Monthly Archives: February 2013

CALIFORNIA’S PERSONAL INCOME

YP Chart

Following the first post-World War 2 year-over-year decline in 2009—falling 5.8 percent—California personal income grew 3.1 percent in 2010 and 5.2 percent in 2011.  However, the details behind these trends point to a change in the nature of California’s economic recovery.

Personal Income Defined

Personal income is the earnings received by all persons from:

  • Employment (wages and benefits net of Social Security payroll taxes).
  • Property income (dividends, interest and rent).
  • Proprietors’ income (individual and partnership business income).
  • Public and private transfer payments, (Social Security, welfare, Medicare, MediCal, etc. from the public sector, and household credit losses from the private sector).

Personal income differs from “cash” income in that it:

  • Includes several non-monetary income items such as employee health insurance benefits and employer contributions to pension funds (Other Labor Income).
  • Excludes capital gains (because gains do not represent current production).
  • Excludes payouts from all pension plans, including IRA, 401k and traditional pension plans.

Income Grows in 2010 and 2011

Compensation paid to employees, or wages and salaries, is the dominant component of total personal income, accounting for 52 percent in 2010 and 2011.  In addition to the large share it represents, trends in wage growth have varied over time.  Historically, non-wage forms of income, such as proprietors’ income, dividends, interest, and rent, have grown faster than wages and salaries.  From 1970 through 1995 non-wage income in California rose an average of 9.9 percent each year while wages grew only 7.9 percent.  During the late 1990s, performance-based and stock market-linked compensation, such as bonuses and stock options, grew in importance, especially in emerging internet-connected industries.  This development, coupled with stock market activity, led to greater wage volatility and, for a time, faster wage growth.  From 1996 through 2000, wages grew 9.0 percent annually on average while non-wage income rose only 6.6 percent each year.  Following the collapse of the ‘dot.com’ bubble, wage growth slowed dramatically and once again non-wage income led the way.  From 2001 through 2011, wages grew 2.7 percent annually on average while non-wage income rose 4.4 percent on average.

Personal income growth in 2011 followed this trend.  California’s total personal income grew 5.2 percent led by 6.2 percent growth of non-wage components and 4.3 percent growth in wage and salary disbursements.  Property income—dividends, interest, and rent—was the leading income component, growing over 8 percent from 2010.  This was nearly twice the growth rate of wages and salaries (4.3 percent) and accounted for almost 27 percent of total income growth in 2011.  After wage and property income, nonfarm proprietor’s income and employer contributions for employee pension and insurance made the next largest contributions, accounting for over 13 percent of total personal income growth in 2011.

Wage growth surges at the end of 2010, then moderates

After declining in 2009, wage and salary disbursements increased in 2010 with a modest 2-percent increase followed by    4.3-percent growth in 2011.  These annual patterns, however, belie a gradual slowing in wage growth since the beginning of 2011.  Wage compensation surged during the final quarter of 2010 and the first quarter of 2011.  This surge was concentrated in four high-wage industries, including Mining, Durable Goods Manufacturing (including Computer and Electronic Manufacturing), Professional, Scientific and Technical Services, and Management of Companies, which accounted for a very disproportionate shares of these gains.  Two other high-wage industry sectors—Information and Financial Activities—also recorded unusually strong wage growth.  It appeared that as much as 30 percent of this surge came in the form of bonuses and stock options, which are often subject to significant fluctuations.

For the most part, subsequent wage growth in these sectors moderated dramatically. Only the Finance and Insurance sector posted higher wage growth at the end of 2011 compared to the end of 2010, and only just slightly better.  Wage compensation in the Mining and Durable Goods Manufacturing sectors actually declined in the fourth quarter of 2011 compared to a year earlier.

In 2011, wages grew 4.3 percent based largely on faster wage growth across a broad range of lower-paying sectors.  The strongest gains in 2011 were made in Professional and Business Services (7.7 percent) and Information (6.6 percent).  Construction saw the most dramatic turnaround.  Construction wages declined for three consecutive years starting in 2008 when a sharp drop-off in nonresidential construction put further downward pressure on a construction industry that had already experienced a dramatic slowdown in new home construction starting in the middle of 2005.  Wages paid in the construction industry fell over 19 percent in 2009, followed by a 10-percent drop in 2010.   Construction wages changed direction and expanded 3.5 percent in 2011 when home building started recovering.  In addition, Nondurable Manufacturing and Other Services, two sectors that pay below-average wages, saw big improvements.

 Changing trends in wage rates

Wage Table

Three high-paying industries, including two that are considered important California specialties, stand out.  In 2010, Mining, Durable Goods Manufacturing, and Information were the wage rate growth leaders, with average wages rising 12.9 percent, 10.1 percent, and 10.6 percent, respectively. Average annual wages paid in these sectors ranged from $89,000 to $120,000 in 2011 and they accounted for an exceptionally large share of total state wage growth in 2010.  However, this phenomenal growth was not sustained.  The pace of average wage growth in these sectors slowed to single-digits in 2011.  The average wage paid in Mining rose 1.3 percent; Durable Goods Manufacturing, 3.7 percent; and Information, 5.5 percent.

At the same time, wage rate growth accelerated notably in four other industries.  Average wage escalation in 2011 was led by the Management of Companies and Enterprises subsector of Professional and Business Services, which rose 7.8 percent in 2011 after rising 5.6 percent in 2010.  Average wages in the Arts, Entertainment, and Recreation subsector of Leisure and Hospitality rose 5.5 percent in 2011, a substantial acceleration from its 3.1-percent growth in 2010. After stagnating in 2010, wage rates paid in Construction rose 4.4 percent in 2011—the strongest acceleration among major industry sectors.  Finally, wage rates paid in the Real Estate and Rental and Leasing subsector of Financial Activities grew 5.2 percent in 2011 after rising 2.1 percent in 2010.

High, but volatile wages

These trends are clearly reflected in 4th quarter average wage payments, which indicate the importance and volatility of income earned in high-wage industries, particularly when it is paid in the form of performance-based instruments like bonuses and stock options.  These payments are fairly sensitive to national and global economic trends.  Average wages paid in the 4th quarter of 2010 rose 4.1 percent on a year-over-year basis—the strongest growth since the end of 2007.  At the end of 2011, average wages grew only 1.1 percent over the year.  Trends in the high-wage sectors noted above accounted for a large part of this slowdown.

  • Average wages earned in Mining increased substantially (over 30 percent) in the 4th quarter of 2010 from a year earlier following a period of rising oil prices and record-setting petroleum industry profits.  At the end of 2011, though, this sector’s average wage had dropped nearly 19 percent, most likely due to weaker global petroleum demand and rising energy production.
  • The wage rate paid in Durable Goods Manufacturing (computers and electronics) grew 11.6 percent in the final quarter of 2010, then dropped almost 5 percent by the close of 2011.   Information wage rates which were up almost 9 percent in the last quarter of 2010, nearly stagnated in 2011, rising less than 1 percent at the end of the year.  After rising 6.6 percent at the end of 2010, average wages in Professional and Business Services rose just over 2 percent by the end of 2011.
  • These trends reflect the strong resurgence of global demand for high technology goods and services that resulted from the initially strong recovery from the recession in 2010, particularly by China.  In 2011, however, global economic growth was slowed by the European economy and by China’s attempts to moderate its rapid expansion in 2010.

Conversely, as noted above, between 2010 and 2011 wage rate growth improved in Construction; Arts, Entertainment, and Recreation; Real Estate Rental and Leasing; and in Other Services—the only industries in which the pace of year-end      wage rate growth in 2011 improved from 2010.  This is generally a reflection of the broadening of California’s economic recovery.  Real estate markets stabilized in 2011, beginning with increased demand for rental properties.  General economic improvements also reinvigorated California’s travel and tourism industries.

Personal income data for 2011 demonstrates that California is still home to many dynamic high-paying industries.  This income, though, is more volatile than earnings in other industries.  Although income growth among California’s specialties was tempered in 2011, other industries picked up the pace, indicating that the recovery became more broad-based and sustainable.

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New Dept. of Finance Economic Forecast- A Slow Steady Recovery

Real GDP

The following is from the Governor’s 2013-14 Budget. The forecasts were prepared in November 2012 and are based on information available at that time.

 [Spreadsheet with forecast details]

While the current economic recovery is slower than previous recoveries, many sectors of the economy are improving.  Home values are rising, credit conditions are improving, and household spending—typically the principal driver of economic recovery—is strengthening.  Job creation, while still modest, also continues to improve.

However, as 2012 came to a close, uncertainty was building over domestic fiscal policies and global economic developments that tempered business investment.  The effects of Hurricane Sandy also softened economic growth at the end of 2012.

This outlook assumes the economy will not incur sharp across-the-board federal tax increases or spending cuts in 2013 and that income tax rates rise only for higher income households.

The Nation— Improving Amid Considerable Uncertainty

The nation continues to recover at a slow but steady pace.  In addition to real estate, improvements are evident in such sectors as business services, leisure and hospitality, and natural resource extraction.  Household formation is recovering in spite of modest employment growth.  The demand for housing has spread from rental housing to owner-occupied homes.   Home prices have improved in nearly all of the nation’s major metropolitan areas.  This improvement has improved consumer attitudes.

Job growth accelerated after a mid-year slowdown.  The nation added nearly 158,000 jobs each month on average from July through November of 2012, compared to adding 153,000 jobs per month on average during 2011.  In light of this modest improvement, the nation’s unemployment rate fell toward the end of the year.

Consumer confidence improved steadily in the latter months of 2012.  In November, consumer confidence was lifted to its highest level since February 2008.  This improvement translated into stronger consumer spending.  In the third quarter of 2012, consumer spending rose by 1.6 percent and contributed 1.1 percentage points to overall Gross Domestic Product growth In November, retail sales were 3.7 percent above the level a year ago.

In contrast to these positive developments, the outlook of many businesses became more cautious in the latter half of the year due to a weaker global economy and rising uncertainty about federal fiscal policy changes.  Capital equipment spending is expected to remain an important driver of economic growth, but its momentum weakened toward the end of 2012.  For example, spending on equipment and software fell slightly in the third quarter.  The growth of industrial output slowed throughout 2012 and by the year’s end was only growing modestly.  After rebounding from the effects of Hurricane Sandy, industrial production in November rose 2.5 percent from a year earlier—a much weaker gain than occurred in 2011.  Facing a slowing global economy and a strengthening dollar, export growth slowed in 2012.  Near the end of the year, there were declines in exports of industrial supplies and materials, computers, motor vehicles and parts, and consumer durable goods.

California— A Recovery for Housing

Similar to the nation, California is also in the midst of an economic recovery that is modest by historical standards.  However, the state’s recovery has also gathered momentum because of better real estate conditions, faster job growth, and improved consumer attitudes.  The state’s housing market recovery effectively began early in 2012.  The median sales price of existing single-family homes sold during the first 10 months of 2012 rose nearly 9 percent from the same months of 2011.  The pace of existing home sales also trended up during 2012.  These gains were supported by significant reductions in foreclosure activity and limited inventories of homes available for sale.  During the third quarter of 2012, the number of Notices of Default recorded on residential properties in California was down over 31 percent from a year earlier and was at the lowest level since the first quarter of 2007.

Employment gains improved in 2012.  During the first 11 months of the year, the state gained an average of 21,200 jobs per month, which is the strongest pace of job growth since 2005.  Job growth came entirely from the private sector as government employment continued to decline throughout the year.  Even though job gains included high-wage, high-technology industries such as computer systems design and scientific research and consulting, income growth moderated beginning with the last quarter of 2011.  Total California personal income is projected to grow from $1,645 billion in 2011 to $1,728 billion in 2012.  The growth in personal income included approximately $7 billion in additional wages from the Facebook Initial Public Offering, which accounts for more than 8 percent of personal income growth in 2012.

Calif Nonfarm Emplooyment

California personal income has historically grown slightly faster than the nation’s as a whole.  From 1980 to 2011, California’s total personal income grew 6.1 percent per year on average, while the national income grew 6 percent.  Over that time, California’s personal income has become more concentrated.  In 2010, the wealthiest 1 percent of income earners accounted for 21 percent of adjusted gross income compared to 10 percent in 1980.

Consumer spending in California also improved in 2012.  Taxable retail sales during the first half of 2012 grew 8.8 percent from the same period in 2011.  New motor vehicle registrations issued during the first 10 months of 2012 increased over 25 percent from the same months of 2011.

Since the recovery began in 2009, California’s economic growth has been dominated by high-technology and export-oriented industries located predominantly in major coastal metropolitan areas. However, in 2012, growth spread to other sectors and regions, thus improving economic conditions throughout the state.  During the first 10 months of 2012, 23 of the state’s 28 metropolitan areas added jobs.  By contrast, only one area posted a job gain in 2010 and only 19 did in 2011.  Home prices are recovering in most regions, including many of those that were hardest hit by the housing collapse, such as the Inland Empire and the Central Valley.

California’s recovery was initially driven by growing business activity and investment.  This trend slowed in 2012 due to China’s economic slowdown, concerns about European economic troubles, and rising uncertainty about federal fiscal policies.  This has been counterbalanced, however, by better consumer spending and attitudes that resulted from improvements in real estate conditions and modest but consistent job growth.

The Forecast

Both the national and state economies will continue to grow at moderate paces.  This forecast assumes that a recession potentially caused by federal fiscal policies is avoided, economic growth in Europe stabilizes, and China and other emerging market economies improve.

According to the Index of Leading Indicators, the economy should continue to expand at a moderate pace in the near future.  The Index is a widely followed economic indicator based on the average of ten economic statistics used to predict the direction of the economy over the next six to nine months.  It is generally considered to be a good predictor of recessions and recoveries.

The turnaround of the nation’s housing markets coupled with accelerating job growth has strengthened the recovery.  As uncertainty over fiscal policy lessens, national economic growth is expected to reaccelerate in the latter half of 2013.  Real Gross Domestic Product is forecast to grow 1.8 percent in 2013, 2.8 percent in 2014, and 3.4 percent in 2015.

California’s recovery is also expected to improve, with home building and job growth.  Nonfarm employment is projected to grow 2.1 percent in 2013, 2.4 percent in 2014, and 2.5 percent in 2015.  California should recover the jobs lost during the recession in the second quarter of 2015, which is two quarters earlier than projected in the prior forecast.  Total California personal income is projected to grow by $83 billion or 5.1 percent in 2012.

Jobs Lost

The principal risk to this outlook is the potential impact of a series of automatic federal tax increases and spending cuts that were set to take effect early in 2013 and the effect of federal actions regarding the debt limit.  The forecast, developed in early December, assumed that the federal income tax rate for households earning more than $250,000 per year would return to pre-tax cut levels in 2013 and that payroll tax rates would not be raised at the beginning of 2013.  Any effects of federal actions in early 2013 will be incorporated in the May Revision.

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