The California economy will maintain steady growth according to the latest projection from the Center for Business and Policy Research at the University of the Pacific. California is experiencing substantially faster job growth than the rest of the U.S., and the State’s economy is expected to maintain steady 3 percent growth for the next several years even as the pace of job growth slows from 3 percent to a still solid 2 percent in 2016. After 2016, job growth is forecast to remain positive but slowly decelerate towards 1 percent as the unemployment rate stabilizes around a 5 percent rate. Significantly faster growth would require higher population growth which seems unlikely given the state’s extremely high cost of living and building housing shortage. While housing construction is anticipated to continue its recovery, increasing 50 percent over the next three years and provide a significant economic boost to inland areas, this will barely be enough to accommodate a projected 1 percent population growth rate for California.

The regional outlook finds that San Joaquin and Alameda counties led the state in population growth in 2014 and 2015, and largely as a result, the UOP study expects the Oakland and Stockton metropolitan areas to lead Northern California job growth in 2016 after five years of San Francisco and San Jose posting the fastest growth. While a slow-down is expected from incredible growth rates of recent years in Silicon Valley, its dynamic economy is the driving force behind much of the inland growth as high costs and scarce labor cause its economic growth to spill into neighboring areas.

Highlights of the January 2016 California Forecast

California is forecast to experience 3.5 percent growth in real gross state product over the next 12 months, and maintain steady GSP growth near 3 percent growth through 2019.

The California unemployment rate has fallen to 5.8 percent. We expect the unemployment rate to continue to drop gradually over the next two years before stabilizing around 5 percent.

Nonfarm payroll jobs have grown at a strong 3 percent pace for the past three years, but we project more moderate 2.1 percent growth in 2016. Job growth will slow further in 2017 and 2018 as the economy approaches full employment, as 1 percent growth will be sufficient to keep pace with population and labor force growth.

Health Services has become the largest employment sector in the state, and is projected to add an additional 60,000 positions across California in 2016.

Professional Scientific & Technical Services is a high-paying sector that has fueled the recovery, having fully recovered pre-recession employment over three years ago. Growth in this sector will continue but at a slower pace as the cost and labor constraints begin to slow Silicon Valley growth in 2016.

Growing tourism and a gradual shift in consumer spending from retail to restaurants has led the Leisure and Hospitality sector to exceed 4 percent job growth in each of the past four years, and is projected to add an additional 20,000 jobs in 2016.

State and local government employment is growing again, and should add about 30,000 jobs statewide in each of the next several years. State and local government payrolls in California will finally regain their 2008 level in about two years.

About 40,000 new Construction jobs are anticipated in each of the next three years, about a 5 percent annual growth rate. Despite this expected growth, there will still be fewer Construction jobs in 2020 than before the recession.

Single-family housing starts are beginning to increase, falling just short of 50,000 units in 2015. We project a substantial increase over the next two years, to 66,000 in 2016, 85,000 units in 2017, before stabilizing near 90,000 units beyond 2017.

Multi-family housing starts have recovered pre-recession levels, and are projected to gradually increase from 50,000 units in 2015 to 60,000 units by 2018.

The severe drought has had a relatively small statewide economic impact. We estimate total drought related losses in 2015 at $3-4 billion, less than 0.2 percent of state GDP. The El Nino fueled rainy season is off to a promising start, but we don’t anticipate any significant statewide economic boost if the drought abates.

The Center for Business and Policy Research at the University of the Pacific was founded in 2004, and was known as the Business Forecasting Center until March 2015.