Modest Job Growth Seen in California

The California economy may be heating up, but job growth in the state next year will continue to be lukewarm, according to a forecast to be released today.

In their widely followed quarterly report, analysts with the UCLA Anderson Forecast say the worst is over for the Golden State economy. Because of ongoing sluggishness in key sectors such as manufacturing and continued caution by employers, however, there won’t be anything close to normal employment growth until 2005 at the earliest.

The analysts predict California will create about 134,000 jobs next year -- for a growth rate just shy of 1%. While even that sprinkling would be welcome after three dry years for the state’s labor market, it would be only about half of what would be expected in a typical year. And it wouldn’t be enough to keep up with the number of new workers entering the job market or to drive the state’s unemployment rate down from its current level of 6.6%.

“Essentially we’re seeing fewer negatives and more positives, but no great flash of light,” said Tom Lieser, senior economist with the forecast. “It’s a gradual acceleration that will finally be realized in 2005.”

That is when the state’s labor market should start heating up as employers begin to boost payrolls to meet the demands of a growing economy.

In the near term, California’s job prospects are still expected to be slightly better than the nation’s. The UCLA report projects that U.S. nonfarm payrolls will increase by only 0.6% next year as the economy continues to grapple with a largely jobless recovery.

That figure might seem too conservative, coming on the heels of government data showing that the nation’s gross domestic product expanded at a blazing 8.2% annualized rate in the third quarter, its fastest clip in nearly 20 years. Indeed, some analysts have upped their job projections, betting that rising corporate profits will lead to a burst of hiring in 2004.

But UCLA economists, who have been among the most pessimistic and accurate predictors of the nation’s anemic labor market in recent years, don’t expect employment to rebound anytime soon. Rising productivity means that companies have figured out how to do more with fewer workers.

In the third quarter, the measure of output per worker grew by 9.4%, the biggest leap in more that two decades.

In addition, U.S. factory employment isn’t likely to race ahead even when the economy hits full stride. California alone has shed more than 300,000 manufacturing jobs, or 16% of its industrial workforce, since factory employment hit its pre-recession peak in December 2000.

About three-quarters of those losses have come in industries producing durable goods, or big-ticket items, particularly high-tech manufacturing. Rampant cost cutting after the technology meltdown saw domestic firms shift a lot of that production offshore. Thus, while U.S. business spending on computers and other high-tech goods is starting to accelerate, places such as China -- not California -- will reap the accompanying expansion in manufacturing jobs.

The vast public sector employs 1 out of 6 Californians, most of them in local government positions such as teachers and police officers, and will likewise be a source of weakness given the state’s budget woes. Combined federal, state and local government jobs are expected to contract by 0.4%, or nearly 11,000 positions.

Lieser predicts that most of California’s employment gains next year will come in the services sector. Education and health services, which have grown steadily for more than a decade and include private-school and health-care jobs, will continue to expand faster than the overall economy.

The hard-hit information sector, which includes publishing, telecommunications, Internet services and motion picture production, is expected to shake off 10 consecutive quarters of losses and grow by 2.4% in 2004, the fastest of any category.

The giant business and professional services sector, which employs more than 2.1 million Californians, from scientists to secretaries, also is projected to post respectable gains next year.

UCLA analysts say Southern California will continue to outpace the Bay Area, which has borne the brunt of the state’s job losses. The Bay Area labor force -- those who are employed or looking for work -- shrank 1.1% last year as job seekers fled the region for opportunities elsewhere.

The loss of high-paying technology jobs has slammed California much harder than the nation in terms of personal income. Next year, UCLA analysts expect California personal income to grow by nearly 5%, from 3.6% this year. Taxable sales are likewise projected to increase by a solid 5% in 2004, nearly double the growth rate this year.

Despite a chilly labor market, residential real estate up and down the state has continued to sizzle. But UCLA analysts say signs are emerging that the market is overheated.

UCLA economist Chris Thornberg has created a housing index showing that Southland homes may be overvalued by as much as 15% as buyers have continued to bid up properties to unprecedented levels. The median price of a Southern California home hit $333,000 in October, up nearly 20% from a year earlier, according to DataQuick Information Systems.

Although long reluctant to use the “bubble” word to describe the region’s escalating home values, Thornberg said the last few months have convinced him that average prices have finally reached levels too lofty to be justified by the low mortgage rates, pent-up demand or other factors frequently cited by real estate brokers. Of particular concern, he said, is that when interest rates ticked up this summer, home values only accelerated as anxious buyers dove into the market, fearful of losing out on cheap mortgages.

“Just because rates are low doesn’t mean it’s a good time to buy,” Thornberg said. “This is insanity.”

Thornberg’s assumption rests on the notion that homes, like stocks or other assets, have a fundamental value that can be calculated based on the income a property can provide to its owner in the future.

In the case of housing, that revenue stream can be approximated by looking at how much someone would be willing to pay to rent it today. By projecting how much that monthly income is likely to grow, then discounting it to account for mortgage payments and other costs, Thornberg has determined that prices being paid for the average Southland home today are too high in relation to the theoretical income they could be expected to generate.

Thornberg said he didn’t expect Southland home values to collapse as they did in the early 1990s. But he noted that he wouldn’t be surprised to see the market give back some of the rapid gains made in recent months.