California is often at the forefront of the nation’s economy. Now, as fears of a national recession continue to linger, the state hopes not to take the lead on that front.
While California’s economy remains strong, outpacing even most states, the state’s strongest industries — including technology companies and supply chain logistics — have struggled to gain a footing amid high interest rates, investor jitters , labor disputes and other unrest.
Not even the weather. Severe flooding caused by atmospheric rivers throughout much of the winter devastated farming communities in the Central Valley, causing hundreds of millions of dollars in crop losses.
With thousands of Californians laid off over the past few months and the cost of living rising, Gov. Gavin Newsom revealed in January that the state faces a $22.5 billion crisis in the 2023-24 fiscal year. The deficit — plummeted from a deficit of $100 billion a year ago to a surplus of $1 billion.
“It’s an electrocardiogram,” Mr. Newsom said at the time, comparing a graph of state income to sharp spikes and dips in the heart’s electrical activity. “That sums up the tax structure in California. It sums up boom and bust.”
That structure relies heavily on taxing the incomes of the wealthiest Californians, which usually translates into troughs when Silicon Valley and Wall Street are as restless as they are now. Google parent Alphabet, one of the state’s most prominent companies, said in January it would cut 12,000 jobs worldwide, while Silicon Valley Bank, a major lender to tech start-ups, collapsed last month, throwing the federal government into a tailspin. Limit consequences.
This coincided with a decline in venture capital funding as investors became more risk-averse due to rising interest rates and recession fears. that money, 36% drop globally According to management consulting firm Bain & Company, the period from 2021 to 2022 will be critical to Silicon Valley’s ability to create new jobs.
“The tech industry is the backbone of the state’s economy, it’s the backbone,” said Sung Won Sohn, a professor of financial economics at Loyola Marymount University. “These high earners may not be able to carry the burden of the country as much as they have in the past.”
The entertainment industry, another pillar of the California economy, is also in decline as studios adapt to new viewing habits. Burbank-based Disney announced in February that it would cut 7,000 jobs worldwide.
In California alone, employment in the information industry, which includes technology and entertainment workers, fell by more than 16,000 jobs from November to February, according to the latest Bureau of Labor Statistics data, which predates the most recent wave of layoffs in March .
A recent survey by the nonpartisan Public Policy Institute of California found that people are generally pessimistic about the economy. Two-thirds of respondents said they do not expect the state’s economy to do well in the next year, and an overwhelming majority (62%) said they believed the state was already in recession.
When Mr. Newsom announced the deficit earlier this year, he vowed not to tap the state’s $37 billion in reserves, calling instead to suspend funding for child care and reduce funding for climate change initiatives.
California Treasurer Joe Stephen Shaw said in an interview that he and top economists had begun to identify the state’s worries in the second half of last year — persistent inflation, higher interest rates and a volatile stock market. Year.
“These risks became reality,” said Mr Stephen Shaw, a governor’s appointee.
He acknowledged that the problem was largely caused by declining incomes for top earners, including market-based compensation such as stock options and bonus payments. As economic activity slows, interest rates rise and stock prices fall, he said.
But the state’s problems aren’t limited to the tech sector.
California’s robust supply chain, which drives nearly a third of the state’s economy, continues to be overwhelmed by the pandemic and ongoing labor battles between dock workers and port operators up and down the West Coast, prompting Many shipping lines have turned to ports on the Gulf of Mexico and the East Coast. Cargo handling at the Port of Los Angeles, a major entry point for Asian cargo, was down 43% in February compared to a year earlier.
“The longer it drags on, the more cargo is diverted,” said Geraldine Knatz, a professor of policy and engineering practice at the University of Southern California and executive director of the Port of Los Angeles from 2006 to 2014.
Still, no matter which way the economic cycle goes, California will enter it with some strengths. Although the unemployment rate was 4.3% in February, higher than most states, lower than the level of a year ago.inside San Francisco and San Jose Metropolitan Areathe unemployment rate is below 3.5%, which is better than the national average.
For decades, California’s economy has historically experienced the highest of highs and the lowest of lows as part of the state’s boom-bust history. During the recession of the early 1990s, driven largely by aerospace cuts following the end of the Cold War, California was hit much harder than the rest of the country.
In March, UCLA Anderson Forecast, which provides economic analysis, released forecasts for the U.S. and the state of California, pointing to two possible scenarios — one in which a recession is avoided and the other occurs by the end of the year.
“Even in our recessionary scenario, we’re going to have a mild recession,” said Jerry Nickelsberg, director of forecasts at Anderson.
Either way, California’s economy is likely to outperform the national economy, the report said, pointing to increased demand for software and defense products, areas where the state leads. Mr Nickelsburg also said the state’s rainy day fund was healthy enough to absorb the drop in tax revenue.
But that shortfall could complicate how quickly Mr. Newsom can implement some of his ambitious progressive policies. In announcing the deficit, Mr Newsom slashed funding for climate proposals from $54 billion to $48 billion.
The fiscal outlook also casts a cloud over progressive proposals that enjoy broad support from Democrats, who hold a solid majority in the legislature.
A state panel that has been discussing reparations for Black Californians is due to release its final report midyear. Economists predict $800 billion may be needed in reparations to compensate for excessive policing, housing discrimination and disproportionate incarceration rates. Once the panel releases its report, it will be up to lawmakers in Sacramento to decide how much state revenue will support reparations — a notion Mr. Newsom subscribes to.
Through it all, one thing has remained consistent: Many Californians say their biggest financial worry is housing costs.
The median value of a single-family home in California is about $719,000, up nearly 1% from last year, According to Zillow — Recent census data show that some of the state’s largest metro areas, including Los Angeles and San Francisco counties, continue to shrink in population. (In Texas, where many Californians relocate, the median home value is about $289,000.)
Still, some Californians remain optimistic.
Zeeshan Haque, a former software engineer at Google, learned in January that he would be fired. His last day is March 31.
“It just popped up, very suddenly,” said Mr. Harker, 32, who recently moved to Los Angeles from the Bay Area.
In February, he bought a $740,000 home in the city’s Chatsworth neighborhood and has taken the time to focus on renovations. But in recent weeks, he has started looking for a new job. He recently updated his LinkedIn profile picture to show the hashtag #opentowork and said he hopes to find a new job soon.
“There’s a lot of competition right now because there are so many layoffs,” he said.
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