Over the past six months, Sacramento’s economic pulse appears to have gradually slowed. This observation is based on the fact that employment growth in the metro area has steadily moderated from 2.7% year over year in April of this year to 1.0% in October.

Steep Decline in Construction Employment
The major contributor to the slowdown has been a steep decline in construction employment. Since May, construction employment has fallen by 3,700 jobs and has dropped 7.8% compared to October 2006. Despite the jobs weakness in construction and in financial services (i.e., real estate), Sacramento’s economic “vital signs” are still quite healthy due to solid employment gains in professional services (+3.6% year over year), educational services (+2.8%) and government services (+2.9%).

As has happened across the country, tightening of lending standards and a significant erosion of consumer confidence have combined to cause a sharp drop in housing demand. Over the past two years, the median price of an existing resale home in Sacramento has fallen by 15.7%, the second largest decline among the 15 regions across California.

The fact that single-family housing starts have dropped by 19% compared to a greater 28% drop for the country as a whole suggests that moderate growth of employment is supporting single-family housing demand. However, multiple-unit starts in Sacramento have fallen by 67% year over year compared to a 12.9% drop nationwide, suggesting that tighter lending requirements are forcing many first-time and lower-income buyers to sit on the sidelines until market conditions become more stable and credit conditions ease.

Government Jobs Continue to Underpin the Local Economy
Looking forward, housing will continue to depress Sacramento’s growth over the next several quarters. Having said this, the metro area’s largest economic driver, government and government-related businesses (which make up 37% of the city’s economic base) should continue to underpin growth and offset the impact of job losses in construction. As a result, the Sacramento metro-area economy is expected to limp through 2008 and stage a recovery in 2009.

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