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The San Francisco Bay Area Economy, In-Sync with the U.S. Economy: 
Hit by the global economic slowdown, the Bay Area economy has stabilized.
by Anne Ramstetter Wenzel, M.A.

The San Francisco Bay Area economy entered into a deep recession along with the global economy beginning in November 2008.  By October 2008, unemployment was rising along with the slowing U.S. economy, but most Bay Area counties, with the exception of Solano County, had unemployment rates well below the California average of 7.9% (see bar graph, below).  By October 2009, however, unemployment rates averaged 12% for Santa Clara, Solano, Alameda and Contra Costa counties, on par with the California unemployment rate.

SOURCE:  California Employment Development Department.

Employment has fallen throughout the 9-county San Francisco Bay Area region, and in all broad industry categories except health care.  Health care industry employment growth was strongest at hospitals, and the health care industry will continue to grow and benefit from the year-end passage of the national health care reform bill.

Construction industry employment has been declining most significantly in percentage terms, falling 15% in the San Francisco Bay Area in 2009 compared to 2008 levels.  New home construction declines substantially worsened in 2008 and 2009.  New permits issued for single family homes fell from 13,000 units in January through October 2003 (10-month total) to just 3,100 units in January through October 2009 (see table, page 1).  Homebuilding will remain at low levels through 2010.

SOURCE:  Residential construction branch, U.S. Census Bureau.

The Bay Area home resale market is recovering from its historically low levels.  Although October 2009 sales volumes were up 4% when compared to October 2008 levels, the October 2009 sales level was still 40% below the peak sales level reached in October 2003 (see http://www.dqnews.com/).  Year to date, home sales volume is up 16% compared to January through October 2008. 

According to DQNews.com, foreclosure resales accounted for 32 percent of all existing homes sold in the San Francisco Bay Area in October 2009, down from a peak of 52 percent of home resales in February this year (between January 2000 and December 2007, foreclosure sales accounted for just 1% of home resales in the Bay Area each month). 

Office rents are falling while vacancy rates are rising in the San Francisco Bay Area.  The average Bay Area  office vacancy rate fell steadily from peak of 20% in 3rd quarter 2003, according to NAI BT Commercial, to a low of 11% in the 3rd quarter 2007.  The office vacancy rates has since risen to a 17% for the 3rd quarter of 2009 (see http://www.naibtcommercial.com/btresearch.asp).  As office space availability has increased, average Bay Area rents have fallen from $3.11 per square foot (monthly) in 2008 to $2.64 per square foot in the 3rd quarter 2009, a 15% drop.  The monthly absorption rate of vacant space remains low, and so rents will continue to fall, although at a slower rate, into 2010.

San Francisco Bay Area business confidence remains low but is improving substantially, according to the Bay Area Council’s Business Confidence Survey released December 3, 2009 (based on a survey conducted between November 2-19, 2009).  Almost half (47%) of the CEO’s and executives surveyed expect the Bay Area economy to improve over the next year, while only 15% expect it to worsen (37% expect no change).  The hiring outlook continues to be weak:  only 18% surveyed expect to increase their workforce over the next 6 months, while 23% expect to reduce their workforce (56% expect no change).  In Contra Costa and Solano counties, 35% of the CEOs and business executives surveyed expect reductions in their workforce, and a very low 8% expect increases (see http://www.bayareacouncil.org/news_releases.php).  The retail industry outlook is bleak, with 40% of executives in the industry seeing workforce reductions and none anticipating hiring within the next 6 months.

The Federal Reserve’s Beige Book/Summary of Commentary on Current Business Conditions for the Twelfth District--San Francisco (released December 2, 2009) found that fall retail sales remained at low levels but were slightly improved from the October summary.  Traditional department stores, discount chains and sellers of furniture and household appliances reported improvements in demand.  Retailers’ expectations for holiday sales remain downbeat, however, with no change expected from 2008 holiday sales levels.  Inventories are in line with expectations, and so retail prices should remain firm throughout the holiday shopping season.

The economic recovery will show up first as increased profits for many companies, especially in the banking sector.  Once the health care legislation and climate policy is determined, more certainty will enter into small business and corporate planning and will likely translate into business expansion and employment gains.  The construction industry and employment levels will stabilize as we enter 2010.  Broad based business growth will strengthen beginning in the 3rd quarter of next year.  By year-end 2010, moderate employment gains and real earnings growth will resume for the San Francisco Bay Area economy.

§§§

The article above is an excerpt from The San Francisco Bay Area Economic Outlook.  The full, 6 page December 2009 report can be downloaded here.

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