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California’s economy is far from ideal, but it’s not on the brink of a major slowdown as some maintain that it is, a new study has concluded.
Job growth stalled one year ago but has since bounced back to 1.2 percent, a respectable growth rate given that the state’s labor force declined during that time, according to a quarterly report released this month by Beacon Economics in Los Angeles.
California’s economy is facing some critical challenges, but nothing as serious as some news report suggests.
“The state’s economy is growing, just at a slower-than-typical rate,” states Beacon Outlook: California, the firm’s summer report on California’s economic outlook. “California’s output and job growth data doesn’t show a state that has stumbled on hard times.”
The report is based largely on data from the U.S. Bureau of Labor Statistics, and it acknowledges that the state’s economy could be stronger than it is. Job growth, while improved during the last 12 months, remains below where it was in 2019, before the pandemic hit.
California also faces a staggering $68 billion budget deficit, people are leaving the state in droves, and it has one of the highest unemployment rates in the country: 5.2 percent in June, well above the national rate of 4.3 percent.
In June of 2023, the state’s jobless rate was 4.6 percent.
On the positive side, California gained 107,100 non-agricultural jobs in the first six months of 2024. That was more than double the number of jobs it gained during the first half 2023.
Those numbers are hardly catastrophic, but much of the media still portrays California as on the verge of a recession, if not an outright economic collapse.
The reports cites a story published in March by The Economist that describes California as “gripped by economic problems with no easy fix,” and that the state with the world’s largest sub-economy is “a weak spot” in an otherwise healthy U.S. economy.
The Beacon report doesn’t see it that way.
“The picture is a little more complex than [the article] implies,” the report states. “The only substantial argument is over why the state is faring so poorly, and the depth of the rot.”
Right now, the biggest problem facing California’s economy is not enough workers. “California is facing some problems, and it’s biggest problem is a lack of labor supply,” said Chris Thornberg, author of the report and a founding partner with Beacon Economics, during a telephone interview. “It also has a housing crisis, but the housing crisis is being caused largely by the drop in the labor supply. People can’t afford to buy a house.”
The report notes that the three regions that have added a significant number of jobs during the last few years – the Inland Empire, Fresno and Stockton – all have housing that is less expensive than other parts of the state. Cheaper housing has allowed all three of those economies to grow, according to the report.
Meanwhile, the more affluent coastal areas have seen their labor pools experience less growth, which in turn has led to a drop in payroll jobs in those regions. Retirements have had something to do with that trend, but the driving force has been slow growth in the housing supply.
Ultimately California’s housing crisis is about supply, not affordability.
“We need more housing construction up and down the state,” Thornberg said. “We need to open up the spigots on that, and that has to start in Sacramento. Think of the state government as parents and the cities, where the houses are being built, as the kids. The parents have to lead the way.”
The report also addresses California’s declining population, a trend it acknowledges to be true, but it maintains is not as severe as some media outlets have reported it to be.
During the last five years, California’s household population has dropped by 360,000 a decline of a little less than one percent, according to the report.
“This drop is being driven primarily by negative net migration, meaning more people have moved out of the state than have moved in,” the report states.
But California’s population was steady from 2023 to 2024, which suggests the worst of the population declines are finished.
While people are leaving California, a lot of people – and even some businesses – still want to come to the state that is the fifth-largest economy in the world, with a GDP of nearly $3.9 trillion last year, according to the U.S. Bureau of Economic Analysis.
“Everyone knows about people leaving California for Texas, an it’s true, a lot of people are moving from California to Texas,” Thornberg said. “Well, believe it or not, people are leaving Texas and moving to California, and most of them have high incomes.”
That trend – not just from Texas but other parts of the country as well – is causing what Thornberg calls the “gentrification” of California, meaning people with high incomes driving out people with low incomes.
“California right now is like a large gentrified neighborhood,” Thornberg said. “People with high incomes are moving, and people with low incomes are moving out. We’re getting a lot of people with college degrees.”
One reason California’s economy is not performing as well as it could is because, unlike some other states, it has not fully recovered from the pandemic, according to economist Robert Kleinhenz.
Only seven of the state’s 17 major industries have recovered all of the jobs they lost to COVID-19. Entertainment (-50,000), manufacturing (-20,000) and information technology (-10,000) are among the sectors still trying to return to pre-pandemic job levels.
“It’s true that the state economy isn’t what it should be,” said Kleinhenz, who operates an economics consulting firm in Long Beach. “The question is whether or not we’ll have a soft landing.”
