Home Finance The State of California’s Economy

The State of California’s Economy

by internationalbanker

In January, California’s governor, Gavin Newsom, unveiled his $222.2-billion budget for the 2020-21 fiscal year for his state. “It’s often said that budgets are statements of values,” Newsom noted in his budget letter to the California State Legislature. “In America’s most populous and productive state, our state budget is more than that. It is a blueprint for a better quality of life and brighter future for millions of individuals striving and succeeding together—in pursuit of their own version of the California Dream.”

But just a day before the budget was disclosed, the Legislature’s budget analyst issued an assessment of California’s fiscal health, which contained some clear warnings. “Data provides a mixed message about the condition of the state’s economy,” the bulletin said. “Some signs point to a weakening economy, while others continue to signal growth. Overall, while not imminent, the risk of a slowdown in the coming year appears higher than it has been for some time.”

Indeed, it is perhaps this duality that represents one of the state’s greatest challenges: while some indicators suggest that it is roaring ahead, others signal caution ahead. California is the world’s fifth-largest economy, having surpassed the United Kingdom in 2018. Today, it is among the United States’ most progressive states, in which Democrats control all three branches of government and in which taxes and regulations are aplenty—which in turn helps to fund much-needed social programmes. And that $3-trillion economy can boast of record low unemployment, spectacular growth in household income that has easily outstripped the national average over the last decade and being the home of many of the world’s most valuable companies, including Apple, Google and Facebook.

Much of its stellar performance in recent years can be attributed to its leadership as a global hub for technology and healthcare. According to Bloomberg research last year, 17 percent of the 5,440 corporate locations in the state are research-and-development facilities, which comfortably beats the United States’ 10 percent, Germany’s 16 percent, China’s 13 percent and Japan’s 11 percent. And according to economist William Yu, California had the highest human-capital gain from 2011 to 2017 among the 50 states for adults 25 to 34 years old, “possibly because of the tech boom that attracted a highly educated workforce during the same period”.

Indeed, a strong labour market underlines much of California’s economic prosperity. By the end of last year, the state’s unemployment rate had reached a record low of 3.9 percent, while the job gains in December contributed to a record job expansion of 118 months, which surpasses the long expansion California managed in the 1960s. The Golden State has managed to add almost 3.5 million jobs since the current growth began nearly 10 years ago, which constitutes a remarkable 15 percent of the country’s 22.7-million job gain during the same period.

But compared to 2018, California’s gross domestic product (GDP) growth has markedly slowed. For last year’s third quarter, the Bureau of Economic Analysis (BEA) recorded California’s GDP growth at just 2.1 percent, less than half of the 4.3 percent posted for 2018 and just over half of Texas’s quarter-three growth rate of 4.0 percent.

Source: US Bureau of Economic Analysis

California is hampered by distinct challenges, most pressing being the shocking income inequality that has developed in recent years. Despite the spectacular income growth California has experienced, homelessness and poverty have also grown rapidly. Indeed, California has the nation’s worst poverty rate, with nearly 40 percent of its residents rated as either poor or “near-poor” by the Census Bureau and the Public Policy Institute of California (PPIC). As such, the state ended up being ranked a lowly 47th in terms of median annual household income in a study conducted last July by personal financial-services website WalletHub.

The state has also suffered from a deepening housing crisis over the last few years. Today, the median house price is just shy of $600,000, which is around double the national average. This is thanks in large part to California being home to four of the country’s five most expensive residential markets: Silicon Valley, San Francisco, Orange County and San Diego, as well as seventh-placed Los Angeles. And affordable houses continue to remain in acutely short supply. A highly influential 2016 study by McKinsey & Company concluded that California must build 3.5 million new housing units by 2025 to account for the backlog in unbuilt homes and to accommodate the current population growth. Governor Newsom responded in kind by making that housing-production target one of his priorities.

But a report commissioned last year by California Forward, which aimed to answer the question, “Is there enough available land in urban-served areas to meet the governor’s goal of 3.5 million units by 2025?”, found that the state won’t meet this target due to market and regulatory roadblocks that prevent development. As such, prices continue to be pushed higher, well out of the reach of much of the population, who are not experiencing similar growth in their incomes. It has thus forced many Californians to move further out of town to find affordable accommodation and thus endure tougher daily commutes. But with wildfires in the state becoming more frequent and more intense in recent times, some areas may well be prevented from adding new homes. According to Stephen Levy, director of the Center for Continuing Study of the California Economy (CCSCE), this could worsen the housing crisis even further. “At some point, the regions that are under pressure to build more housing are going to find areas that are prone to more frequent fires,” he told Bloomberg.

That said, while climate change is seemingly worsening the wildfire situation, California should be commended for having the most ambitious climate policies in the country. Indeed, the state has a goal of achieving carbon neutrality by 2045. A cap-and-trade programme that has been in place for more than five years leads the efforts, limiting carbon-dioxide emissions across numerous industries and punishing those that emit excessively with financial penalties. The revenue generated from this initiative is then used to fund further environmental programmes within the state as part of its bid to reduce greenhouse-gas emissions. And it seems to be working on the whole. By 2018, the state declared emissions had been reduced to 1990 levels, an achievement that was two years ahead of initial targets.

Looking forward, a December forecast by UCLA (University of California, Los Angeles) Anderson School of Management finds that California’s economic growth will slow in 2020. But it will still outpace the country as a whole. The research puts California’s economic expansion at 2.6 percent. “This is still above the US rate,” wrote Jerry Nickelsburg, forecast director, noting that US GDP grew by 2.1 percent in the last quarter of 2019. “While we expect further slowing of the California economy as part of the US economic growth slowdown in 2020, this differential is expected to persist.” The state’s logistics and tech industries are likely to continue to grow faster than those industries in the rest of the nation, however.

But the forecast also identifies the state’s high housing costs as well as President Donald Trump’s administration’s restrictive immigration policies, which are likely to impact Silicon Valley and the hospitality sector in particular, as likely constraints on growth. Trump’s trade war with China also threatens California’s economic prosperity, with around 200,000 businesses importing goods through the San Pedro Bay ports, representing 40 percent of all US imports. Indeed, the rate of total goods movement through the ports of Long Beach, Los Angeles and Oakland for the quarter ending in October was 4.5 percent lower than that of the previous year, while international air cargo at Los Angeles and San Francisco airports fell by nearly 10 percent over the same period.


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