lingered into September. From its high in May of this year, the market declined a total of 14 percent. Today, it’s currently off by 10 percent. Certainly any unexpected jolt to the economy or geopolitical setting could set off another bearish reaction. Consequently, we are not ready to forecast the stock market direction for the rest of the year. But there is no imminent decline foreseen in the market from my reading of the taro cards. And I don’t care if it’s October.


Upcoming Autumn Conference

Santa Barbara Technology and Industry Association
Economic Summit

November 5, 2015
Radisson Hotel, Santa Maria
8:00 am – 10:00 am

Register for the Event

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

A Full Employment Economy

By Mark Schniepp
September 2015

Approaching Full Employment

Less than two years ago the Congressional Budget Office predicted a sluggish labor market improvement in the U.S. economy with the unemployment rate making no improvement throughout calendar year 2014, forecasting an unemployment rate of 6.7 percent at year’s end.

09-2015 CBO ScanLos Angeles Times online, February 4, 2014

Well, that forecast did not work out too well for the CBO.  The U.S. labor market created 2.6 million jobs in 2014 and the unemployment rate fell to 5.6 percent at year’s end.

National Employment.xlsNow, eight months later, the economy is on pace to create 3.1 million jobs in 2015—the most since 1999—and the unemployment rate has dropped to 5.1 percent.   This rate is either at or is very close to the “full employment” level of unemployment. Modern notions peg the rate at or around 5.0 percent.  We haven’t seen an unemployment rate that low since April of 2008.

In California, the pace of job creation has been stellar, eclipsing previous years in the current economic cycle and pushing the rate of unemployment down to 6.2 percent.  For the state as an entire economic region, we are still a ways off from the full employment rate of unemployment, but the likelihood is for that threshold to be reached by the summer of 2016.

For many counties in the state, full employment has certainly been reached. Here’s the most recent list of the counties with the lowest rates of unemployment:

County Unemployment Rate (%)
San Mateo 3.6
Marin 3.7
San Francisco 3.8
Santa Clara 4.3
Napa 4.4
Sonoma 4.6
Orange 4.7
San Luis Obispo 4.7
Alameda 5.0
Placer 5.2
San Diego 5.4
source: Labor Market Information Division

What is Full Employment?

Typically, it’s when employers experience difficulty filling job vacancies and they have to bid up wages or salaries to keep employees from leaving, or to recruit skilled employees from other firms or right out of college.

California NAICS NSA.xlsNationwide, there still appears to be slack in the labor force because wages are not generally rising yet.  That’s because the “underemployment rate” is still relatively high.  The underemployment rate includes the unemployed plus those people working in part time positions that would prefer to work full time. The rate in August was 10.3 percent of the labor force—a big improvement over the peak value of 17.4 percent in 2009. Using this rate to ascertain reaching full employment, the country will arrive there by next summer, and wage growth is expected to accelerate in 2016.

Here in California, wages are already rising in the largest labor market centers, most notably, the Bay Area.  And the creation of technology jobs is the principal reason why wages are moving upward.

Employment Cost Index.xlsxSince early 2014, wage/salary appreciation rates have jumped, from approximately 2.5 percent in 2012 and 2013 to over 4 percent this year in the Bay Area.  In Southern California, wage inflation moved from 1.5 percent increases per year to over 3.0 percent this year.

More wage increases are coming in California, sooner than later.  Labor shortages are occurring in construction, in K-12 education, in trucking and other transportation, some retail, and for skilled positions in healthcare and technology.

Higher wages will push the general inflation rate higher. Businesses will face higher costs which reduce profit levels and stock valuations.  Consequently, as the expansion matures and full employment is reached, we’ll have new reasons to worry about increased volatility in the stock market, and the timing of the next recession.


Upcoming Autumn Conference

Santa Barbara Technology and Industry Association
Economic Summit

November 5, 2015
Radisson Hotel, Santa Maria
8:00 am – 10:00 am

Register for the Event

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

Full Steam Ahead

By Mark Schniepp
August 2015

The Expansion has Kicked into Higher Gear

The U.S. economy continues to make steady and consistent progress.  Strength is evident across most sectors and markets, especially the labor market where a full employment economy is now less than a year away.

Reviewing this newsletter a year ago ( the August 2014 edition), I wrote:

The evidence to date in 2014 indicates that the economy is in its best condition and growing at its fastest sustained pace since 2007.   Employment is now expanding at a rate that would bring the economy to full employment in two years or less.

• Consumer confidence is at a 7-year high
• The growth of manufacturing remains positive including job creation
• The financial markets appear very healthy as the bull market takes a needed breather this summer
• Treasury bond yields have recently declined and are lower today than a year ago
• Over the last 12 months, inflation is running at a rate of 1.4 percent
• Existing home sales were higher for the third straight month in June and home price appreciation is still running positive, at 4.3 percent

CPI-D.xlsToday, a full year later, not much has changed. Consumer confidence has slipped some, largely because of the “breather” that the stock market is taking again this summer.  Nevertheless, the bull market has not been vanquished. The Nasdaq is 100 points from its all time high. The S&P 500 index is about 20 points from its all time high. Interest rates are sinking again. Oil prices are below $50/barrel again.  Inflation over the last 12 months has been an imperceptible 0.1 percent, and home sales in June jumped to their highest level since before the last recession.

08-2015 Spot Price of GoldSince 2011, gold prices have been on the decline as the U.S. recovery gradually picked up momentum and investors “rebalanced” their portfolio away from gold and into stocks. The rapid downturn in gold prices during July also reflects investor expectations of an interest rate hike by the Fed this year. The Fed is still expected to begin tightening monetary policy in September.

There is no whiff of a slowdown in the economy. If there was, you’d see it in the financial markets.  And although the broader indexes like the S&P and Nasdaq have generally moved laterally since May, volatility has been remarkably absent from the market.  International events like a possible Greek exit from the euro zone or a bear market in Chinese stocks are just not big or bad enough to impact the U.S. economy.

08-2015 Scan-2

Source: Ventura County Star, September 12, 2014, front page

Nearly a year ago at the Ventura County Economic Forecast Conference, the news was decidly upbeat. Since then, there have been no real surprises in the economy’s progress or in the forecast for 2015 and the year ahead.  We continue to expect a tightening labor market, higher wages and salaries, a strengthening housing market, more consumer spending, and rising interest rates.

Households are in a Strong Position to Increase Spending

US Quarterly IndicatorsThe creation of jobs is strong and broad-based, and wage growth will accelerate more significantly as the economy approaches full employment. Household debt is about as low as it has ever been, and many homeowners have locked in the exceptionally low interest rates by refinancing their mortgages.

Because stock prices are near record highs, and house prices are rising solidly throughout the nation and especially in California, higher asset values make us feel wealthier and more comfortable to spend. Consumers also have plenty of savings, having stashed away most of what they saved on lower gasoline costs over the last 6 months (except in California where the premium to the average U.S. price has now widened from 37 cents on February 1st to over $1.10 per gallon today: $2.63 versus $3.71).

08-2015 Gas price chart


Upcoming Economic Forecast Conference

2015 Ventura County
September 10, 2015
Westlake Hyatt, 7:30 AM

Have you ever had to obtain financing for your business or to buy commercial real estate or apartments? Are you thinking about it? We are going to present a comprehensive picture of the current commercial lending environment, the demand for hard and soft money, and how that is all changing in the marketplace, this year and next.

Mark Schniepp will also update the outlook for the California and Ventura County economies.

  • Where are we now in the business cycle?
  • Is the housing market going to improve with the threat of higher interest rates?
  • What can you expect over the next year regarding worker recruitment and compensation?

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.