1. home and garden

February 24, 2015
Economics Group
Special Commentary
Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com ● (704) 410-3277
Michael T. Wolf, Economist
michael.t.wolf@wellsfargo.com ● (704) 410-3286
Alex V. Moehring, Economic Analyst
alex.v.moehring@wellsfargo.com ● (704) 410-3247
California Economic Outlook: February 2015
Executive Summary
California’s economy continues to power forward, with many of the Golden State’s largest and
most important industries gaining momentum over the course of 2014. High-tech employers have
shown no sign of slowing their hiring. Employment in professional, scientific and technical
services, the industry with the largest number of tech-related workers, grew 4.3 percent in 2014.
San Francisco, San Jose and San Diego are all benefitting from the strong growth in this major
industry group. Health services are also expanding rapidly and appear to have adjusted to the
rollout of the Affordable Care Act with only minimal disruption. Construction has picked up to
keep pace with the rapidly expanding economy and demand for apartments, warehouse and office
space is rising solidly. Home sales remain sluggish but the trend seems to be somewhat more
positive than what we have seen nationwide. Home price appreciation continues to run ahead of
the national average, reflecting both stronger economic gains and a scarcity of developable land.
Although we expect California’s economy to continue to grow, the state is not without its
challenges. Growth has moderated recently, and the huge surge in tech-related hiring and
associated construction projects is unlikely to be sustained longer term. Retailers and financial
services firms are still posting only modest gains. In addition, labor disputes at West Coast ports
could push importers to make more permanent adjustments to their supply chains away from Los
Angeles and Long Beach. Lower oil prices are weighing on the energy producers in Kern County,
and a lack of water remains a challenge for farmers and residents alike. In addition, the state’s
high costs of living, combined with sluggish wage and salary growth for middle-income
households, has exacerbated the out-migration of residents. Few of these problems are truly new,
however, and California seems to continuously prove that none of them are insurmountable.
Figure 1
Figure 2
California Technology Employment
California Nonfarm Employment
3-Month Moving Averages
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-8%
-10%
90
92
94
96
98
00
02
04
06
08
10
12
14
15%
California: Dec @ 3.9%
12%
12%
9%
9%
6%
6%
3%
3%
0%
0%
-3%
-3%
-8%
-6%
-6%
-10%
-9%
-6%
QCEW: Yr/Yr Pct. Change: Jun @ 2.9%
Nonfarm: Yr/Yr Pct. Change: Dec @ 2.2%
Household: Yr/Yr Pct. Change: Dec @ 2.8%
Year-over-Year Percent Change
15%
-9%
00
02
04
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
06
08
10
12
14
Few of these
problems are
truly new,
however, and
California seems
to continuously
prove that none
of them are
insurmountable.
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Facing Headwinds Head On
So far, the state
seems to be
weathering its
challenges
rather
gracefully.
So far, the state seems to be weathering its challenges rather gracefully. The port dispute at the
Port of Los Angeles and Port of Long Beach created some real hardship for businesses in southern
California. While some of the total loss figures bandied about may be over the top, the losses for
individual businesses are quite meaningful. Despite the ongoing dispute, which has left a flotilla
of ships at sea waiting to unload, activity at Port of Los Angeles through the end of 2014 was
actually 6.0 percent higher than the prior year and the Port of Long Beach also showed growth.
Despite any bottlenecks that have occurred, those ports are busier than last year, though activity
would certainly have been stronger had there been no disruptions.
Estimating the impact from the work stoppage is difficult. Some traffic is being diverted to other
ports and some firms had built precautionary stockpiles in anticipation of some sort of supply
shock. Most firms, however, operate with extremely lean inventories and cuts in production at
manufacturing facilities along the West Coast and elsewhere are expected. In addition, businesses
involved with perishables, including seafood and produce, likely suffered some sizable losses.
Moreover, the dispute makes it more likely that businesses in the Midwest and Northeast will look
to alternative ports for future shipping needs as West Coast ports look less reliable.
Drought is a major long-term challenge for California. Farmers have suffered as a result, but
higher prices of key crops are partially offsetting low yields and farmers are moving toward more
water-efficient crops. Almond and grape prices received in 2014 in California were both well
above their year-ago levels. In addition, the scarcity of fresh water has spurred investment in
much needed infrastructure improvements, including the desalination plant in Carlsbad and
numerous smaller water storage and water treatment projects around the state.
Another major challenge for the state is that more U.S. residents move out of California each year
than move in. This domestic outmigration has long been a cause for concern and is frequently
blamed on the state’s high housing costs. San Francisco and Oakland, however, actually have
positive domestic net migration, which is somewhat surprising given how expensive the Bay Area
is. Domestic net migration is strongest in Oakland, which offers relatively affordable housing
when compared to San Francisco. A booming labor market is helping to draw more people to the
area. Despite high housing costs, relatively few households spend more than 30 percent of their
income on housing. In the San Francisco metro area, 39.3 percent of households spent 30 percent
or more of their income on housing costs, while that share was 43.4 percent statewide and
52.8 percent in Los Angeles. Although these numbers are above the national average, they show
there is more flexibility in the housing market than first appears. In addition, California does
benefit from positive total net migration, thanks to international migrants.
Figure 4
Figure 3
Domestic Net Migration
California State Trade
Year-over-Year Percent Change, 3-MMA
40%
Share of Total Population, 2013
40%
Import: Dec @ 8.9%
Exports: Dec @ 0.2%
30%
Oakland
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
San Francisco
Riverside
San Diego
San Jose
California
Los Angeles
-40%
-40%
00
02
04
06
08
10
12
14
-0.4%
-0.2%
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
2
0.0%
0.2%
0.4%
0.6%
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Office Market Holds Strong in the Bay Area
The office market in the state continues to flourish. Employment in the construction of
nonresidential buildings is up a whopping 9.6 percent from a year ago. The office market is
tightest in San Francisco where the vacancy rate is just 11.7 percent, considerably lower than the
nation’s 16.7 percent. Demand remains strong in the San Francisco market, as the tech sector
continues to snap up large swathes of space, with notable leases from Salesforce, Uber, Yelp and
Pinterest. In addition to high rents, another threat to the San Francisco office market is Prop M,
which limits the amount of office space that can be built in the city. There appears to be some
ways to temporarily work around this cap, but the pace of building has been strong and the
current limit of 875,000-square-feet per year is unlikely to allow for supply to keep up with
demand and could push rents even higher and drive new construction toward Oakland and San
Jose.
With an office vacancy rate of 17.7 percent, San Jose has more supply than the markets along the
Peninsula. Activity in Silicon Valley, however, is still quite high. About 3 million square feet of
space is under construction in Santa Clara-Sunnyvale and another 1 million square feet in
Cupertino. The new supply is doing little to alleviate demand. The vacancy rate has come down
considerably from recent highs over the past couple of years. Although we remain constructive on
the metro area, demand slipped some in the fourth quarter, which may point to some of the
competition Silicon Valley is facing from San Francisco and elsewhere.
The office
market is
tightest in San
Francisco where
the vacancy rate
is just
11.7 percent.
Demand for office space in southern California has been considerably softer. Los Angeles has only
recently started to improve. Although there are some sizable projects under construction,
including about 500,000 square feet in downtown and another 300,000 square feet in LAX/El
Segundo and Long Beach. Los Angeles’s broader economic recovery has been more modest than
in other parts of the state. While more modest than the Bay Area, the creative sector has been
vibrant throughout southern California, particularly companies producing digital entertainment
content. Some of that work is beginning to come downtown. The office vacancy rate in Los
Angeles is slightly below the national average and rents are increasing, which could help spur
some more construction. Moreover, there has been a great deal of activity in the hotel and
apartment sectors. Similarly, San Diego’s office market is holding its own, with very little space
currently under construction. Leasing remains steady and rents and resale prices continue to rise,
benefitting from a lack of new supply and low interest rates. Considerably more projects are in the
planning phases, however, though the physical construction still appears to be a ways off.
Figure 5
Figure 6
San Francisco Office Supply & Demand
Los Angeles Office Supply & Demand
Percent, Thousands of Square Feet
20%
1,500
Office Completions: Q4 @ 367,000 SF (Right Axis)
Office Net Absorption: Q4 @ 784,000 SF (Right Axis)
Office Vacancy Rate: Q4 @ 11.7% (Left Axis)
18%
1,000
16%
500
14%
0
12%
-500
10%
-1,000
8%
-1,500
Percent, Thousands of Square Feet
17%
2,000
16%
1,500
15%
1,000
14%
500
13%
0
12%
-500
11%
-1,000
10%
-1,500
9%
-2,000
Office Completions: Q4 @ 0 SF (Right Axis)
Office Net Absorption: Q4 @ -523,000 SF (Right Axis)
Office Vacancy Rate: Q4 @ 15.0% (Left Axis)
8%
6%
-2,000
2007
2008
2009
2010
2011
2012
2013
2014
-2,500
7%
-3,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Reis, Inc. and Wells Fargo Securities, LLC
3
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Home Sales Growth Struggles
Home sales improved only modestly in 2014, with the single-family market up just 0.6 percent
over the year and the condo and townhome market rising a paltry 0.2 percent. In the first month
of 2015, however, sales worsened considerably, pushing single-family sales down 2.7 percent from
a year earlier and condo and townhomes 4.6 percent lower over the same period. Some of the
largest year-ago declines were felt in the Bay Area, which likely has more to do with the slim
inventories than a lack of underlying demand in the rapidly improving economy. Indeed, San
Francisco homes spend very little time on the market before being sold. The upshot is that weaker
sales in the first month of the year means more inventory to lure potential buyers into the market.
The pace of single-family construction has leveled off at fairly low levels but is showing signs of
reviving in a handful of areas. The strongest markets have few developed lots available for singlefamily construction. The multifamily sector continues to strengthen, which comes somewhat in
contrast to the slowdown we have seen nationwide. The apartment market is exceptionally strong
in the Bay Area and San Diego. Vacancy rates in San Jose, San Diego, Los Angeles and San
Francisco are all below the national average, which is encouraging more growth in those markets.
Although home prices have moderated recently, they remain 7.0 percent higher than a year ago.
Thanks to the faster-than-average appreciation, home prices are just 15.2 percent below their
prerecession peak, not much further than the national average of 13.4 percent.
Figure 7
Figure 8
California Housing Permits
CoreLogic HPI: CA vs. U.S.
Index, 2000=100, Not Seasonally Adjusted
240
240
Single-Family: Dec @ 39,456
Single-Family, 12-MMA: Dec @ 37,359
Multifamily, 12-MMA: Dec @ 45,244
200
200
Single-Family Average (1998-2003): 109,729
160
160
120
120
80
80
40
40
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Thousands
Thousands
Thousands of Permits, Seasonally Adjusted Annual Rate
260
260
United States: Dec @ 172.2
California: Dec @ 214.8
220
220
180
180
140
140
100
100
60
60
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC
Conclusion & Outlook
The longer-run
prospects for the
state are also
favorable, as
California is
home to some of
the most highlyskilled workers
in the world.
4
California’s economy will continue to outperform the national average. The surge in technologyrelated industries has had huge spillover effects in the Bay Area and San Diego, with construction
projects cropping up to meet rising demand. The state has proved to be much more than a onetrick pony, however, with gains seen in most industries. Life and health sciences also appear to be
strengthening, while transportation & warehousing continue to pick up. The housing market
continues to show improvement and rising home prices should help boost consumption in a state
where numerous homeowners had seen sizable wealth declines during the housing bust. The state
faces its fair share of challenges, but by most measures, they appear to be abating. Drought has
plagued the state’s farmers and although water levels remain below normal, they have improved
relative to a year ago. Furthermore, the port dispute has now been resolved, with workers rapidly
removing the backlog of goods, which should provide a boost to the Inland Empire. The longerrun prospects for the state are also favorable, as California is home to some of the most highlyskilled workers in the world, a key driver of growth that is unlikely to change any time soon.
Despite the high-cost environment, more people move into the state than move out of it, further
reflecting the robust labor market and the abundance of high-paying jobs.
(2.4)
306
43,716
25,693
18,023
14,210
(160)
12.4
37,336
375
12,406
192
1,924,438
0.9
1,578,553
2.7
2010
(4.7)
288
45,471
21,705
23,766
14,359
149
11.8
37,702
366
12,469
62
1,957,114
1.7
1,685,635
6.8
Actual
2011
13.5
321
58,549
27,736
30,813
14,706
347
10.4
38,063
361
12,553
84
2,009,936
2.7
1,805,194
7.1
2012
20.6
408
80,742
37,034
43,708
15,153
447
8.9
38,431
369
12,675
122
2,080,284
3.5
1,856,614
2.8
2013
7.0
448
82,925
38,599
44,326
15,566
412
7.6
38,803
371
12,800
125
2,148,933
3.3
1,953,158
5.2
2014
Sources: CoreLogic, California Association of Realtors, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
Forecast as of: February 24 2015
* Value in 2013 includes expected revisions
277
(2.6)
35,069
25,525
9,544
Total Housing Permits
Single-Family Permits
Multifamily Permits
CoreLogic Home Price Index, Percent Change
14,370
(872)
11.4
Nonfarm Employment, Thousands
Change, Thousands
Unemployment Rate, Annual Average
Existing Single-Family Home Sales, Thousands
36,961
357
12,215
38
1,906,376
(4.1)
1,537,095
(3.7)
Population, Thousands
Change, Thousands
Households, Thousands*
Change, Thousands
Real Gross Domestic Product, Millions*
Annual Rate
Nominal Personal Income, Millions
Percent Change
2009
California Economic Outlook
4.7
475
98,000
46,000
52,000
15,961
395
6.6
39,178
375
12,935
135
2,215,550
3.1
2,070,348
6.0
Forecast
2015
4.5
498
105,000
51,000
54,000
16,336
374
5.5
39,548
370
13,085
150
2,284,232
3.1
2,194,568
6.0
2016
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
5
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
San Francisco DMSA Nonfarm Employment
San Francisco


6
San Francisco is in an enviable position, with
strong employment gains being made in highpaying industries. A concentration of highlyskilled workers makes its long-term prospects
favorable. The rising costs of doing business will
limit growth, but the metro area has still seen
positive domestic net migration, which is in
stark contrast to the state as a whole.
8%
8%
4%
4%
0%
0%
-4%
-4%
-8%
-8%
-12%
-12%
-16%
-16%
Office Employment: Dec @ 5.7%
Non-office Employment: Dec @ 2.7%
-20%
-20%
91
93
95
97
99
01
03
05
07
09
11
13
San Francisco DMSA Employment Growth By Industry
Office-using employment is up 5.7 percent,
which has contributed to the growing demand
for office space. Relatively few new projects
were completed in 2014, but plenty are in the
pipeline, including the 61-story Salesforce
tower, which should be completed in 2017.
Office vacancy rates have fallen to a low
11.7 percent. Despite all the new construction,
more downward pressure on vacancy rates and
upward pressure on rents is likely. San
Francisco limits the amount of new space each
year to 875,000 square feet, which can be rolled
over to subsequent years if left unused. That cap
should be reached this year, which means
demand will continue to outstrip supply.
Construction has not been confined to the
commercial sector. Homebuilding has surged
recently, and although multifamily permits have
come down from recent highs, they remain
roughly in line with past peaks. Strong
population and employment gains are fueling
the building spree. After decent gains in 2014,
home sales plummeted in January, down nearly
20 percent from a year earlier. Home prices,
however, continue to rise and are well above
their prerecession peak, while nationwide they
are still 13 percent lower.
12%
Year-over-Year Percent Change, 3-MMA
Total Nonfarm
Prof. & Bus. Svcs.
Trade, Trans. & Utilities
More
Leisure and Hospitality
Government
Number of
Employees
Educ. & Health Services
Financial Activities
Less
Information
Other Services
Construction
December 2014
Manufacturing
-2%
0%
2%
4%
6%
8%
10%
San Francisco DMSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
6
6
Single-Family: Dec @ 480
Single-Family, 12-MMA: Dec @ 594
Multifamily, 12-MMA: Dec @ 4,145
5
5
Single-Family Average (1998-2003): 1,490
4
4
3
3
2
2
1
1
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and
Wells Fargo Securities, LLC
Thousands

After moderating during the first half of 2014,
employment growth in San Francisco is
accelerating again, with nonfarm payrolls
3.7 percent higher than a year ago. The techheavy professional and business services and
information sectors continue to lead the metro
area’s job growth, while construction projects
continue to ramp up to accommodate the surge
of new businesses and residents. Retail trade,
hospitality and personal services have followed
suit and tourism has strengthened further. The
one industry still struggling, however, is
financial services, which shed jobs in 2014.
Thousands

Year-over-Year Percent Change
12%
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
San Jose MSA Employment Growth By Industry
San Jose



Prof. & Bus. Svcs.
Home sales in Santa Clara County were
4.4 percent lower than a year ago in January.
Despite the weaker home sales, prices were still
10.7 percent higher. The pace of single-family
construction has started to level off, but the
multifamily sector continues to surge higher.
Even with the building boom, apartment
vacancy rates continue to inch lower.
The long-run trajectory remains bright. Many of
the world’s largest tech firms are based in
Silicon Valley, and startups continued to be
drawn there to capitalize on the region’s depth
of intellectual and financial capital. High costs
and congestion remain hurdles and may lead to
a retracement whenever this boom ends.
Number of
Employees
Trade, Trans. & Utilities
Educ. & Health Services
Less
Government
Leisure and Hospitality
Information
Construction
Financial Activities
December 2014
Other Services
The amount of investment in San Jose is
staggering. More than 5 million square feet of
office space are under construction, much of
which is by tech behemoths, such as Apple and
Facebook. Facebook recently bought another
56 acres in Menlo Park, making way for
additional growth. Palo Alto is considering
placing a cap on office development, similar to
the one that was implemented in San Francisco.
Such caps will push rents higher and move new
construction to nearby areas where such limits
are not imposed.
Financial activities have been a welcome bright
spot in the metro area, while they have been a
slight negative throughout the state. Some of the
growth is due to the booming real estate market,
the rental portion of which is included in this
industry group. Even stronger growth was seen
in the more traditional finance and insurance
services, with employment up 5.9 percent from
a year earlier. In addition, confidence among
venture capitalists in Silicon Valley remained
high in the fourth quarter of 2014.
More
Manufacturing
-3%
0%
3%
6%
9%
12%
15%
San Jose MSA Population Growth
In Thousands
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
80
84
88
92
96
00
04
08
12
San Jose MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
9
9
Single-Family: Dec @ 2,016
Single-Family, 12-MMA: Dec @ 1,933
Multifamily, 12-MMA: Dec @ 7,666
8
8
Thousands

Total Nonfarm
While the growth in San Francisco’s tech sector
has made great headlines the past few years,
activity remains brisk all along the San
Francisco Peninsula and into Santa Clara
County. Employment in San Jose’s information
sector, which includes internet publishing and
web search portals, was 13.7 percent higher than
a year ago in December. However, almost every
major industry group posted solid year-overyear job gains in 2014. Population growth is
nearly twice the national rate.
Thousands

Year-over-Year Percent Change, 3-MMA
Single-Family Average (1998-2003): 2,990
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce,
and Wells Fargo Securities, LLC
7
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Sacramento MSA Nonfarm Employment
Sacramento



8
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
QCEW: Yr/Yr Pct. Change: Jun @ 2.6%
Nonfarm: Yr/Yr Pct. Change: Dec @ 2.3%
Household: Yr/Yr Pct. Change: Dec @ 2.7%
-6%
-8%
-8%
91
95
97
99
01
03
05
07
09
11
13
Year-over-Year Percent Change, 3-MMA
Total Nonfarm
Government
More
Trade, Trans. & Utilities
Prof. & Bus. Svcs.
Number of
Employees
Educ. & Health Services
Leisure and Hospitality
Less
Financial Activities
State government employment is expanding
rapidly in the state capital, with payrolls up
2.8 percent from a year ago. The California
budget is in considerably better shape than it
was earlier in the recovery. Local governments,
however, have not bounced back as quickly.
Local government employment is still lower
than a year ago, though it looks to be firming.
The large share of public sector employment is
likely to limit future growth in Sacramento, but
it should also help insulate the area from future
downturns. Recent gains in manufacturing look
set to continue in the near term and should help
bolster
growth
in
warehousing
and
transportation
industries.
The
region’s
agriculture sector continues to struggle with the
drought but is managing modest gains.
93
Sacramento MSA Employment Growth By Industry
Construction is booming in the state’s capital.
Part of the huge gain in related employment is
likely due to the construction of the new arena
for the Sacramento Kings. More development is
likely, as restaurants, retailers and hotels are
attracted to the surrounding area. The recent
slowdown in retail may partially reflect the
closings and relocations from Downtown Plaza.
The housing market in Sacramento bounced
back at the end of 2014 before weakening again
in January, with sales falling 5.8 percent from a
year ago. Home price growth moderated to a
still strong 6.7 percent year-over-year pace. So
far in the recovery, residential construction has
been notably weak, with only very modest
improvements in the single-family sector and
virtually no new multifamily development.
-6%
Manufacturing
Construction
Other Services
December 2014
Information
-6% -4% -2%
0%
2%
4%
6%
8%
10% 12%
Sacramento MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
28
28
Single-Family: Dec @ 2,688
Single-Family, 12-MMA: Dec @ 3,589
Multifamily, 12-MMA: Dec @ 326
24
24
Thousands

Sacramento has been posting average gains as
the metro area still works to catch up to its
prerecession employment peak. As the state’s
capital and with a preponderance of
government workers, it was always unlikely that
growth was going to come back more strongly.
Fortunately, the public sector has turned
modestly positive, while the highly-paid
professional, scientific and technical services
added 6.1 percent more workers over the past
year. Two notable weak spots come from the
retail and leisure & hospitality sectors, which
had posted sizable gains earlier in the recovery
but have since stalled.
Thousands

3-Month Moving Averages
8%
Single-Family Average (1998-2003): 14,169
20
20
16
16
12
12
8
8
4
4
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and
Wells Fargo Securities, LLC
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Los Angeles DMSA Employment
Los Angeles


The moderation in growth should stabilize as
soon as manufacturers and governments stop
shedding workers. Infrastructure spending, if
fully approved should help boost construction
employment further, while providing an
incentive for more residential and commercial
building along proposed rail lines.
150
150
140
140
130
130
120
120
110
110
100
100
90
90
Motion Picture and Sound Recording: Dec @ 134.9
80
80
91
93
95
97
99
01
03
05
07
09
11
13
15
Los Angeles DMSA Employment Growth By Industry
Manufacturing has been the biggest weight on
overall employment, with the number of factory
jobs falling 1.6 percent over the past year.
Although port access gives Los Angeles-based
manufacturers some advantage, high costs and
limited space are clear negatives and have
pushed more labor-intensive work elsewhere.
More weakness is likely coming, as Boeing lays
off more workers when production of the
C-17 Globemaster ends. Some relief may be on
the way, with the proposed budget from the
Pentagon increasing demand for the F-35 parts
made throughout the state and a new bomber
that is being developed in Palmdale.
The Los Angeles housing market, like those
throughout the nation, has struggled, with home
sales still below year-ago levels. The shortfall in
home sales worsened in January, with sales
falling 11.6 percent lower on a year-over-year
basis. Home prices rose a much stronger
6.5 percent over the same period. Although
single-family construction remains weak, like
many
other
urban
areas,
multifamily
construction has filled the void. With belowaverage population gains and out-migration, a
huge surge in residential construction is
unlikely.
160
Year-over-Year Percent Change, 3-MMA
December 2014
Total Nonfarm
Trade, Trans. & Utilities
Prof. & Bus. Svcs.
More
Educ. & Health Services
Government
Number of
Employees
Leisure and Hospitality
Manufacturing
Less
Financial Activities
Information
Other Services
Construction
-4%
-2%
0%
2%
4%
6%
8%
Los Angeles DMSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
30
Single-Family: Dec @ 4,080
Single-Family, 12-MMA: Dec @ 4,439
Multifamily, 12-MMA: Dec @ 13,764
25
Single-Family Average (1998-2003): 8,265
30
25
20
20
15
15
10
10
5
Thousands

Employment growth in Los Angeles has steadily
moderated over the past two years. The factory
and public sectors weakened in 2014, but other
industries continue to move ahead. After more
than a decade of little employment growth
coming from the motion picture and sound
recording industry, the entertainment business
is finally posting solid gains. Professional &
business services are also expanding solidly,
though the bulk of the gains appear to be
concentrated in the lower-paid administrative &
waste management services. Transportationrelated projects are also moving forward, which
have added to the growth in construction.
Thousands

3-Month Moving Average, Thousands
160
5
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and
Wells Fargo Securities, LLC
9
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Santa Ana DMSA Employment Growth By Industry
Orange County
Year-over-Year Percent Change, 3-MMA
Total Nonfarm


10
Trade, Trans. & Utilities
Leisure and Hospitality
Orange County will continue to benefit from a
strengthening economy that fuels demand for
tourism in the area. Replacing high-paying jobs
lost in defense and aerospace remains a
challenge, particularly with the region’s large
financial services industry still struggling.
Building activity remains a bright spot.
Number of
Employees
Educ. & Health Services
Manufacturing
Less
Government
Financial Activities
Construction
Other Services
December 2014
Information
-4%
-2%
0%
2%
4%
6%
8%
10%
Santa Ana DMSA Nonfarm Employment
Education services are booming in the metro
area, with private education employment rising
14.5 percent from a year ago. Chapman
University opened a school of pharmacy this
year. In addition, the state recently approved
15 community colleges to offer four-year
baccalaureate degrees. Cypress College and
Santa Ana College were among those on the
approved list. All of these developments should
keep growth moving in the right direction for
education services in the area.
The housing market in Orange County remains
weak, with sales still falling on a year-over-year
basis. The area remains one of the most
expensive places to live, but has not shared in
the same economic gains seen in other
expensive areas, such as the Bay Area. Price
appreciation has been muted as a result, with
prices up just 3.8 percent from a year earlier.
The one silver lining here is that despite a
30.6 percent monthly loss in January, sales
were only 4.3 percent lower than a year ago. The
apartment market, however, remains much
stronger, with the vacancy rate well below the
national average. Plenty of construction remains
in the pipeline, as multifamily permits have
recently breached their prerecession peak.
More
Prof. & Bus. Svcs.
Year-over-Year Percent Change
15%
15%
12%
12%
9%
9%
6%
6%
3%
3%
0%
0%
-3%
-3%
-6%
-6%
-9%
-9%
Office Employment: Dec @ 2.3%
Non-office Employment: Dec @ 2.3%
-12%
91
93
95
97
99
01
03
05
-12%
07
09
11
13
15
Santa Ana DMSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
15
Single-Family: Dec @ 3,096
Single-Family, 12-MMA: Dec @ 3,444
Multifamily, 12-MMA: Dec @ 6,130
12
Single-Family Average (1998-2003): 6,749
15
12
9
9
6
6
3
3
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and
Wells Fargo Securities, LLC
Thousands

Orange County continues to post solid gains,
with nonfarm payrolls rising 2.3 percent from a
year earlier. Tourism still looks reasonably
strong, with solid gains in the leisure &
hospitality industry and another gain in
passengers moving through John Wayne
Airport. Education & health services are also
performing well and construction is booming.
Manufacturing is a clear weight on the area,
with the decline in payrolls exacerbated by the
most recent layoff at Boeing’s Huntington Beach
location. In addition, the metro area still has
room to grow as employment remains below its
prerecession peak.
Thousands

California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Riverside MSA Employment Growth By Industry
Inland Empire
Year-over-Year Percent Change, 3-MMA
December 2014
Total Nonfarm


Government
Leisure and Hospitality
The Inland Empire’s positive growth trajectory
will continue in the near future as an
accelerating U.S. economy brings more goods
through West Coast ports and through the area.
The longer-run prospects are less certain.
Although it is a welcome sign that professional
& business services firms are hiring quickly, the
metro area relies too heavily on the production
and distribution of goods, which exposes the
region to the vagaries of the global economy and
makes the region vulnerable to disruptions at
the Port of Los Angeles and Port of Long Beach.
Number of
Employees
Prof. & Bus. Svcs.
Manufacturing
Less
Construction
Financial Activities
Other Services
Information
-6%
Riverside and San Bernardino counties are now
growing solidly again. The local PMI posted its
fourth straight month of expansion territory
readings
in
January.
Employment
in
manufacturing also picked up quite a bit at the
end of the year. In the PMI survey from Cal
State San Bernardino, growing orders stemmed
from the hospitality and aerospace industries.
Concerns about the stronger dollar and port
disruptions, however, were also evident. The
improving
factory
sector
has
helped
transportation and warehousing employment
surge 6.8 percent from a year earlier.
Home sales growth has been strong in San
Bernardino County, although sales plummeted
in Riverside. Home prices are appreciating
faster than the state and national averages.
Although conditions are mostly improving, the
area was one of the hardest hit housing markets
in the nation and new construction remains
quite soft. There has been some modest growth
in housing permits, but they are still a long way
off from a pace of construction that would be
consistent with historical norms.
More
Educ. & Health Services
-4%
-2%
0%
2%
4%
6%
Riverside MSA Nonfarm Employment
3-Month Moving Averages
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
QCEW: Yr/Yr Pct. Change: Jun @ 4.3%
Nonfarm: Yr/Yr Pct. Change: Dec @ 2.1%
Household: Yr/Yr Pct. Change: Dec @ 2.5%
-6%
-8%
91
93
95
97
99
01
03
05
07
-6%
-8%
09
11
13
Riverside MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
60
60
Single-Family: Dec @ 9,972
Single-Family, 12-MMA: Dec @ 6,757
Multifamily, 12-MMA: Dec @ 3,484
50
Thousands

The Inland Empire’s recovery slowed toward the
end of 2014, though year-ago gains remain just
below the national average. The bread and
butter of the region, transportation and
warehousing, continued to show exceptionally
strong growth despite issues at west coast ports.
Professional, scientific and technical services
firms are also expanding rapidly in the area. The
moderation in headline growth comes from
weaker construction numbers and a relatively
abrupt slowdown in the leisure & hospitality
sector.
Thousands

Trade, Trans. & Utilities
50
Single-Family Average (1998-2003): 23,457
40
40
30
30
20
20
10
10
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and
Wells Fargo Securities, LLC
11
California Economic Outlook: February 2015
February 24, 2015
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
San Diego MSA Employment Growth By Industry
San Diego
Year-over-Year Percent Change, 3-MMA
December 2014
Total Nonfarm



12
Prof. & Bus. Svcs.
Leisure and Hospitality
Manufacturing
Financial Activities
Construction
Less
Other Services
Information
-2%
0%
2%
4%
6%
8%
San Diego MSA Nonfarm Employment
Year-over-Year Percent Change, 3-MMA
Government is the largest employer in the area.
Fortunately, it is expanding at the state and
local level. Some of this growth is likely coming
from the rapidly expanding population in the
area demanding more public services. The
downside is that federal payrolls continue to
slide lower as more costs savings are sought to
reduce the deficit.
The rapidly improving economy coupled with
strong population growth will fuel more
demand for housing and should result in more
residential construction. The large public sector
should be a stabilizing force in the area, while
technology and health services firms continue to
lead the metro area’s economic expansion.
Number of
Employees
Educ. & Health Services
Professional, scientific and technical services
employment is up 9.0 percent from a year ago.
Although much of the industry is composed of
defense contractors, there are plenty of other
tech employers, including a whole host of life
sciences firms. The other source of sizable
growth has come from health services, with
related employment up 3.1 percent from a year
ago. Two of the largest employers in the metro
area are Sharp Healthcare and Scripps Health.
A strong university system and concentration of
engineers should help keep the industry moving
in the right direction.
Demand for homes ended 2014 on a high note
but slipped some in January of 2015 as home
sales weakened across the state. Growing
demand has pushed home prices up 4.5 percent
year over year. Single-family construction is
barely above what it was at the worst of the
housing crisis, and although the multifamily
sector had performed better, permits have
recently started retreating.
More
Trade, Trans. & Utilities
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
Professional, Scientific & Technical: Dec @ 7.1%
Health Care & Social Assistance: Dec @ 3.9%
-6%
-8%
-6%
-8%
91
93
95
97
99
01
03
05
07
09
11
13
San Diego MSA Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate
20
Single-Family: Dec @ 2,400
Single-Family, 12-MMA: Dec @ 2,441
Multifamily, 12-MMA: Dec @ 4,160
Single-Family Average (1998-2003): 9,297
15
10
20
15
10
5
5
0
0
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce
Wells Fargo Securities, LLC
Thousands

San Diego’s economic expansion is gaining
steam, with nonfarm payrolls up 3.3 percent
from a year ago, and employment gains evident
across a broad assortment of industries.
Communications, information technology, life
sciences and health-related employers are
leading growth. Even the outsized public sector
has been expanding. The one remaining weight
is financial services, which, like elsewhere in the
country, have seen their payrolls decline.
Thousands

Government
Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
diane.schumaker@wellsfargo.com
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
john.silvia@wellsfargo.com
Mark Vitner
Senior Economist
(704) 410-3277
mark.vitner@wellsfargo.com
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
jay.bryson@wellsfargo.com
Sam Bullard
Senior Economist
(704) 410-3280
sam.bullard@wellsfargo.com
Nick Bennenbroek
Currency Strategist
(212) 214-5636
nicholas.bennenbroek@wellsfargo.com
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
eugenio.j.aleman@wellsfargo.com
Anika R. Khan
Senior Economist
(704) 410-3271
anika.khan@wellsfargo.com
Azhar Iqbal
Econometrician
(704) 410-3270
azhar.iqbal@wellsfargo.com
Tim Quinlan
Economist
(704) 410-3283
tim.quinlan@wellsfargo.com
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
eric.viloria@wellsfargo.com
Sarah Watt House
Economist
(704) 410-3282
sarah.house@wellsfargo.com
Michael A. Brown
Economist
(704) 410-3278
michael.a.brown@wellsfargo.com
Michael T. Wolf
Economist
(704) 410-3286
michael.t.wolf@wellsfargo.com
Zachary Griffiths
Economic Analyst
(704) 410-3284
zachary.griffiths@wellsfargo.com
Mackenzie Miller
Economic Analyst
(704) 410-3358
mackenzie.miller@wellsfargo.com
Erik Nelson
Economic Analyst
(704) 410-3267
erik.f.nelson@wellsfargo.com
Alex Moehring
Economic Analyst
(704) 410-3247
alex.v.moehring@wellsfargo.com
Donna LaFleur
Executive Assistant
(704) 410-3279
donna.lafleur@wellsfargo.com
Cyndi Burris
Senior Admin. Assistant
(704) 410-3272
cyndi.burris@wellsfargo.com
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and
Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these
publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells
Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC.
("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National
Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in
good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may
be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm
which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo
Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from
the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general
information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice.
Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2015
Wells Fargo Securities, LLC.
Important Information for Non-U.S. Recipients
For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm
authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For
purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as
defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of
retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be
relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general
informational purposes only.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE