California has often been at the economic forefront of the country. With fears of a national recession continuing to nag, the state hopes not to take the lead there.
While California’s economy maintains its powerhouse status, even surpassing that of most countries, the state’s most powerful sectors — including technology companies and supply chain logistics — are struggling to hold their own, beset by high interest rates, investor skittishness, labor disputes and other anxiety.
Not even the weather cooperated. Severe flooding for much of the winter, caused by atmospheric rivers, 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 becoming increasingly astronomical, and Gov. Gavin Newsom revealed in January that the state ran a $22.5 billion deficit in fiscal year 2023-24 — a decline from the $ 100 billion surplus a year ago.
“It’s an EKG,” Mr. Newsom said at the time, comparing a graph of state revenue to the sharp peaks and troughs of the heart’s electrical activity. That sums up California’s tax structure. It sums up the boom-bust.
The structure, which relies in large part on taxing the incomes of the wealthiest Californians, often translates into dips when Silicon Valley and Wall Street are unsettled, as they are today. Alphabet, the parent company of Google, one of the state’s most prominent companies, said in January it would cut 12,000 employees worldwide, and Silicon Valley Bank, a major lender to tech startups, collapsed last month, leaving the federal government got confused. to limit outages.
This has coincided with a decline in venture capital funding, as rising interest rates and recession fears have led investors to become more risk averse. That money, which according to management consultancy Bain & Company has fallen 36 percent globally between 2021 and 2022, is critical to Silicon Valley’s ability to create jobs.
“The technology sector is the workhorse of the state economy, it’s the backbone,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University. “These are big earners who may not be able to support the state as much as they have in the past.”
Entertainment, another pillar of the California economy, has also retreated 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 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 spate of job cuts. in March.
A recent survey by the impartial Public Policy Institute of California found widespread pessimism about the economy. Two-thirds of respondents said they expected bad economic times for the state in the coming year, and a solid majority — 62 percent — said they felt the state was already in recession.
When Mr Newsom announced the shortfall earlier this year, he vowed not to dip into the $37 billion state reserves, calling instead for pauses in childcare funding and reduced funding for climate change initiatives.
Joe Stephenshaw, director of the California Department of Finance, said in an interview that in the second half of last year he and top economists began to spot concerns — continued inflation, higher interest rates and a turbulent stock market — on the state’s horizon. year.
“Those risks became a reality,” said Mr Stephenshaw, a governor’s appointee.
He acknowledged that the problem was largely caused by declines in high earners’ incomes, including 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, continues to buckle under the pressure of the pandemic and an ongoing labor battle between longshoremen and port operators along the West Coast, leading many shipping companies to rely instead on their reliance on ports along the Gulf and East coasts. Cargo throughput at the Port of Los Angeles, a major entry point for shipments from Asia, was down 43 percent in February from the previous year.
“The longer it takes, the more cargo will be diverted,” said Geraldine Knatz, a professor of the practice of policy and engineering at the University of Southern California who served as executive director of the Port of Los Angeles from 2006 to 2014.
Still, wherever the economic cycle leads, California is going in with a number of strengths. While the February unemployment rate was higher than most states at 4.3 percent, it was lower than a year earlier. In the metropolitan areas of San Francisco and San Jose, the unemployment rate was below 3.5 percent, better than the national average.
In recent decades, California’s economy has historically seen the highest of highs and lowest of lows, part of the state’s boom-bust history. During the recession of the early 1990s, driven largely by aerospace cuts after the end of the Cold War, California was hit much harder than other parts of the country.
In March, the UCLA Anderson Forecast, which provides economic analysis, released forecasts for both the nation and California, indicating two possible scenarios: one in which a recession is avoided and another in which it occurs by the end of this year.
“Even in our recession scenario, we have a mild recession,” said Jerry Nickelsburg, director of Anderson Forecast.
Whatever scenario unfolds, California’s economy is likely to be in better shape than the national one, according to the report, which notes increased demand for software and defense goods, areas in which California is a leader. Mr. Nickelsburg also said the state’s rain fund was healthy enough to withstand the fall in tax revenues.
But that shortfall could complicate the speed with which Newsom can implement some of his ambitious, progressive policies. In announcing the shortfall, Mr Newsom slashed funding for climate proposals from $54 billion to $48 billion.
The fiscal outlook also casts a shadow over progressive proposals, widely supported by Democrats, who have a supermajority in the legislature.
A state panel that has discussed reparations for black Californians will release its final report midway through the year. Economists have predicted that reparations could cost $800 billion to offset overpolicing, housing discrimination and disproportionate incarceration rates. Once the panel has issued its report, it will be up to Sacramento lawmakers to decide how much state revenue would support reparations — a concept Mr. Newsom has endorsed.
Through it all, one thing has remained constant: Many Californians say their biggest economic concern is housing costs.
The average value for a single-family home in California is about $719,000 — nearly 1 percent more than last year, according to Zillow — and recent census data show that some of the state’s largest metropolitan areas, including Los Angeles and San Francisco Counties, have remained 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 software engineer at Google, learned in January that he was fired. His last day was March 31.
“It came out of nowhere and was very abrupt,” says Haque, 32, who recently moved to Los Angeles from the Bay Area.
He bought a $740,000 house in the Chatsworth neighborhood of the city in February and spent time on renovations. But in recent weeks he has been looking for a new job. He recently updated his LinkedIn avatar to show the hashtag #opentowork and said he hopes to find a new job soon.
“It’s just very competitive at the moment because of so many layoffs,” he said.
Ben Casselman reporting contributed.
