Promise and Perils of an Accelerated Economy

Bay Area Economic Profile

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It has been over eight years since the onset of the Great Recession, and we are in the midst of one of the longest periods of consecutive jobs and output expansion in the history of the Bay Area. Since the middle of 2009, the region has posted consistent, strong growth in every quarter.

In contrast to its slow recovery following the dot-com crash, the Bay Area has recovered much faster than the rest of the country. The nation did not return to its pre-recession employment peak until early 2014, but the Bay Area reached its peak by the end of 2011. By the end of 2015, the region’s absolute employment level was more than 10% higher than at the height of the last economic cycle.

But there are storm clouds on the horizon. The question is not whether we will experience another recession, but how significant the economic contraction will be in the Bay Area compared with the rest of the nation and the world. Will it be as short as it was in the recovery from the Great Recession or as severe as it was in the wake of the dot-com crash?

Equity considerations must inform our outlook as well. The phenomenal regional run-up in wealth has not been shared by all, and poverty in the region has actually increased during the recovery. How can we leverage the Bay Area’s many strengths to sustain economic success across business cycles and promote more prosperity?

 

This report, the ninth in a series of Bay Area Economic Profile reports produced since 1997 by the Bay Area Council Economic Institute and McKinsey & Company, examines the region’s economy as it has emerged from the Great Recession to enter a new period of growth and innovation. As previous reports have done, it benchmarks the Bay Area’s performance against other knowledge-based economies to assess the region’s national and global competitiveness. It also examines the economic and policy challenges that continue to confront the region even in a period of extraordinary growth.

Net Domestic Migration Has Turned Positive
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Ten Bay Area Startups Are Now Valued at More Than $4 Billion, and Five Have Achieved "Decacorn" Status
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The Bay Area Continues to Dwarf Other States and Regions in Venture Capital Investment Attraction
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The Pace of Housing Construction is Increasing, but is Insufficient to Meet Demand
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California Faces a Significant Gap for Qualified Talent
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Home Prices Are Dramatically Rising Across the Bay Area
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Bay Area Jobs Recovery vs. United States
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A Diverse, Resilient Economy

The typical narrative behind the Bay Area’s strong recovery is that it is largely tech-sector led, and it is certainly true that tech has grown and Silicon Valley is booming once again, powered by unparalleled financial resources that support peerless innovation. The Bay Area’s share of US venture capital funding is higher than it has ever been and patents per capita vastly outnumber peer regions. The number of “unicorns”—start-ups with valuations over $1 billion—has multiplied, though some have recently stumbled.

The Bay Area’s economy is now rooted in a diverse, competitive industry set. Whereas peer regions such as New York City and Houston tend to have their largest companies focused in one sector (e.g., finance and energy, respectively), the Bay Area has companies distributed across all major sectors.

 

In addition, the traditional lines between technology and other sectors are blurring. Technology is transforming industries such as finance, accommodations, and transportation through companies such as SoFi, AirBnB, and Lyft. Unlike many of the technology firms of the dot-com era whose business models relied on internet advertising revenue, today’s technology companies often generate revenue early in their life cycles and appear to be on more solid financial footing. They are producing regional wealth and driving job growth in a fundamentally different way. The region is also home to three of the world’s most valuable companies—Apple; Google’s parent company, Alphabet; and Facebook—all of which are likely to endure for decades as major engines of economic growth.

Challenges to Sustained Growth

This run-up in jobs and income growth, however, brings with it many challenges. In many ways, it is exacerbating longstanding issues such as transportation congestion and lack of affordable housing. In prior economic profiles, we contended that as long as the Bay Area maintained its productivity edge, the region would remain globally competitive and would be able to prosper. Underpinning this logic is the notion that productivity gains would be broadly shared, either directly through employment or indirectly through increased demand for supporting services.

Over the past 15 years, the average wage in the Bay Area has remained largely flat in real terms while productivity has increased over 20%.
 
 
 
 
 

 

This widening gap has led to the point where the “premium” we get for being more productive than peer regions is more than offset by our high cost of living. In San Jose, for example, the difference between the local cost of living and the national average is greater than the difference between average local and national wages. And workers who do not participate in the Bay Area’s “knowledge economy” often make much less than the region’s average wage.

We write this not to sound alarmist or to take away from the region’s glowing success. Rather, our focus is on how we can manage this success and ensure that the new economy works for everyone. We cannot ignore our perennial problems in infrastructure, education, and housing. We also need new tools and perspectives to manage a rapidly changing 21st century economy. Success requires innovations not only in technology, but in healthcare delivery, education-to-employment pathways, and other policies and practices that will sustain regional success and a high quality of life in the long run.

Read the Full PDF Report on the Promise and Perils of an Accelerated Economy: Bay Area Economic Profile »