Wells Fargo economist: ‘Bay Area is beginning to buckle’

Wells Fargo economist: ‘Bay Area is beginning to buckle’

A Wells Fargo economist says the Bay Area economy might be getting so hot that the region’s tight labor market and ever-higher cost of living could take a toll on economic growth.

“After five years of exceptionally solid economic growth, the Bay Area is beginning to buckle under some of the strains generated from growing at such a rapid pace,” senior economist Mark Vitner said Thursday.


“The strains are rising costs, increased traffic congestion and greater difficulty finding the workers employers need,” said Vitner, who also discussed the region’s economy with more than 700 business and civic leaders at the San Francisco Business Times annual Mayors’ Economic Forecast Breakfast in Oakland today.

The Bay Area economy is roaring. Annual economic growth after inflation has averaged 4 percent from 2010 to 2015, Vitner said. The national economy grew at slightly less than half that rate during the same period.

He estimates the greater Bay Area economy grew 5.9 percent in 2016, more than three times the national economic growth rate of 1.6 percent.

That’s the good news. Vitner says traffic congestion and the high costs associated with calling the Bay Area home are serious headwinds on the region’s economy.

Plus the ability to hire and retain employees has become more challenging, pushing up wages, Vitner said.

Bay Area employers are also facing a growing wave of baby boomer retirements, adding to hiring demand amid the region’s tight labor market. For instance, San Francisco-based PG&E said 40 percent of its total workforce is eligible to retire today.

“Growth in the region has shown some signs of moderation this past year,” Vitner said, pointing to San Francisco metro area job growth coming in at 3.1 percent last year, down from 4.8 percent in 2015.

“Home price appreciation has moderated, following huge gains at the higher-end of the market,” Vitner said. “In addition to suffering from some indigestion from previous price spikes, demand for higher-priced homes also likely cooled off a bit as the IPO market slowed and interest from overseas buyers waned.”

Vitner’s assessment on the region’s economy is echoed by others.

Fremont Bank CEO Andy Mastorakis told the Business Times this week that some of his bank’s borrowers, such as those tied to health care and tech are doing great, but real estate investors and developers are growing more cautious.

That’s a good thing, Mastorakis said, adding, “We’re closer to the top of the market than the bottom.”

Looking ahead, Vitner sees employment growth and home prices continuing to moderate in 2017.

“Hiring has cooled off as employers have had a more difficult time filling vacant positions and rising compensation costs have raised the bar for many new hires,” Vitner said, adding that the Trump administration’s policies on trade and immigration could also hinder the Bay Area economy.

“Increasing restrictions on immigration is another issue for employers, and the Bay Area in general, which may adversely affect hiring in the region’s technology, construction, hospitality and agriculture sectors,” Vitner said. “The Trump administration’s trade initiatives may also create some downside risks to the region, with threats of border taxes and tariffs potentially slowing trade with key trading partners such as Mexico and China.”