California has often been at the economic forefront of the country. Now, as fears of a national recession linger, the state is hoping not to lead the way.
While California’s economy maintains its powerhouse status, surpassing even that of most countries, the state’s most powerful sectors, including tech companies and supply chain logistics, have struggled to hold their ground, battered by high interest rates, investor jitters, labor struggle and other tumult.
Even the weather hasn’t cooperated. Severe flooding for much of the winter, caused by atmospheric rivers, has devastated farming communities in the Central Valley, causing hundreds of millions of dollars in crop losses.
Thousands of Californians have been laid off in recent months, the cost of living is increasingly astronomical, and Governor Gavin Newsom revealed in January that the state faced a $22.5 billion deficit in fiscal year 2023-24, a plummeting fall. from the $100 billion surplus a year ago.
“It’s an EKG,” Newsom said at the time, comparing a graph of the state’s revenue to the sharp spikes and dips in the heart’s electrical activity. “That pretty much sums up California’s tax structure. It sums up the rise and fall.”
The structure, which is based in large part on taxing the incomes of the richest Californians, often translates to busts when Silicon Valley and Wall Street are jittery, as they are now. Alphabet, the parent company of Google, one of the state’s most prominent corporations, said in January it was laying off 12,000 workers worldwide, and Silicon Valley Bank, a key lender to tech startups, collapsed last month. , prompting the federal government to scramble. to limit the consequences.
This has coincided with a drop in venture capital funding, as rising interest rates and recession fears have led investors to become more risk-averse. That money, that decreased by 36 percent globally from 2021 to 2022, according to management consultancy Bain & Company, is critical to Silicon Valley’s ability to create new jobs.
“The technology sector is the workhorse of the state’s economy, it’s the backbone,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University. “These are high-income people who may not be able to run the state as much as they have in the past.”
Entertainment, another mainstay of California’s economy, has also slipped as studios adjust 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 sector, a category that includes technology and entertainment workers, fell by more than 16,000 from November to February, according to the latest data from the Bureau of Labor Statistics, which predates a recent wave of job cuts in March.
The State of Employment in the United States
A recent survey by the nonpartisan Public Policy Institute of California found widespread pessimism about the economy. Two-thirds of those surveyed said they expected bad economic times for the state over the next year and a solid majority of those surveyed, 62 percent, said they felt the state was already in a recession.
When Mr. Newsom announced the deficit earlier in the year, he vowed not to dip into the state’s $37 billion reserves and instead called for breaks in child care funding and a reduction in funding for anti-drug initiatives. climate change.
Joe Stephenshaw, director of the California Department of Finance, said in an interview that he and top economists had begun to see points of concern — persistent inflation, higher interest rates, and a turbulent stock market — on the state’s horizon during the second half of last year. year.
“Those risks became a reality,” said Mr. Stephenshaw, the governor’s appointee.
He acknowledged that the problem was largely due to declining earnings for high-earning workers, including from market-based compensation such as stock options and bonus payments. As activity slowed, he said, interest rates rose and stock prices fell.
But the state’s problems are not limited to the tech industry.
California’s robust supply chain, which powers nearly a third of the state’s economy, has continued to weaken under the stress of the pandemic and an ongoing labor fight between longshoremen and port operators across the West Coast, led many shipping companies to rely on it instead. in ports along the Gulf and Eastern coasts. Cargo processing at the Port of Los Angeles, a key entry point for shipments from Asia, was down 43 percent in February from a year earlier.
“The longer it goes on, the more cargo is diverted,” said Geraldine Knatz, a professor of policy and engineering practice at the University of Southern California who was chief executive officer of the Port of Los Angeles from 2006 to 2014.
Still, wherever the economic cycle leads, California is facing it with some strengths. Although unemployment in February, at 4.3 percent, was higher than most states, was lower than the rate of the previous year. In it San Francisco and San Jose metropolitan areasunemployment was below 3.5 percent, better than the national average.
For decades, California’s economy has historically seen the highest of highs and the lowest of lows, part of the state’s boom and bust story. During the recession of the early 1990s, fueled in large part by cutbacks in the aerospace industry after the end of the Cold War, California was hit much harder than other parts of the country.
In March, UCLA’s Anderson Forecast, which provides economic analysis, released projections for both the nation and California, pointing to two possible scenarios: one in which a recession is avoided and one in which it occurs toward the end of this year. .
“Even in our recession scenario, we have a mild recession,” said Jerry Nickelsburg, director of Anderson Forecast.
Regardless of which scenario unfolds, California’s economy is likely to be better off than the nation’s, according to the report, which cites increased demand for software and defense goods, areas in which California is a leader. Mr. Nickelsburg also said the state’s emergency fund was strong enough to withstand declining tax revenue.
But that shortfall could complicate the speed at which Newsom can carry out some of his ambitious and progressive policies. In announcing the shortfall, Newsom cut funding for climate proposals from $54 billion to $48 billion.
The fiscal outlook also overshadows progressive proposals, widely supported by Democrats, who have a large majority in the Legislature.
A state panel that has been debating reparations for black Californians will release its final report in the middle of the year. Economists have projected that repairs could cost $800 billion to offset excessive policing, housing discrimination and disproportionate incarceration rates. Once the panel releases its report, it will be up to Sacramento lawmakers to decide how much state revenue would support the repairs, a concept Newsom has endorsed.
Through all of this, one thing has remained constant: Many Californians say their biggest financial concern is housing costs.
The median value of a single-family home in California is about $719,000, up almost 1 percent from last year. according to Zillow — and recent census data shows that some of the largest metropolitan areas in the state, including Los Angeles and San Francisco counties, have continued to shrink. (In Texas, where many Californians have moved, the median home value is about $289,000.)
Still, some Californians remain optimistic.
Zeeshan Haque, a former Google software engineer, learned in January that he was being laid off. His last day was March 31.
“It was out of the blue and very abrupt,” said Haque, 32, who recently moved to Los Angeles from the Bay Area.
He bought a $740,000 home in the city’s Chatsworth neighborhood in February and spent time concentrating on renovations. But in the last few weeks, she has started looking for a new job. She recently updated her LinkedIn avatar to display the hashtag #opentowork and said that he hoped to get a new job soon.
“It’s very competitive right now because of so many layoffs,” he said.
ben casselman contributed reporting.
