Economist: Banking crisis may help the Fed curb inflation — and support Bay Area economy

An economist said the recent banking crisis, referring to the Silicon Valley Bank takeover by the FDIC and the last-minute bailout of First Republic Bank by 11 major banks depositing $30 billion, might impact the Bay Area economy in one way not yet explored.

“The recent banking crisis may put a soft brake on the economy that the Fed could not have achieved. Breaking out of this inflationary environment will require higher unemployment rates,” said Jeff Bellisario, executive director of the Bay Area Council Economic Institute (BACEI).

Bellisario’s comments on “Insights on the Bay Area Economy: Moving from Recovery to Recession?” came during the Outlook 2023 Bank of Marin Economic Breakfast at the College of Marin Indian Valley Campus in Novato on Wednesday, attended by nearly 200 business leaders.

He said while headline inflation has moderated, prices for services continue to run up, when comparing core consumer prices versus year over year price changes for services.

Bay Area: The innovation capital

“The tech economy might already be in a recession, but the region is not. The region has a highly cyclical economy, and we have come out stronger in the end (referring to the post-pandemic business environment),” said Bellisario. “Consumers power the economy, and the Bay Area is still creating tremendous wealth. We still have venture capital, good ideas and money to fuel next generation businesses.”

As an example of its vitality in the area of creating new business, he pointed to another positive indicator, how many companies are in the Initial Public Offering (IPO) pipeline with valuations over $5 billion (the “pentacorn” category) as of Sept. 13, 2022.

For the Bay Area, the total is 45, compared with New York (14), Boston (6), Los Angeles (3), Texas (2) and Seattle (2). Forty-five of 80 pentacorn companies across the U.S. are based in the Bay Area, along with 59 of the “unicorn” companies (firms with a $1 billion valuation) as of 2022.

In addition, the Bay Area’s share of overall U.S. venture capital investment was $118 billion of the $378 billion nationwide total, or 29%, in the third quarter of 2022, according to market-research firm GB Insights.

Local GDP growth strong

Bellisario said while the region’s job recovery has been slow, the Bay Area leads in GDP growth, resulting from a concentration of high-value industries. He noted that pre-pandemic, the Bay Area surpassed peer metro areas on almost every economic metric, except for population growth, according to Moody’s Analytics.

But, “It’s tough to grow the economy without people. With up to 180,000 leaving the Bay Area out of a total population of 7.5 million, due to housing price challenges, the cost of living, inner city crime, etc. — it’s noticeable, but not a trend yet. Many in this exiting group are split between those who are older and high net-worth individuals. Previously those leaving were middle-aged or younger.”

Overall, California metro areas have been the biggest population losers in the nation from 2019 to 2021, Bellisario observed. San Francisco was the worst with a -2.3% loss, followed by San Jose with -1.9%, and -1.6% in both Los Angeles and San Diego.

Bay Area population numbers increased by a scant 0.8% versus 1.0% for the peer cities in the same time frame driven in part by several hundred thousand residents leaving the state.

Sunbelt metro areas (Austin, Dallas, Atlanta, etc.) have outperformed the Bay Area since the onset of the pandemic when it comes to overall job growth as well as knowledge worker job growth.

Wages high, but housing short

Even though the Bay Area records wages that are higher that other parts of the country, it still continues to suffer for housing. From the beginning of the pandemic, home prices rose steadily, especially from April 2021 to a peak in July 2022 falling back by December 2022 with the average San Francisco detached home selling for $1,465,000, $1,447,000 in Marin County, while across California the price average was $735,480.

“Our family has wanted to buy a home with a yard for kids somewhere outside of a city, but with these high prices we are still renters,” said Bellisario. “There is an urgent need for single-family housing and affordable apartments. I’m seeing single home construction projects being approved but not a lot of large-scale developments. It is expensive to build here, and regulatory, permitting and SEQA barriers in the Bay Area along with shortages of available land.”

Based on 2022 housing permits per 10,000 people by metropolitan area, California regions rank the lowest among the largest metro areas when it comes to housing production. Housing permits per 10,000 people in San Francisco (24), Los Angeles (25) and San Diego (29). San Jose (35) and Sacramento (44) — all were near the bottom of a list of 21 U.S. major cities, according to BACEI analysis of U.S. Census Bureau Housing Permits Survey population estimates.

Job recovery slow

Bellisario said the North Bay counties have been particularly slow to recover when it comes to non-farm employment with Marin County still down approximately 7,500 jobs — while this county reported total employment at 109,600 jobs.

From 2020 to 2023 recovering job categories include the information sector (+7.3%), manufacturing (+6.7%), education and health services (+3.1%) and professional and business services at +2.3% — with total employment at 4,116,000 jobs — up 1,000 jobs from pre-pandemic levels in the North Bay, according to the Bureau of Labor Statistics and BACEI.

Job sectors declining included leisure and hospitality (-10.1%), retail trade (-7.2%), construction (-4.5%), trade and transportation (-2.7%) and financial activities (-2.0%).

Government jobs were negatively impacted the most in Marin, Napa and Sonoma Counties between 2020 and 2023 (-10.7%), according to BACEI analysis of bureau data.

In total, Bellisario stated job growth remains resilient even with the recent slowdown in the tech economy.

“U.S. job openings remain elevated, though the pace of hiring has slowed somewhat. The first sign that the limited labor market is rebalancing can be seen when wage growth begins to taper off,” he said.

But it is also clear worker preferences have changed.

“Remote work is the new normal for many workers and employers, according to remote job postings as a percentage of all job postings,” Bellisario said.

San Francisco leads 17 other major U.S. cities with 15.2% of job postings shown as remote as of August 2022.

In a separate 2021 American Community Survey, researchers found that 45.6% of San Francisco residents were primarily working from home. That year Marin had 35.9%, Sonoma 20.6%, Napa 19.4% and Solano 12.8% of home-based workers.

Perhaps related to that, office vacancy rates as of the fourth quarter of 2022 in the Bay Area remained high, Bellisario said, citing real estate brokerage estimates. San Francisco led with nearly 30%, Walnut Creek 22%, the Tri-Valley area 21%, Oakland 19%, Marin and Sonoma counties 14%, and both Santa Clara and San Mateo counties at 14% each, according to CBRE and Cushman & Wakefield.

“Despite challenges, the Bay Area will come back strong. People here know how to innovate their way out of the current problems,” said Bellisario. “I believe we can — and will — grow again and regain our creative edge. There are a lot of smart people in this region and a ton of money for investment as well as excess savings to get us through. Another wave of job growth is also over the horizon.”

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