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By Steve Levy

Is the Bay Area Economy in a Bubble?

Uploaded: Feb 19, 2016

I think it is helpful to try and use common language here.

Most talk about bubbles refers to asset bubbles—like the sharp decline in tech startup stock prices after the boom or the sharp drop in home prices that started in 2005.

But some people talk about a bubble in the real economy—so there are two uses of the term.

Second, a bubble breaking implies a decline in prices or jobs. So the end of a bubble is different from a slowing of asset price or job growth.

And finally the end of a bubble should be distinguished from a recession. The end of the boom or the end of the housing bubble in 2005 contributed to the recessions that followed but they preceded them. The housing market correction after 2005 was really the end of a bubble because the rise in prices was not caused by a shortage of housing but rather from exuberant valuations.

The real Bay Area economy is not in a bubble. Jobs and income are not poised to decline. Major companies like Google, Facebook, Apple and LinkedIn have major expansion plans underway as well as millions of customers and $billions in revenues, still rising. UCLA does forecast a slowing of job growth from over 4% in 2015 to 3% in 2016 and 2.7% in 2017 with even slower growth after that.

It is hard to match the growth rates possible when coming after high unemployment but now unemployment is already low so that part of job growth is behind us. But a decline is not in sight.

What about asset prices. I am not an expert on stock prices so will not comment on the stock market except to say that if asset prices continue to fall, it IS more likely a revaluation of future prospects than a sign that a recession is coming.

Home prices and rents, like jobs, may see a decline in their growth. But in this case the price and rent increases ARE the direct result of a housing shortage, which is unlikely to be erased any time soon.

We are not yet building enough housing to match even a slowing job growth rate.

Disturbances in the world economy or policy muck ups at home can cause a recession but that raises a whole different set of questions than assessing whether jobs or asset prices are currently at a bubble stage.