California economy surges, but future cloudy

Last year was a strong one for California’s $3.4 trillion economy.

The state added 621,400 jobs, finally regaining the nearly 3 million that were initially lost during the COVID-19 pandemic as Gov. Gavin Newsom shut down major economic sectors. The year ended with a near record-low 4.1% unemployment.

“California continues leading the nation’s economy,” Newsom boasted after the December employment report was issued this month. Earlier he projected that if California were a nation, it would be close to surpassing Germany as the globe’s 4th most powerful economy.

All good. In fact, some economists believe that California’s job growth is so strong that only a shortage of workers – due to a decline in the number of Californians seeking work – is a major impediment to expansion.

That’s the economic upside.

The downside is that no one seems to know whether the good times will continue or the state will experience one of its periodic recessions, which tend to hit about once a decade.

For the last few months, the Federal Reserve System has been attempting to dampen inflation by raising interest rates. Its stated hope is that the economy will cool off enough to curb inflation but avoid a sharp downturn into recession.

It’s not yet clear whether the system’s efforts will work as planned and economists are mixed in their projections of what lies ahead economically for the nation, not only because of the Federal Reserve’s actions but other factors, such as the war in the Ukraine.

Newsom’s proposed 2023-24 budget reflects that uncertainty.

“The uncertain future paths for inflation and Federal Reserve policy pose short-term risks,” the budget declares. “If high inflation persists longer than expected or if the Federal Reserve policy causes greater pullbacks by businesses or individuals, the economy could tip into a mild recession.

“This could lead to a steeper decline in investment and interest-sensitive consumption, which in turn could cause a larger decline in economic growth and reduced nonfarm employment and personal income growth.”

“The biggest economic threat is continued inflation,” an analysis by the Public Policy Institute of California contends. “While December consumer data marked six straight months of slowing inflation, prices have not yet abated enough. Until that happens, the Federal Reserve will likely continue to take steps to slow the economy, increasing the risk of a recession.”

Recession fears and other factors are already having an effect on the budget, turning what Newsom and legislators thought was a nearly $100 billion surplus last summer into a multi-billion-dollar deficit due to sharp declines in projected revenue, mostly taxes from high-income Californians.

The most powerful engine of California’s economy, and therefore of the state’s revenue stream, is the Bay Area-centered technology industry, whose major firms are sharply reducing payrolls through layoffs after expanding during the pandemic to serve the shift to work-at-home employment.

Despite the layoffs, the region was still adding jobs during December – in fact 84% of the jobs California gained during the month, which attests to the mixed economic signals the state is experiencing.

“We don’t see anything catastrophic happening with tech,” Patrick Kallerman, vice president of research with the Bay Area Council Economic Institute, said. “I don’t see the tech industry collapsing.”

While economists debate over the economic future and Capitol politicians dicker over how to deal with the projected deficit, their constituents are turning sour.

A November poll by the Public Policy Institute of California found high pessimism about the economy with 69% of Californians surveyed saying they expect bad times in the next year and 62% expecting periods of higher unemployment during the next five years.