Report: California economy is better than most believe

In December, Calmatters published an ominous forecast of California’s economy heading into 2024.

“Danger Signs For California’s Economy” read the headline. The nonprofit, nonpartisan news website that covers California exclusively then spelled out disturbing trends that were starting to roil the state’s economy.

Rising unemployment, a budget surplus that turned into a $32 billion deficit in 2024, tax revenue that has leveled off in the past several years, weak job growth, and massive debt related to California’s unemployment insurance fund.

In October, the Legislative Analyst’s Office predicted the state could see $9.5 billion in revenue, partly because of an increase in income-tax withholdings and an improving stock market.

However the analyst’s office still expects flat revenue from personal income as well as corporate and sales taxes for the next three years, and it is projecting a $68 billion deficit for 2024-25 fiscal year, which starts July 1.

Other news outlets were equally pessimistic, or more so.

On Dec. 1, The Sacramento Bee compared California’s “grim” revenue decline – a $58 billion shortfall during the last three fiscal years – to the Great Recession. The New York Times called that situation “the state’s biggest budget challenge since the early 1990s,” more formidable even than the mountain it had to climb to recover from the pandemic.

“California has been in a downturn since 2022, and state finance officials ‘have’ been warning of a darkening fiscal outlook,” the Times reported.

Also in December the Los Angeles Times reported that, “for several years, thousands more high-earning, well-educated workers have left California than have moved in.” That reversed a long-established trend of well-educated professionals who moved out of California being replaced by other well-educated professionals who moved into the state.

“The reversal, largely in response to the state’s high taxes and soaring cost of living, has begun to damage California’s overall economy,” the newspaper noted. “And, by cutting into tax revenues, [the reversal] has delivered punishing blows to state and local governments.”

While no one predicted a recession, the general assessment was one of an economy headed in the wrong direction, and that Gov. Gavin Newsom and the state legislature had serious work to do heading into an election year.

But not everyone is so pessimistic.

Yes, California’s economy is beset by negatives, most notably its housing crisis. But the reality is “significantly less grim” than much of the media, and many government officials are making it out to be, according to Beacon Economics in Los Angeles.

“Even a cursory look at the data illustrates how off-base that doom and gloom narrative is,” writes Christopher Thornberg, founding partner of Beacon Economics, in a report released this month titled Despite the Narratives, California is Doing OK.

The report spells out some of state’s current economic strengths, starting with the job market’s 2.1 percent growth rate since just before the pandemic started. That’s well below the 3.7 percent U.S. growth rate, but California’s private sector has grown by 10 percent, compared with the nation’s eight percent growth.

That means California’s output has expanded because of greater worker productivity, according to the report.

Other findings include:

• California’s median household income grew 9.2 percent from 2019 to 2022, well below the national eight percent growth rate during that time. Median incomes in the state are 14.3 percent higher than in the United States, the largest difference ever recorded in that category;
• Despite some claims otherwise, real income has increased in California during the past four years. Consumer prices, adjusted for inflation, went up 20 percent between the end of 2019 and the end of 2023, according to the U.S. Bureau of Labor Statistics.
• At the same time, workers’ average weekly earnings went up 23 percent, with the largest growth among lower skilled workers, the report found.
• California recorded an average poverty rate of 12 percent from 2019 to 2022, lower than the U.S. average during that time and the lowest level ever recored in the state.

“The state’s economy certainly has its share of problems, but the problems are fairly mundane,” the report states. “They are things that can be solved with some pragmatic change to policy.”

Two of the most urgent issues facing California’s economy are its budget deficit, which is anywhere from $35 billon to $70 billon, and the amount of money that the state is spending: 40 percent more than it was before the pandemic.

“As painful as it is, the deficit will not fully go away until either programs are cut back or new taxes are raised,” Thornberg said. “Both of those things will be difficult to achieve.”

California’s economy will probably be stronger at the end of this year that was at the start, said Robert Kleinhenz, an economic consultant based in Long Beach.

“I’m guardedly optimistic,” Kleinhenz said. “ I think the state’s economy will do a little better this year than it did last year, even though it isn’t off to a good start. Our unemployment rate is higher than any other state. It will be a challenging year, but we aren’t looking at a recession this year, either.