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SAN JOSE STATE UNIVERSITYRegional Intelligence Report

March 2020

Prepared by

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Regional Intelligence Report | United States Outlook3

THE TIME OF THE CORONAVIRUS: A LITTLE, NOT A LOT, OF PANIC GOES A LONG WAY

The current state of affairs in the global and U.S economy is unlike anything experienced in modern times, and like

many forecasting organizations, Beacon Economics is working to fully grasp the scope of what is happening and

exactly how it might shift the economic outlook. There are many potential outcomes to this crisis. And while it is easy to

underestimate the resilience of the U.S. economy, that does not diminish the risks posed by the worldwide Coronavirus

(Covid-19) pandemic – it is the greatest threat to the nation’s economic expansion in over a decade.

This is significant for Beacon Economics as we were largely dismissive of the many bearish claims and predictions of

recession that have dominated the headlines over the past couple of years. The health crisis created by the Coronavirus

is extremely serious and the economic risks are still not fully understood. The next two weeks will be critical in gaining

an accurate sense of the true scope of the problem.

United States Outlook

Regional Intelligence Report | United States Outlook 4

Despite it all, it is by no means fait accompli that the U.S. economy is about to fall into a recession of any scale, much

less a major one – or even a depression as suggested by U.S. Treasury Secretary Steve Mnuchin. Too many pundits,

forecasters, and politicians are leaping to the conclusion that a recession is inevitable (or even already here) and the

financial markets are in almost complete freefall while panic grips short term debt markets. Of course, hyperbolic

overreactions have become routine on Wall Street—remember that 14 months ago the stock market was down 20%

due to fears centered on inflation, rising interest rates, the trade war, and a real estate bust. But this time, Wall Street’s

overreaction is on the verge of creating an unnecessary financial crisis of its own, distinct from the real effects of the

pandemic.

At the center of the uncertainty are the actions being taken by businesses, consumers, and regulators to contain the

disease. There have been wholesale cancelations of conferences, travel, sporting events, live entertainment, and

really any forum in which large groups of people gather. Public health mandates, both voluntary and otherwise, have

led many businesses to implement short run work-from-home policies for their employees and caused restaurants

and bars across the nation to close temporarily. The San Francisco Bay Area upped the ante by instituting mandatory

shelter-in-place rules that restrict activity to essential needs such as grocery shopping and medical appointments. Just

before this outlook was published, both the State of California and New York followed suit. Such draconian actions may

well be emulated in other parts of the nation.



This sudden halt in economic activity will create turmoil in the economy in the coming weeks. The March employment

numbers will surely be grim. Initial unemployment claims are already crashing some state’s computer systems due

to demand and will likely jump more quickly than ever before. The pullback in retail sales (outside of essentials) will

send ripples through the U.S. and global manufacturing base. The will also be a slowing in home sales and business

formation. Many businesses will continue to operate but will experience a loss in productivity driven by absent

employees and the basic complications of unexpected work-from-home policies. Local governments will experience

short-term disruptions in their revenue flows. This is one big pothole the U.S. economy is hitting.

But as dramatic as these changes are, such a shock is not necessarily recession causing. A recession occurs when a

negative shock to one part of the economic system is large enough and sustained enough to create cascading effects

on other parts of the economy. While the sharp jump in unemployment will be startling, it’s important to remember that,

at least initially, these are furloughed jobs, not lost jobs.

As long as current public health measures are sufficient to prevent the Coronavirus from becoming truly widespread

across the nation, it is business delayed rather than business cancelled. The vast majority of restaurants will reopen.

Cars not purchased this month, will likely be bought in the months ahead. Canceled trips to Disneyland or other travel

will happen this summer if not now.

Truly ‘lost’ jobs are positions that will not return for a long period… perhaps years, if ever. This characterizes the

construction, mortgage lending, retail furniture and appliance, and real estate jobs that disappeared after the crash of

the sub-prime fueled real estate bubble more than a decade ago. Today, we are talking about jobs that may only be lost

for a period as short as 6 to 10 weeks—of course this is highly dependent on containment of the virus. And while short-

term job losses will be a jolt to the system, the impact will be partly offset by employment increases in sectors such

as health care and transportation, as well as unemployment insurance and various assistance programs the Federal

government is rushing to put into place.

Beacon Economics expects there to be a sharp drop in employment and a commensurate rise in unemployment in the

near term. It is highly likely that the U.S. economy will experience negative growth in the second quarter—although how

negative is unknown. But if the shock is short lived enough, the economy will quickly catch up, possibly with a positive

third quarter that makes up for much of the loss in the second. Under this scenario job growth would get back to trend

by the end of the year. Critically, how this plays out will be revealed over the next few weeks as the U.S. health and

medical system gets a more accurate sense of the true breadth of the nation’s outbreak.


The more quickly the Coronavirus’s transmission rates can be slowed, which will prevent hospitals and the health care

system from being overwhelmed, the less long run harm to the economy. This does not imply that the disease will be

eradicated in a few weeks—but rather

that the current pause in economic activity will give regulators a chance to slow the spread and contain the virus within

a few hot spots. This will still lead to disruptive local situations, but the nation as a whole will largely be able to get back

to business albeit with a different modus operandum. The good news is that at the moment outside of New York and

Seattle, as of this writing, hospitals are not yet overrun with severe cases of the illness. But, again, what happens over

the next few days and weeks will be - we have to wait and see what transpires over the next few days.

Beacon Economics also acknowledges the possibility that the cat is already out of the bag, and there will be an explosive

increase in confirmed cases in the coming days. If the virus does overrun a substantial portion of the population and

the United States has to deal with the kind of tragedy occurring in Italy or Wuhan, then expect the economic disruptions

to go on longer – the fallout of delayed action by U.S. authorities. Clearly there is a breaking point, where the economy

can’t simply rebound quickly and will fall into a recession.

But how bad will it get? A recession would be likely, but it isn’t clear how deep or damaging it would be. Mitigation

and adaption will be key. The ability of people and businesses to mitigate and adapt under challenging circumstances

is often underestimated. History is replete with examples of populations and nations overcoming complex obstacles

created by disastrous circumstances ranging from natural disasters to war.


While we continue to see dire predictions of millions of American becoming infected with the Coronavirus, some of the

earliest hit countries, including China, Korea, and Japan, appear to have gained control over the spread of the disease

within two months. Data coming from Korea’s extensive testing also indicates that for a large portion of the population

the virus has had a fairly modest health impact. Even under the worst of circumstances, businesses will eventually have

to start operating and people will begin to travel again.

Sadly, the United States is running in the dark because of our dangerous lack of capacity in Coronavirus testing.

While we should be prepared for any scenario, best to worst, simply assuming the worst and acting on that right now

may cause unnecessary harm. For example, policymakers in some regions, including here in California, are already

suggesting that schools may end up being closed for the rest of the school year. At the moment there are less than

1,000 cases in California, out of 40 million people. This doesn’t imply that schools should necessarily reopen, but that

decision will hopefully be made only after several weeks of stay-at-home efforts and increased testing provide better

direction.

And consider the increasingly hysterical reactions of the financial markets. The utter panic gripping short run credit

markets could create an economic crisis all by itself, leading the Federal Reserve to intervene heavily in the markets

to keep things somewhat stable. Some of the most hyperbolic rhetoric and cries for relief are coming from hedge fund

managers, which is ironic given how they seem to be the ones who make out the best in these situations.

And then there is the Trump administration itself which seems intent on offsetting their lack of action at the beginning

of the crisis with an extreme fiscal stimulus plan that could cost the Federal government upwards of $1 trillion in a

year when the nation is already expected to borrow $1 trillion due to the 2017 tax cut. There are very real long run

implications to further exploding the national deficit if the situation actually doesn’t warrant such dramatic intervention.

Throughout all this, in our favor, is the strength of the U.S. economy. While business investment has been a drag over

the last 18 months, the fundamentals for growth are very good. Unlike the typical rhetoric heard in this miserabilist age,

households are not on the verge of financial apocalypse. Financial obligation ratios and debt-to-income ratios are at

their lowest points in years. Savings rates are at a 30-year high even as housing affordability, as measured by housing

cost-to-income ratios is at a ten-year low. Consumer debt delinquencies outside of student loan debt are all lower

today than they were at any point before the Great Recession.


U.S. unemployment has been at record low levels even though over the last two years the number of job openings in

the nation has been greater than the number of people looking for work. It is true that corporations have been building

up debt to buy back shares, something that the Federal policymakers should worry about and address. But overall,

business debt-to-GDP is actually lower now than five years ago. Banks look rock solid in their portfolios as well, largely

due to the (excessive) restrictions placed on them by Dodd-Frank. This is an economy that can take a hit.

Overall, Beacon Economics is urging caution but not panic. In the days ahead, we will do our best to stay in front of

this rapidly changing situation and deliver to our clients the best economic outlooks possible. Right now, we lack the

data to fully understand how effects from the pandemic might ripple through the economy. This is true of all economic

prognosticators—and it’s precarious to release dire outlooks without appropriate caveats. Yes, things could get much

worse and have a truly profound impact on the economy. Then again there is another case to be made. that this crisis

could be nothing more than a period that lies at the heart of your “what I did during the great virus lockdown” story in

the years ahead.

Regional Intelligence Report | California9

California Outlook

The final quarter of 2019 brought to a close another strong year for the California economy. During the year, 310,300

jobs were added to total nonfarm payrolls in the state. This represented a growth rate of 1.8% for the year, and compared

favorably to 2018, when 260,400 nonfarm jobs were added by the state’s nonfarm employers, a growth rate of 1.5%.

The state’s strong fourth quarter paints a picture that is a far cry from the beginning of the year, when the stock market

had just seen a major correction, there was anxiety about trade uncertainty, and forecasts about a national and global

slowdown were coming from all quarters. The fears surrounding trade, for now, seem overblown, and there is no

evidence that we are on the cusp of a turndown in economic activity. While there are concerns surrounding the spread

of the Coronavirus, the extent of any impact on the California economy, while uncertain, would likely be temporary and

limited.

Yet as California’s economy continues to soar, questions remain about the growth of the state’s labor force and the out-

migration of low-income workers. And with another defeat for SB 50 – the state’s ambitious effort to increase housing

construction though density increases in cities – the state’s housing shortage remains cause for worry.

Regional Intelligence Report | California 10

ANOTHER STRONG EMPLOYMENT YEAR CAPS A STRONG DECADE

The fourth quarter of 2019 marked the end of a decade of strong expansion for the California economy. Over the course

of the past decade, nearly 3.5 million nonfarm jobs were added to the state, at a growth rate of 23%. In the preceding

decade, fewer than one quarter of a million jobs were added to California’s economy, a growth rate of 1.5%. These

numbers are obviously skewed by the business cycle: the first decade of this century ended during the depths of the

‘Great Recession’, while the last decade ended in the midst of the nation’s longest economic expansion on record. That

said, California’s rate of job growth over the past decade was not only impressive compared to the previous decade,

but also when compared to the entire nation, where the rate of job growth was 18%.

Within California, job growth has varied by region. Over the past year, Los Angeles County added 66,500 jobs, more

than any other county in the state. This is a function of LA County’s size – it’s the largest in the state and nation –

where a small percentage increase in jobs can lead to a large number of total jobs added. In terms of growth rate, the

number of jobs in the County grew at a 1.5% rate, slower than the state average. The fastest growth was in the Yuba

City MSA, were jobs grew at a 4% rate. Given its relatively small size, this rate of growth equals just 1,700 jobs, which

while important to the local economy, accounted for less than 1% of the state’s job growth.

The most impressive combination of absolute job growth and percentage increases occurred in San Diego County at

34,500 jobs and 2.3% growth, the San Jose MSA at 33,200 jobs and 2.9% growth, the Inland Empire at 30, 800 jobs

and 2.0% growth, and the San Francisco MSA at 29,800 jobs and 2.6% growth.



MSA Dec-19 YTY Change YTY % Change

CALIFORNIA EMPLOYMENT BY REGION

California

Los Angeles-Long Beach-Glendale Metro Div

San Diego-Carlsbad MSA

San Jose-Sunnyvale-Santa Clara MSA

Riverside-San Bernardino-Ontario MSA

San Francisco-Redwood City-South San Francisco Metro Div

Anaheim-Santa Ana-Irvine Metro Div

Oakland-Hayward-Berkeley Metro Div

Sacramento--Roseville--Arden-Arcade MSA

Fresno MSA

Salinas MSA

Santa Rosa MSA

Bakersfield MSA

San Rafael MD

Modesto MSA

Merced MSA

Santa Maria-Santa Barbara MSA

San Luis Obispo-Paso Robles-Arroyo Grande MSA

Visalia-Porterville MSA

Yuba City MSA

Oxnard-Thousand Oaks-Ventura MSA

Santa Cruz-Watsonville MSA

Chico MSA

Redding MSA

Hanford-Corcoran MSA

Napa MSA

Stockton-Lodi MSA

Madera MSA

El Centro MSA

Vallejo-Fairfield MSA

17,612,500

4,599,000

1,529,700

1,167,300

1,544,900

1,193,700

1,676,600

1,206,200

1,025,100

367,000

150,200

213,400

273,700

120,400

182,000

70,700

189,100

120,900

129,900

46,600

312,300

104,700

85,000

68,200

41,900

75,700

244,100

39,900

52,800

141,000

310,300

66,500

34,500

33,200

30,800

29,800

23,000

19,800

11,400

7,100

4,500

4,200

4,000

3,700

2,700

2,500

2,300

1,900

1,800

1,800

1,700

1,400

1,100

1,000

900

900

900

800

600

-100

1.8

1.5

2.3

2.9

2.0

2.6

1.4

1.7

1.1

2.0

3.1

2.0

1.5

3.2

1.5

3.7

1.2

1.6

1.4

4.0

0.5

1.4

1.3

1.5

2.2

1.2

0.4

2.0

1.1

-0.1

Source: California Employment Development Department; Analysis by Beacon Economics


EMPLOYMENT GROWTH BY INDUSTRY

In terms of relative growth by job sector, Educational Services, Construction, and Health Care and Social Assistance

saw the biggest employment gains while the highest number of jobs was added in Health Care and Social Assistance

and Government. Long-term trends, particularly an aging population, will continue to drive job growth in Health Care

and Social Assistance. Modest job losses occurred in Retail Trade and Wholesale Trade. In relation to Retail Trade, the

continued trend towards ecommerce will suppress employment prospects for physical retail businesses.

Industry Dec-19 YTY Change YTY % Change

CALIFORNIA JOB GROWTH BY SECTOR

Total Nonfarm

Educational Services

Construction

Health Care & Social Assistance

Administrative & Support & Waste Services

Professional, Scientific & Technical Services

Real Estate & Rental & Leasing

Information

Management of Companies & Enterprises

Government

Transportation, Warehousing & Utilities

Leisure & Hospitality

Finance & Insurance

Manufacturing

Other Services

Mining and Logging

Retail Trade

Wholesale Trade

17,612,500

399,200

902,400

2,456,100

1,178,600

1,330,700

299,700

562,400

258,800

2,641,700

686,100

2,032,700

547,300

1,344,200

576,500

23,400

1,677,100

695,600

310,300

17,100

31,300

81,000

36,500

30,700

6,400

11,600

4,300

40,300

10,300

28,000

6,600

11,400

2,900

100

-5,400

-2,800

1.8

4.5

3.6

3.4

3.2

2.4

2.2

2.1

1.7

1.5

1.5

1.4

1.2

0.9

0.5

0.4

-0.3

-0.4



Beacon Economics is forecasting that employment in California will grow by 1.83% in 2020 or 322,561 jobs. Growth will

continue in 2021 with employment forecast to expand by 1.43%, or 252,209 jobs.

NONFARM EMPLOYMENT, HISTORICAL AND FORECAST


6

2

-2

-6

4

0

-4

-8

Actual Forecast

Qua

rter

Q4-

01

Q4-

91

Q4-

03

Q4-

93

Q4-

05

Q4-

95

Q4-

07

Q4-

97

Q4-

09

Q4-

90

Q4-

02

Q4-

92

Q4-

04

Q4-

94

Q4-

06

Q4-

96

Q4-

08

Q4-

98

Q4-

10

Q4-

99

Q4-

11

Q4-

15

Q4-

00

Q4-

12

Q4-

16

Q4-

19

Q4-

13

Q4-

17

Q4-

20

Q4-

22

Q4-

14

Q4-

18

Q4-

21

Q4-

23Q

4-24



The number of housing permits issued in the state peaked in the first quarter of 2018 and has trended lower since then.

Even before this downturn, the state was in the midst of a housing shortage. As the shortage persists, it will create two

primary effects. First, it will put upward pressure on housing prices, exacerbating affordability problems, and second

(relatedly), it will shape the nature of the state’s labor force.

LABOR FORCE AND HOUSING SHORTAGES

After five months of no growth or negative growth, California’s labor force finally expanded in December 2019, although

growth was down for the quarter overall, and December’s growth was below the trend since the ‘Great Regression’.

This naturally raises questions about the state’s housing market, and more specifically, the extent to which local

governments have created a conducive environment for creating new, badly needed housing.

Labo

r For

ce (S

A) T

hous

ands

Year

-ove

r-Yea

r Gro

wth

Rat

e (S

A)

20,000 2.0

19,0001.0

18,000

0.0

19,5001.5

18,500

0.5

-0.5

17,500 -1.0

Jan-

10

Jan-

12

Jan-

14

Jan-

16

Jan-

18

Jan-

11

Jan-

13

Jan-

15

Jan-

17

Jan-

19

Sep-

10

Sep-

12

Sep-

14

Sep-

16

Sep-

18

Sep-

11

Sep-

13

Sep-

15

Sep-

17

Sep-

19

May

-10

May

-12

May

-14

May

-16

May

-18

May

-11

May

-13

May

-15

May

-17

May

-19

Labor Force Growth


LABOR FORCE


Source: The American Community Survey (ACS) Public Use Microdata Sample; Analysis by Beacon Economics

Domestic net migration patterns reveal a worrying trend: California has lost more population to other states than

it has gained from them. These losses have been offset by international migration to the state, but the nature of

domestic net migration raises red flags. California has been losing low-income workers to other states, while also

losing workers with lower levels of education as housing shortages are rendering California relatively inaccessible

for these residents.

Num

ber o

f Per

mits

35,000

25,000

15,000

5,000

30,000

20,000

10,000

0

Q1-1

0

Q1-1

1

Q1-1

4

Q1-1

7

Q1-1

2

Q1-1

5

Q1-1

8

Q1-1

3

Q1-1

6

Q1-1

9

Q3-

10

Q3-

11

Q3-

14

Q3-

17

Q3-

12

Q3-

15

Q3-

18

Q3-

13

Q3-

16

Q3-

19

Single-Family Multi-Family


HOUSING PERMITS

Income EducationWages Net Migration

Under $30,000

$30,000 to $49,999

$50,000 to $99,999

$100,000 to $149,999

Over $150,000

Total

-219,812

-65,502

28,075

18,447

13,774

-225,018

Less Than High School

High School Graduate

Some College

Bachelors Degree

Grad./Prof. Degree

Total

-67,283

-153,804

-202,881

-18,228

62,646

-379,550

HOUSING PERMITS


TRENDS IN INTERNATIONAL TRADE

The recent tariff war truce between the United States and China will be welcome news for California’s trade businesses,

as 2019 marked downward years for both imports to and exports from the state, compared to 2018. Removing the

uncertainty surrounding U.S. trade policies, if only in the short-term, should help to improve the picture in 2020. How

this plays out, however, is yet to be seen.

Overall, 2019 marked a strong year for the state’s economy, and this trend is expected to continue in 2020.

250

150

50

200

100

0

2003

2006

2009

2004

2007

2010

2005

2008

2011

2013

2015

2017

2012

2014

2016

2018

2018

YTD

2019

YTD

TOTAL EXPORTS, CALIFORNIA ($BILLIONS)

TOTAL IMPORTS, CALIFORNIA ($BILLIONS)

Source: Wiser Trade; Analysis by Beacon Economics

Source: Wiser Trade; Analysis by Beacon Economics

600

400

200

100

500

300

0

2003

2006

2009

2004

2007

2010

2005

2008

2011

2013

2015

2017

2012

2014

2016

2018

2018

YTD

2019

YTD

Regional Intelligence Report | San Jose State University17

THE SOUTH BAY

The previous sections discussed the potential impact of the Coronavirus (COVID-19) on the U.S. and California

economies. The same uncertainties surrounding the national and state pictures apply to the South Bay as well.

The following analysis demonstrates that the South Bay is entering these troubled waters from a position of

strength.

The South Bay kicked off the year with total nonfarm employment growing 1.4% from January 2019, to total

1.2 million workers. Although year-over-year growth was below January 2019’s 2.4%, it wasn’t because of a

lack of job openings, but rather a tightening labor force. The South Bay’s year-over-year nonfarm growth was

slightly below the 1.5% statewide increase and far ahead of the East Bay’s employment growth of 0.2%. But San

Francisco County had stronger growth from January 2019 to January 2020, at 3.0%. The South Bay’s labor force

increased 0.7% from January 2019 to January 2020, slower than the previous year’s growth of 1.8%. Most of the

workers were absorbed into the job market, however, as the unemployment rate fell 0.3 percentage point to

2.5%, far lower than California’s unemployment rate of 3.9%.

OVERVIEW

EMPLOYMENT

Empl

oym

ent (

000s

,SA)

Year

-Ove

r-Yea

r (%

) Gro

wth

1200 6

10002

800

700

-2

-4

-6

-8

11004

900

0

600 -10

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

06

Jan-

08

Jan-

10

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

Jul-0

5

Jul-0

7

Jul-0

9

Jul-1

1

Jul-0

6

Jul-0

8

Jul-1

0

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Jul-1

7

Jul-1

8

Jul-1

9

Total Nonfarm Employment Year-Over-Year % Growth


TOTAL NONFARM EMPLOYMENT AND GROWTH

Regional Intelligence Report | San Jose State University 18

Information Services was the fastest-growing sector from January 2019 to January 2020 at 8.4%, following the

previous year’s 9.0% increase. Transport and Warehousing grew 4.9%. Professional, Scientific, and Technical

Services grew 2.2%, slowing from the previous year’s 4.9% growth. Nonetheless, Professional, Scientific, and

Technical Services added a little over 3,500 workers over 2019, second only to Information Services, which

increased by roughly 8,100 employees.

Although overall employment was up throughout the South Bay, certain sectors lost workers in 2019. Leisure

and Hospitality, which has over 106,000 employees, declined 0.5% from January 2019 to January 2020, following

growth of 2.6% in the previous year. Management had the largest percentage decrease of any sector at 6.1%,

similar to 2018, when it fell 9.3% year over year. In absolute numbers, Retail Trade sustained the largest job

losses from January 2019 to January 2020: 1,300 workers, or 1.6%.

Year

-ove

r-Yea

r % G

row

th

15

5

-5

-10

10

0

-15

Jan-

05

Jan-

10

Jan-

15

Sep-

06

Sep-

11

Sep-

16

May

-08

May

-13

May

-18

Nov

-05

Nov

-10

Nov

-15

Jul-0

7

Jul-1

2

Jul-1

7

Mar

-09

Mar

-14

Mar

-19

Jul-0

5

Jul-1

0

Jul-1

5

Feb-

07

Feb-

12

Feb-

17

Oct

-08

Oct

-13

Oct

-18

Apr-0

6

Apr-1

1

Apr-1

6

Dec

-07

Dec

-12

Dec

-17

Aug-

09

Aug-

14

Aug-

19Ja

n-20

Tech Total

Source: California Employment Development Department; analysis by Beacon Economics*Tech is defined as the Professional, Scientific, and Technical Services Industry (NAICS 54)

TECH* VS. TOTAL NONFARM GROWTH


IndustryJanuary 2020

Emploment (Thousands) 1-Year % Growth1-Year Absolute

Change (Thousands)

JANUARY 2020 EMPLOYMENT BY INDUSTRY

San Jose

Total Nonfarm

Information

Transport/Warehouse

Other Services

Financial Activities

Prof Sci and Tech

Admin Support

Government

Construction

Manufacturing

Education/Health

Leisure and Hospitality

Utilities

Retail Trade

Wholesale Trade

Management

1,156.1

104.6

15.4

29.8

38.5

166.6

63.7

96.8

51.9

174.8

176.8

106.3

1.6

83.2

31.3

14.7

1.4

8.4

4.9

3.8

3.6

2.2

2.0

1.5

1.4

0.9

0.2

-0.5

-0.5

-1.6

-2.3

-6.1

2.3

9.0

8.7

0.3

1.6

4.9

0.2

-0.5

1.6

2.2

3.4

2.6

-11.2

-2.0

-2.8

-9.3



Average annual wages across the South Bay declined slightly from the third quarter of 2018 to the third quarter

of 2019, contracting 0.6% to $129,500. The main factor was a decline in Information Services, which fell 7.8%.

Because the industry picked up the largest number of workers, it is likely several of the added positions paid

less than average for the industry, causing the average wage to drop. The average annual wage for Information

Services is nonetheless the highest in the South Bay at $284,900. Wages in manufacturing, another high-paying

industry, also declined. The industry’s annual average wage fell 3.4%, to $187,800, from the third quarter of

2018 to the third quarter of 2019.

Wages rose in several industries in 2019. Leisure and Hospitality’s increased 11.1%, the largest percent increase

of any industry. Leisure and Hospitality’s annual wage reached $34,600, the lowest among all industries in the

South Bay and far below the average. Construction’s annual wage increased to $87,300 in the third quarter of

2019, a growth of 4.0%, the second highest in the two counties. Financial Activities followed suit, with a year-

over-year growth of 3.5%, which increased the annual average wage to $128,800, just shy of the South Bay

average.

WAGES

Industry 1-Year % GrowthQ3-2019 ($)

Q3-2019 ANNUAL AVERAGE WAGE BY INDUSTRY

South Bay

Total Private

Leisure/Hospitality

Construction

Financial Activities

Education/Health

Logistics

Natural Resources

Administrative Support

Other Services

Professional/Business

Wholesale Trade

Retail Trade

Manufacturing

Information Services

129,469

34,601

87,332

128,779

76,258

70,324

48,067

61,781

45,020

188,359

130,900

47,809

186,789

284,888

-0.6

11.1

4.0

3.5

2.9

2.5

2.2

1.9

1.9

0.0

-0.2

-1.6

-3.4

-7.8

Source: Quarterly Census of Employment and Wages; analysis by Beacon Economics


Consumer and business spending was aided by increased employment throughout the South Bay in 2019.

Taxable sales climbed to roughly $48.0 billion in 2019. Its 4.5% growth beat the East Bay’s increase of 1.7%. San

Francisco fell 10.1%. The South Bay’s growth outpaced California’s 4.1%.

The City of San Jose had the largest increase in terms of absolute taxable sales, with over $770 million added

from 2018 to 2019, to total $17.2 billion. The City of Cupertino also added a significant amount, over $235.1

million, with its taxable sales reaching $2.9 billion in 2019. The largest percentage growth of any city in the

South Bay was Hollister: 8.9% to reach $425.6 million. Some cities’ taxable sales fell. The largest drop was in

Sunnyvale, where taxable sales fell by $214.2 million, followed by the City of Santa Clara, with a decline of

$108.6 million.

Analyzing sales tax receipts allows us to examine areas of consumer and business spending that are changing in

the South Bay. Sales tax receipts increased 0.4% from the first three quarters of 2018 to the first three quarters

of 2019 (year to date), reaching $343.7 million. Restaurants and Hotels had the largest percentage growth,

3.4%, followed by Food and Drugs at 2.0%. This is unsurprising, because as more people were employed and

earnings increased across several industries, higher demand arose for leisure and food. The largest decline in

sales tax receipts was in General Consumer Goods, which fell 4.6%, followed by Business and Industry, which

dropped 3.2%.

LOCAL SPENDING

Category 1-Year % Growth2019* Sales Tax Receipts ($ Millions)

SOUTH BAY TAXABLE SALES BY CATEGORY

Restaurants and Hotels

Food and Drugs

Building and Construction

Fuel and Service Stations

Autos and Transportation

Business and Industry

General Consumer Goods

42.6

13.3

26.0

19.9

48.0

78.0

53.2

3.4

2.0

0.3

-1.1

-1.7

-3.2

-4.6

Source: HdL Cos.; analysis by Beacon Economics


With Silicon Valley home to some of the world’s most prominent tech company headquarters, venture capital

plays a vital role in the South Bay economy. Over the past few years, the region has had massive increases in

capital raised and deals completed across various industries and verticals, and 2019 was no exception. From

2018 to 2019, total capital raised in the South Bay increased 18.1% to $11.9 billion—the largest amount ever

raised in the region. Furthermore, year-over-year growth was stronger than the 12.4% increase in 2018. The

total number of deals in 2019 was 771, slightly lower than the 797 in 2018, but the capital raised per deal was

much higher.

Automotive deals dominated in 2019. Nuro completed a deal for $940 million and Aurora Innovation did

one for $600 million. These two deals accounted for 12.9% of all venture capital raised in 2019. Business and

Productivity Software also was notable in 2019, with three deals worth $700 million total.

VENTURE CAPITALC

apita

l Rai

sed

($, B

illio

ns)

Dea

l Cou

nt

14 1200

10800

6

4

2

400

200

12 1000

8600

0 0

2001

2005

2009

2013

2003

2007

2011

2015

2017

2019

2002

2006

2010

2014

2004

2008

2012

2016

2018

Capital Raised Deal Count

Source: PitchBook; analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.

SOUTH BAY CAPITAL RAISED AND DEAL COUNT


As we approach the second quarter of 2020, significant deals have already been completed in the South Bay. In

early March, Waymo, also in the automotive industry, completed a deal for a whopping $2.25 billion. Netskope

had the second-largest deal so far: $340 million for network management software.

Company Primary Industry Code HQ LocationDate Size, ($ Millions)

2019’S TOP 15 DEALS

Nuro

Aurora Innovation

Carta

BridgeBio

Rubrik

Next Insurance

TripActions

ThoughtSpot

PsiQ

Fungible

CloudMinds

SambaNova Systems

Pensando Systems

Clumio

Druva

Feb-19

Feb-19

Apr-19

Jan-19

Jan-19

Oct-19

Jul-19

Aug-19

Sep-19

Jun-19

May-19

May-19

Oct-19

Nov-19

Jun-19

940.00

600.00

318.00

299.20

261.00

250.00

250.00

248.00

229.70

200.00

186.00

150.00

145.00

135.00

130.00

Automotive

Automotive

Financial Software

Pharmaceuticals

Network Management Software

Commercial/Professional Insurance

Business/Productivity Software


Computers, Parts and Peripherals


Electronic Equipment and Instruments

Application Specific Semiconductors


IT Consulting and Outsourcing


Mountain View, CA

Palo Alto, CA

Palo Alto, CA

Palo Alto, CA

Palo Alto, CA

Palo Alto, CA

Palo Alto, CA

Sunnyvale, CA

Palo Alto, CA

Santa Clara, CA

Santa Clara, CA

Palo Alto, CA

San Jose, CA

Santa Clara, CA

Sunnyvale, CA

Source: Pitchbook; analysis by Beacon Economics


Company Primary Industry Code HQ LocationDate Size, ($ Millions)

2020’S TOP 15 DEALS YEAR-TO-DATA (MARCH)

Waymo

Netskope

SambaNova Systems

SentinelOne

Outset Medical

NextNav

Plume

Mojo Vision

Arctic Wolf Networks

HeadSpin

Cepton Technologies

Securiti.ai

Bigfoot Biomedical

Rancher Labs

OpsRamp

Mar-20

Feb-20

Feb-20

Feb-20

Feb-20

Jan-20

Feb-20

Feb-20

Mar-20

Feb-20

Feb-20

Jan-20

Jan-20

Mar-20

Jan-20

2,250.00

340.00

250.00

200.00

125.00

120.00

85.00

82.00

60.00

60.00

50.00

50.00

45.93

40.00

37.50

Automotive




Therapeutic Devices

Other Communications and Networking

Wireless Communications Equipment



Software Development Applications



Decision/Risk Analysis

Software Development Applications


Mountain View, CA

Santa Clara, CA

Palo Alto, CA

Mountain View, CA

San Jose, CA

Sunnyvale, CA

Palo Alto, CA

Saratoga, CA

Sunnyvale, CA

Palo Alto, CA

San Jose, CA

San Jose, CA

Milpitas, CA

Cupertino, CA

San Jose, CA

Source: Pitchbook; analysis by Beacon Economics


A key factor influencing the housing market has been the changing mortgage rates in recent years. Fixed-

rate mortgage averages in the U.S. increased throughout 2018. Not surprisingly, sales of existing single-family

homes in the South Bay began falling. After reaching a local peak in November 2018, however, 30-year fixed

rate averages in the U.S. began declining. Although home sales were slow to react, the lower rates began

taking effect in the fourth quarter of 2019 in the South Bay and much of California. From the fourth quarter

of 2018 to the fourth quarter of 2019, single-family home resales in the South Bay increased 2.0% to roughly

2,700. However, the double-digit home sales growth in the fourth quarter of 2019 across Southern California

outpaced the South Bay, as well as San Francisco County (1.3%), Alameda County (0.8%), and Contra Costa

County (-3.5%).

RESIDENTIAL REAL ESTATE MARKETSM

edia

n Pr

ices

($)

Sale

s

1,400,000 7,000

1,000,000 5,000

600,000

400,000

200,000

3,000

1,000

0

2,000

1,200,000 6,000

800,000 4,000

0

Q2-

07

Q2-

12

Q2-

17

Q4-

04

Q4-

09

Q4-

14

Q4-

19

Q3-

08

Q3-

13

Q3-

18

Q1-0

6

Q1-1

1

Q1-1

6

SalesMedian Price

Source: CoreLogic; analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.

EXISTING SINGLE-FAMILY HOMES

South Bay


After year-over-year home price appreciation tracked into negative territory from the fourth quarter of 2018

through the third quarter of 2019, the median home price in the South Bay increased 1.2% year-over-year in

the fourth quarter of 2019. The turnaround was probably due to the rebound in home sales, as increased home

sales indicates more demand for single-family housing, driving up prices as potential buyers compete for a

limited supply.

Low inventories have also contributed to the substantial price growth of the past 10 years, as the tight supply of

single-family homes put upward pressure on prices. In October 2019, the supply of homes on the market in the

South Bay would have been exhausted in 2.0 months at the current pace of sales. At $1,207,000 in the fourth

quarter of 2019, roughly double the statewide average, the median price in the South Bay left homeownership

out of reach for many. In 2018 the median home price in the South Bay was 7.0 times the median household

income.

Much as in the state as a whole, single-family permitting in the South Bay has failed to reflect the needs of the

growing labor market. In 2019, the South Bay issued 130 more single-family permits than the previous year. But

this came after a 400-unit decline in 2018.

Perm

its Is

sued

9,000

4,000

7,000

2,000

5,000

0

8,000

3,000

6,000

1,000

Single-Family Multifamily

Source: CIRB; analysis by Beacon Economics

RESIDENTIAL CONSTRUCTION ACTIVITY

South Bay

2001

1995

2005

1999

2009

2013

2003

1997

2007

2011

2015

2017

2019


For those priced out of homeownership, the average rent in the South Bay increased 2.4% year over year in

the fourth quarter of 2019 to reach $2,750. Second only to San Francisco ($3,270), the South Bay is among the

most expensive rental markets in California. But rent growth has cooled from the 6.2% average annual growth

following the 2008-09 recession. Apartment vacancies stabilized near 4.4% in the fourth quarter of 2019, with

the lowest vacancy rates in the East San Jose (2.6%), Cupertino/Saratoga (3.3%), and Campbell/Los Gatos (3.4%)

submarkets. Not surprisingly, two of the submarkets with the lowest vacancies also had the lowest cost of rent,

with high housing costs pushing residents into lower-cost neighborhoods such as East San Jose ($2,380) and

Campbell/Los Gatos ($2,570).

The emergence of COVID-19 as a threat to the U.S. and California economy muddies the near-term outlook for

residential real estate. Homebuyer sentiment will drop as isolationist policies restrict their ability to visit open

houses. But countervailing financial effects will offset some of the drop in homebuyer demand. Concerns over

the economic implications of COVID-19 have pushed U.S. bond yields to record lows amid a global flight to

quality assets. The 10-year Treasury bond yield fell to all-time lows of less than 1%, which should subsequently

push the 30-year fixed-rate mortgage rate to a record low. Lower financing costs will boost demand, especially

in the second half of the year, assuming sufficient containment by the end of summer. As a result, the housing

market in 2020 will probably decline in the first half of the year and then rebound. However, there is a substantial

amount of uncertainty around the length of time until proper containment and the overall decline in economic

activity that may come as a result.

Cos

t of R

ent (

$)

Vaca

ncy

Rate

(%)

3,000 7.0

2,0005.0

1,000

500

3.0

1.0

0.0

2.0

2,500 6.0

1,5004.0

0

Q2-

01

Q2-

06

Q2-

11

Q2-

16

Q4-

03

Q4-

08

Q4-

13

Q4-

18

Q3-

02

Q3-

07

Q3-

12

Q3-

17

Q1-0

0

Q1-0

5

Q1-1

0

Q1-1

5

Cost of Rent Vacancy RateSource: REIS; Analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.

APARTMENT MARKET

South Bay


Performance of the various nonresidential real estate markets was a mixed bag in 2019. Employment growth

and a tight labor market led to robust demand for most commercial property types and drove gains in rent and

appreciation. The office and retail markets had strong demand and robust construction and cooling growth

in the cost of rent. Net demand for warehouse and distribution space fell, however, as softening rents, rising

vacancies, and negative net absorption indicated that more space was vacated and placed on the market than

was leased.

The cost of rent in the South Bay office market increased 3.4% from the fourth quarter of 2018 to the fourth

quarter of 2019 to $46.9 per square foot. Second only to San Francisco ($64.3 per square foot), the South Bay

office market remains one of the most expensive in California. But annual rent growth cooled from the highs of

2012 to 2016 and rested below the postrecession average of 4.4%. At 18.2%, the vacancy rate was the highest

of California’s major metro areas: 15.3% in the East Bay and 8.9% in San Francisco.

Many new developments have come online over the past five years. Office completions in 2019 totaled 2.15

million square feet, the largest by far of the nonresidential real estate markets in the South Bay. Of the new

supply added to the market in 2019, roughly 70% was A-class office space.1 Additionally, annual net absorption

remained positive in 2019, indicating that more office space was leased than was vacated and that demand for

office space in the South Bay remained strong.

The COVID-19 pandemic will hurt demand for office space in 2020, as economic activity drags amid uncertainty

about the virus’ spread. This effect will be largest in regions with a large amount of service exports and regions

tied directly to goods trade, as social distancing and travel restrictions limit services consumption and disrupted

global supply chains place a heavy drag on trade.

NONRESIDENTIAL REAL ESTATE MARKETS

Property Type 3-Year Growth % 3-Year Change (p.p.) Q4-19 Q4-19

COMMERCIAL RENTS AND VACANCY RATE

South Bay, Q4-16 to Q4-19

Office

Retail

Warehouse & Distribution

46.9

37.7

8.4

18.2

5.5

8.1

11.9

7.5

8.6

1.2

0.0

-0.6

Source: REIS; Analysis by Beacon Economics

1 A property’s asset class indicates a property’s condition and operating performance. A-class properties tend to be the best in the market, with above-average design, minimal or no deferred maintenance, superior locations, the highest rents, and tenants with strong credit.

Cost of Rent Vacancy Rate


Rising 0.2% from the fourth quarter of 2018 to the fourth quarter of 2019, the cost of rent in the South Bay

retail market reached $37.7 per square foot, below San Francisco ($38.4 per square foot) but above the East

Bay ($32.1) and every other major metro in California. But annual rent growth has cooled from the highs during

much of the postrecession recovery. Retail space in the South Bay is highly sought after, as shown by the 5.5%

vacancy rate in the fourth quarter of 2019, down 0.3 percentage point from the same period a year earlier.

Squa

re F

eet (

Thou

sand

s)C

ost P

er S

quar

e Fo

ot ($

)

5,000

40.0

0

3,000

30.0

1,000

20.0

-2,000

15.0

4,000

35.0

2,000

25.0

-1,000

Completions Net Absorption

South Bay San Francisco East Bay

Source: REIS; nalysis by Beacon Economics

Source: Reis; nalysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.

OFFICE MARKET COMPLETIONS & ABSORPTION TRENDS

RETAIL MARKET RENTS

South Bay, 2008 to 2019

Bay Area

2010

2012

2009

2014

2016

2011

2008

2013

2015

2017

2018

2019

Q1-9

0

Q1-9

3

Q1-0

2

Q1-1

1

Q1-9

6

Q1-0

5

Q1-1

4

Q1-9

9

Q1-0

8

Q1-1

7

Q3-

91

Q3-

94

Q3-

03

Q3-

12

Q3-

97

Q3-

06

Q3-

15

Q3-

00

Q3-

09

Q3-

18


Retail construction has picked up substantially since 2013. $507 million in retail permits were issued in 2019,

up $189 million from the previous year. Despite the increased permitting, no retail developments were brought

online in 2018 or 2019. Facing heavy disruptions from e-commerce, which continues to grow, net absorption

remained positive in 2019, indicating that retail space recorded strong occupancy gains.

In the near term, the spread of COVID-19 will affect the retail sector strongly. As the fear of contagion and

policies of self-isolation continue, brick-and-mortar retailers, restaurants, and entertainment venues will

sustain a large and rapid drop in demand.

Key indicators of real estate supply and demand reveal that during the fourth quarter of 2019, the South Bay

warehouse and distribution market experienced a slowdown in year-over-year rent growth, a modest increase

in vacancies, and negative net absorption. Trailing San Francisco ($10.3 per square foot), the average cost of rent

in the South Bay warehouse and distribution market was $8.4 per square foot, up 0.8% from the fourth quarter

of 2018. This was a substantial moderation in annual rent growth compared with the postrecession average

(2.5%). At 8.1% in the fourth quarter of 2019, the vacancy rate in the South Bay warehouse and distribution

property market was below San Francisco (9.0%) and the East Bay (9.4%). With year-over-year declines in

vacancies from 2014 through the first quarter of 2019, the vacancy rate rose 1.2 percentage points in the

fourth quarter of 2019. No new supply entered the market in 2018 or 2019, and a five-year stretch of positive

net absorption ended in 2019, when the South Bay recorded 530,000 square feet of negative net absorption.

A restriction and decrease in goods trade in the near term due to COVID-19 will impact supply chains and

reduce economic activity. Less consumer spending will eventually lead to a decline in demand for warehouse

space, tempering demand in the industrial property market. But demand in the logistics and industrial market

remains extremely strong, and the increased supply over the past several years has not satiated it. As a result,

after the impact of COVID-19 has faded, we expect construction activity in this market to ramp up very quickly.

Commercial permit values issued in 2019 across all property types totaled $2.25 billion, up $419 million

from the previous year. In fact, the South Bay issued more permits than the East Bay ($693 million) and San

Francisco ($1.0 billion). Similarly, although the total value of commercial permits increased in the South Bay,

they decreased in San Francisco (-$997 million) and remained stagnant in the East Bay ($21 million). The office

property market issued the largest value of permits in the South Bay at $1.07 billion in 2019, and the retail

market recorded the strongest year-over-year gains, with $189 million in additional permits in 2019 over 2018.

On the other hand, construction in the industrial property space has been lackluster starting in 2002 and

remained that way through 2019, with $41 million in industrial permits issued in 2019, up a meager $9 million

from the previous year.

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