APA CALIFORNIA LEGISLATIVE UPDATE – June 2017

 

APA CALIFORNIA LEGISLATIVE UPDATE
JUNE 2017
 
By Paul Clark, AICP, Vice Director – Policy
 
This commentary was derived through the CALAPA Legislative Representatives in Sacramento and is primarily a copy of Governor Brown’s Budget update analysis, felt relevant to the planning profession.
 
Hello APA California Legislative Review Team and Board Members – The Governor just released his May Revise. We will be reviewing this in detail but note that there is very little mention of housing in the summary and none in the press release. Below are two paragraphs that briefly speak to the issue from the summary and the link to the full press release/summary.
 
California – Shifting Growth
California’s unemployment rate fell to 4.9 percent in March 2017 and is expected to remain near that level throughout the forecast. With job growth slowing, average wages are starting to rise. The source of personal income growth is shifting from increased employment to higher income per worker. Labor force growth is expected to keep up with job growth, despite increasing numbers of retirees in California.
 
Consumer inflation is expected to remain higher in California than the nation, with California inflation expected to average 3.0 percent in 2017, and 2.9 percent in 2018 and afterwards. Housing permits issued by local authorities remain well below levels needed to account for population growth, a trend that is expected to continue throughout the forecast. Low levels of housing relative to demand are expected to continue in 2017 and 2018, contributing to faster inflation in the state (Figure ECO-03). The statewide median sales price of an existing single-family home was $502,250 in 2016, still more than double the national median price of $235,500. See Figure ECO-04 for highlights of the national and California forecasts.
 
Risks to the Outlook
The main risks to the California economic outlook are a stock market correction, an eventual recession in the U.S., geopolitical risks that affect U.S. growth, or continued lack of housing in California that limits growth. This forecast assumes that there are no large changes to federal tax policy. Yet, it appears recent stock market behavior already reflects expected cuts to corporate tax rates. Valuations of companies are relatively high compared with historical benchmarks. Unless the federal government follows through with such a tax cut, the stock market could drop precipitously. This would likely affect investment and hiring decisions at California companies, even in the absence of a recession. The risk of a U.S. recession also remains. Almost eight years after the end of the last recession, both the U.S. and California are at unemployment rates only seen close to the end of an expansion. The U.S. unemployment rate stayed at or below 4.5 percent for eight out of nine months in late 2006 to early 2007, while the California unemployment rate stayed at 4.9 percent for less than a year before beginning to rise in early 2007.
 
To keep growth on the current path, businesses would have to slow their hiring and wage increases in tandem with slowing consumer demand. Otherwise, inflation will rise further, and imbalances that trigger a recession would result. Large policy changes that might affect economic growth, such as trade, immigration, or government spending, may also cause businesses and individuals to pull back on investment or consumption and cause a recession. Geopolitical events such as wars in the Middle East, conflicts in Asia, uncertainty about the European Union, or other incidents could also reduce U.S. growth or cause a recession. Many California companies sell their products and services worldwide, and have supply chains that cross many borders. Disruptions to trade or lower demand abroad would reduce California growth.
 
Finally, California housing growth continues to lag population growth, raising housing costs and potentially limiting the number of jobs that companies can add. In 2016, the state added 89,000 net housing units, but population increased by 335,000. Housing costs are a major component of consumer spending, and have also been increasing faster than inflation since 2012, a trend that is expected to continue. While the forecast assumes that increasing numbers of permits will be issued by local authorities, if permits remain low, it will reduce the number of available workers in those areas.