San Francisco MSA Economy Withstands Market Volatility

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

The San Francisco MSA labor market surprised to the upside in 2016Q1. Area nonfarm jobs were up 3.2 percent from 2015Q4. The rebound occurred even in the face of increased financial market volatility in the technology sector as the Mercury News Silicon Valley 150 index year-over-year growth declined for the first four months of 2016. Strong demand for construction workers helped to boost area job growth in Q1. The continued gains in the area’s labor market helped pull the San Francisco MSA unemployment rate down to 3.7 percent as of March. We expect that tighter labor markets will put upward pressure on area wages as businesses provide competitive compensation packages for labor talent this year.

San Francisco MSA housing market data were mixed in 2016Q1. Single-family home sales dropped in January and February. The decline in home purchase activity may have resulted from the increased uncertainty surrounding the macroeconomic environment and slowdown in overall financial markets at the beginning of the year. However, housing starts climbed to 15,200 in Q1 of 2016. This is the strongest Q1 housing starts rate since 2000. In 2000, housing starts were driven by single-family structures. Yet at the beginning of 2016, multifamily made up about two-thirds of total housing starts. The shift to multifamily structures may show increased demand to reside in core urban areas and the fact that area single-family structures may be financially out of reach for portions of the population.

To address the affordable housing issue, the San Francisco Board of Supervisors is looking to expand its authority to alter affordable housing requirements. Proposition C would more than double the affordable housing requirements tied to housing projects of 25 or more units. There are concerns over the efficacy of this initiative as it will have to balance reducing project profit margins and still incentivize development activity.

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Click here for the complete San Francisco MSA Economic Update: San Francisco 2016Q2.

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