Thursday, September 29, 2005
Today we take another look at job creation in California. We often wonder how the California real estate market will fare in the years ahead, since it has come so far so fast, with no material changes to the employment rate or average wages. Unemployment has dropped from 6 or 7 percent to 5 percent, but with what people are paying for homes these days, you'd think it would be 100 percent employment with average wages of $100,000.
Now that it appears California housing is beginning to cool, surely people are wondering how recent homebuyers will be able to service the debt they have recently acquired. Perhaps they have overextended themselves a bit to get into an average home priced at just over a half million dollars, hoping to quickly acquire an equity "cushion" as their home rises in value.
And the gargantuan amount of home equity that has been extracted in recent years - this debt must be serviced with rising short term rates, unless the homeowner has refinanced this new debt away. But, recent refinancings have not provided the same bang-for-the-buck as in years past because interest rates are not falling like they used to. No longer can a higher debt load be serviced with the same or, better yet, a lower monthly payment through the magic of the re-fi.
How will California homeowners be able to service all this debt in the years ahead?
It's All About the Jobs
It all comes down to jobs. If people don't have jobs, they don't have income and they can't service their existing debt, let alone acquire new debt. Of all the economic indicators, only one really matters - jobs. Without jobs, inflation doesn't matter, nor does GDP - without income the citizenry will cut back so dramatically that prices will naturally plummet, and then no one will care where the GDP number lands.
Headline statistics for employment, both nationally and in California, have been encouraging for the last couple years. We continue to hear about our "strong economy" and about 5% unemployment, which, essentially, is full employment. But, for some time now, after first hearing the statistic that 40% of all new jobs created nationally since 2001 have been real estate related, we have been doing a bit of digging ourselves into both the national statistics and the jobs data here in California (see the links at the end of this post).
We have found that while the quantity of the jobs may pass muster, the quality of the jobs is lacking. And, more importantly, the trend in job quality does not bode well for the future. We saw last week how job creation in California during the 1991-1995 recovery looked much healthier than the recent 2001-2005 recovery.
Last time, here in California, we were trying to cope with a defense industry decline and a plummeting real estate market - fortunately, a technology boom was right around the corner, which resulted in healthy job creation for years to come. More recently, we were trying to cope with a technology boom gone bust - fortunately, another real estate boom was right around the corner, which resulted in, not stellar, but, satisfactory job creation for the last two years.
But with housing in California showing all the signs of having reached it's maximum limits, where will the new jobs come from next year? Or in 2007,or in 2008? Where will the new income be earned to service the huge and growing debt associated with current homes and to support ever-higher home prices, to which many Californians have become accustomed?
We don't know. But, we are not encouraged by this chart.
Click to enlarge
Once again we look at some of the major categories in California employment, this time showing, for each category, the year-over-year change for the last fifteen years. The five categories in this chart represent about 6 million jobs, roughly half of all private sector jobs. Omitted from this chart, because, for one reason or another, they are not germane to this discussion, are the other private sector categories of Natural Resources/Mining, Manufacturing, Trade/Transportation/Utilities, Education/Health Services, and Other Services.
Government jobs add over 2 million more jobs, while farm employment accounts for another half million for a grand total of roughly 15 million jobs reported via the payroll survey. There are apparently another 2 million Californians who, according to the phone survey, are also employed (mostly self-employed), but who do not show up on the payroll survey (we often wonder about that phone survey).
A Closer Look
So, the first thing to notice here are the orange bars representing Professional & Business Services employment. That was some performance back in the late nineties! These are the jobs that were supposed to replace all the lost manufacturing jobs, which, thankfully are not shown above. These are the high quality, high paying service jobs that fifteen years ago so many Americans yearned for as manufacturing jobs accelerated their migration across the Pacific. It looks like we were doing quite well at creating these sorts of jobs in California during the 1990s with the technology boom - not so much anymore.
Information employment seems to track the Professional & Business Services employment fairly well. Both of these categories were just getting warmed up in the early 1990s, and then took off in the latter half of the decade. As we saw in last week's data, the 1993-1994 period looks similar to the 2004-2005 period for these two categories, but there is little reason to think that the latter part of this decade will result in anywhere near the new jobs created in these categories in the late 1990s.
Back in 1995 the internet was about to take off - today, it is hard to think of anything that is taking off, aside from energy prices and perhaps gold.
Financial Activity and Construction seem to track each other reasonably well also. Lagging in the early nineties after the S&L bust and a declining real estate market that bottomed out in 1995-1996, there was steady job creation in Construction from 1997 to the present except for 2002, which was bad for just about every category. The construction jobs created lately actually don't look like much to get excited about compared to prior Construction employment and other categories on this chart. The thing about recent job creation in Construction that should be very disconcerting is that it now leads all other categories.
Instead of just being a by-product of an economy creating well-paying service jobs, it is now the leading category in job creation.
This is part of what is being referred to in recent media reports about the over-reliance on real estate for job creation. The other real estate related jobs are spread out over multiple categories and require a little more digging to expose.
It's kind of funny to look at the Financial Activities category over fifteen years - all throughout the late nineties boom, comparatively few jobs were created, but as soon as things hit the skids in 2001, and the Fed Funds rate went from over 6 percent to 1 percent, all of a sudden there was a tremendous demand for those able to process loan and re-financing documentation. It was the leading category in job creation in 2003, and during the 2001 to 2003 period, it provided more new jobs than any other category in this data set. The last couple years seems to be more of a "maintenance" level of hiring, since all the heavy lifting had previously been done, and all the borrowed money was out in the economy providing the convincing illusion of a prosperous economy.
That flurry of Financial Activity hiring set the stage for people to start spending all this borrowed money, as can be clearly seen in the 2004 and 2005 data where Leisure & Hospitality (primarily restaurant help) and Construction led the way in job creation. It is a bit odd to see so much restaurant help being hired in relation to Professional & Business Services hiring - with the exception of one year in the 1990s, Professional & Business Services job creation far outpaced Leisure & Hospitality hiring. In this decade the relationship is reversed.
So, to get back to the original questions posed above, where are the new jobs in California going to come from to service current and future debt amassed by present and future homeowners? If housing cools anything like it did in the early 1990s, the dark blue Construction bars above may begin to descend below the zero line as they did in 1991-1993. What happens then?
What's around the corner to fill this gap, should new construction employment wane?
Will restaurant help still be in such demand when people begin to feel less wealthy?
We would like to think that there is something around the corner that will drive job growth in California for the rest of the decade, but we do not see it. And, we have not heard of anyone who has seen it.
Until we do see it, we'll have to be content to dream.
Previous posts on employment:
One Last Look at the Jobs Data
Trade and Transportation Jobs
The Quality of the Jobs
A Chart for the Cassandras
More on San Diego Job Creation
There's a Housing Jobs Bubble in San Diego
Is There a Housing Jobs Bubble?