At 5.2 percent, the Bay Area’s¹ gross domestic product (GDP) grew at the fastest rate in the nation and among California metropolitan areas in 2016, according to the U.S. Bureau of Economic Analysis Gross Domestic Product by Metropolitan Area 2017. The Bay Area’s GDP grew three times faster than the national rate of 1.5 percent and twice as fast as the state rate of 2.9 percent. Real GDP growth in the San Francisco-Oakland-Hayward metropolitan area was led by gains in the in finance, insurance, real estate, rental, and leasing industries.
The Austin-Round Rock, Texas metro area was the second fastest-growing economy, with GDP growth of 4.9 percent. Growth there was led by the professional and business services sector.
Within the Bay Area, San Jose outperformed all other California metro areas, with a GDP increase of 5.9 percent, followed by San Francisco-Oakland, with a gain of 5.4 percent. Both regions benefited from gains in the tech sector, while San Francisco’s financial sector posted growth.
The Los Angeles Basin’s² GDP also grew faster than the national rate at 2 percent, fueled by gains in the information sector, which encompasses motion picture and Internet services.
In fact, the economies of the Los Angeles Basin ($1.2 trillion) and the Bay Area ($781 billion) are so large that they would rank a respective fourth and sixth among the top 10 U.S. states.
According to a report from Palo Alto-based Center for Continuing Study of the California Economy, when compared with other world economies, the Los Angeles Basin ranks 15th after Australia and before Mexico, up from 16th place last year. The Bay Area ranks 18th behind Turkey and ahead of the Netherlands.
Following a strong 2016, California has reached full employment this year — especially in the Bay Area, where unemployment rates hover around and below 3 percent. Nevertheless, as Federal Reserve Chair Janet Yellen said in her speech this week at the National Association of Business Economics, further employment is still possible, since current assumptions of a sustainable unemployment rate are based on past experiences and different measures of the economy than currently exist. In other words, the low unemployment rate may not mean that the economy is now at maximum employment because demographic and structural changes may have lowered the sustainable unemployment rate from levels recorded in the past.
According to a National Federation of Independent Businesses survey of small businesses, 35 percent said they were having trouble filling positions in July. Finding qualified employees was the second biggest challenge for small businesses behind taxes. Among businesses that rejected job applicants, 26 percent noted a lack of specific skills, 14 percent complained about a lack of social skills, and 10 percent said that drug issues were a problem.
As we have noted in previous job-market analyses, stronger wage growth was anticipated at this point in the employment cycle, and it has come in below expectations. Nevertheless many economic indicators and aggregate measures at the state or national level may be masking wage growth at the metropolitan level. And as recent U.S. Census Bureau data showed, the median income for the San Francisco-Oakland-Hayward metropolitan area is now highest in the country, jumping by 9 percent from 2015 to 2016 to surpass the Washington, D.C. metropolitan area, which held the No. 1 spot last year.
What does this all mean for California’s economy going forward? Future employment and economic growth are tied to the availability of skilled workers, who will choose to live in California if the economics make sense. Put differently, housing affordability will be the major factor in ensuring that qualified workers remain here.
1 The Bay Area includes Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano, and Sonoma counties.
2 The Los Angeles Basin includes Los Angeles, Orange, Riverside, San Bernardino, and Ventura counties.
by Selma Hepp, Pacific Union’s Chief Economist