Can the Bay Area Maintain the Boom Times?

How should businesses in the Bay Area plan for the year ahead? Todd Hankin, Partner-in-Charge of EisnerAmper’s California Audit and Assurance Practice sat down with Patrick Kallerman, Research Director at the Bay Area Council, to get an economic forecast for 2019 to help clients plan for the coming year.                         

Hankin: How does growth in the Bay Area compare to other places, both nationally and internationally?

Kallerman: The Bay Area is a pretty hot place to be—San Francisco and Silicon Valley particularly. What a lot of people don't realize is just how big economically the Bay Area really is. If it was its own country, it would be the 18th largest economy in the world. The growth rate here compared to almost everywhere in the world, including India and China, is really high—as high as 12.9% in the San Jose metro area in 2015, which was actually faster than China’s growth rate for the same year. It’s slowed down a bit since then, but not by much. While the 2018 numbers aren't out yet, I think there'll indicate more of the same. Regardless, the Bay Area looks pretty impressive. It’s not surprising, then, that we lead by quite a bit when compared to our domestic peers. In fact, only four states have an economy larger than the Bay Area.

One key driver of Bay Area growth is its highly educated workforce. Add to that the world-renowned   universities and major research facilities and you have the ingredients for a very successful economy.

Hankin: How much does the technology sector impact the Bay Area?

Kallerman: Well, it’s no secret that high-tech jobs are a primary reason for our economy’s success. This sector has an extremely high productivity factor or what we call a local jobs multiplier. The Bay Area is made up of two metros: San Francisco has more than one-and-a-half times the technology jobs than the average U.S. metro has; in San Jose it’s almost two-and-a-half times. Boston and Austin—frequently cited as booming alternative technology and biotech hubs—are not even close to these numbers.

And there’s more good news. The Bay Area gets just shy of 50% of all venture capital dollars nationwide each year, and about 30% of all the deals are done here. This took a small dip in 2016, which concerned us that things may be slowing down, but it has ticked back up to an all-time high.

Hankin: What’s the scene like beyond the tech community?    

Kallerman: FORTUNE breaks up its list of the top 500 companies among different U.S. economic sectors. And what people may not realize is that the Bay Area has a pretty diverse economy. For example, compared to New York, we have a really good distribution of companies across consumer products, energy, financial services, insurance, telecom, media and others. This diversification has helped us stay strong through past recessions. Furthermore, we’re increasingly seeing a rush of companies from other metro areas as well as other countries opening offices here. It just goes to show that unique things are happening here and a host of other companies are noticing and want to be part of it.

Hankin: What’s happening with consumer spending in the Bay Area?

Kallerman: Consumer spending is one of the main drivers of our economy and it remains really strong. The last couple quarters have been great and it hasn't shown any sign of slowing down. It appears, however, that there might be some cracks that are starting to show up in other statistics as a result of the government shutdown, market volatility and so forth. So, it’s definitely something to keep an eye on.

Interestingly, lightweight vehicle sales is a really popular and somewhat wonky statistic worth looking at. When the economy is going well and you have high confidence, consumers start purchasing durable goods. And one of those things is lightweight vehicles, which had strong sales, but have recently leveled off—though they are a seasonal purchase. I think that's kind of a fun thing to think about.

Hankin: How concerned should we be about the effects of the recent government shutdown?

Kallerman: The Chair of the Council of Economic Advisors just warned that the U.S. could post zero economic growth in the first quarter of 2019. That would be extremely worrisome. It’s not only all of the federal workers who were impacted, but all of those who were also indirectly affected. For example, federal contractors are a huge portion of the economy and their purchasing patterns are very important to the private sector. So when that decreases over time, confidence falls and bad things can happen. While I don't think Q1 economic growth will drop to zero, anything's possible these days.

Hankin: Our clients are concerned about interest rates. Should they be?

Kallerman: The Fed Chairman and Federal Open Market Committee members get together to discuss rates on a regular basis. Compared to the last meeting, they think rates might not rise quite as much as they thought six months ago. They're probably going to level off a bit more than folks thought, and they won't reach as high a point before they level off longer term. The committee predicts rates will rise slightly, less than they did at their last meeting, settling at 2.75% long term. It's not an official vote, it's just a way of gauging their feelings. But these are the folks who know the economy better than probably anyone.

The International Monetary Fund estimates that the world economy will level out and growth, specifically in the advanced economies, will slow. I think it's no surprise to most that our current expansion, one of the largest in modern history, can’t last forever. Fundamentals still look very good, so there's no reason to panic yet, but there is some worry that eventually it might fizzle out. I honestly don't see any of that happening in 2019, but it is something to monitor.

Hankin: What should we be concerned about at the local level?

Kallerman: Well, there are a few things worth watching:

• Coming from a national level but hitting at the local level is the trade war. Our imports and exports are going to be impacted by this. So as this continues, not only does confidence dip, but prices go up, which might slow things down.
• Another difficulty that faces us locally is that we’re building a lot fewer homes than similar metros. We're well below other urban places like Boston, Seattle, New York and Houston in terms of building. When supply is so constricted, it becomes really expensive to keep and move talent here. And that's a pretty big impediment to economic innovation, especially if you're a smaller startup that can’t afford it. It’s something we're always looking at, something that's really important. If folks don't have a place to live, the economy's probably not going to thrive.
• We have a lot of mega commuters—people who take more than 90 minutes to get to work. A biotechnology company executive told me that his employees are increasingly coming to him saying it's tough to get here. Now this company requires very specialized talent and can't just go find someone else to do this research.
• Over the years, the Bay Area has been a magnet for foreign expats moving in, which might slow down given the circumstances. If that trend continues, we will have a problem. We hope this migration continues to happen. But if it is undermined, that would harm the country as a whole and be especially detrimental for us.

So when we take a look at everything that’s happening, 2019 could wind up being the best year economically ever for the Bay Area. But I’d be remiss if I didn’t temper that statement by saying there are some headwinds at the international, national and local fronts that should concern us.

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