How close is California to a recession? Here’s why it is a real possibility in 2023

Andy Alfaro/aalfaro@modbee.com
·4 min read

The risk of a recession has grown in recent months, according to a new UCLA economic forecast released Wednesday.

It sees “real risks” to the California economy from the war in Ukraine, Covid-related problems and other factors.

Nationally, “We expect the depth of this economic slowdown and the highest risk of recession to occur in the middle of 2023, although we still think a recession is unlikely at this time.,” said Leo Feler, forecast senior economist.

A national recession would be acutely felt in California, which is not only the country’s largest economy but the fifth largest in the world.

The forecast from the UCLA Anderson School of Management did have some encouraging news. Price increases in the state are likely to cool, and unemployment should remain at low levels.

Yet the key message from the forecast remained guarded — that the outlook for the state’s economy is full of potential danger.

“It is no longer all about the pandemic, though pandemic-induced economic disruption in California is still a major factor,” said Jerry Nickelsburg, forecast director, in his report on the state’s economy.

Supply chain disruptions are affecting consumers, business and agriculture.

Higher energy prices because of the Russian invasion of Ukraine add “additional headwinds to the state’s economic growth,” Nickelsburg said.

And back home, “On Wall Street uncertainty about the Fed and the economy will now be impacting funding for entrepreneurial technology firms,” he reported.

A California recession?

The Federal Reserve has raised key interest rates twice this year, and further increases are expected this month and next, as well as later this year. Financial markets have rebounded somewhat lately, but only after the Dow Jones industrial Average fell for eight straight weeks.

Gasoline prices continue to climb, setting records almost daily. The average price per gallon in California Tuesday was a new high of $6.16 per gallon of regular, as oil prices flirted with $120 a barrel.

While many experts see potential for a recession within the next two years, Nickelsburg and Feler were more circumspect.

Nationally, “while we do not expect a recession in the next two years, the risk of a recession has grown,” Feler said..

“It is possible that continued global economic shocks will pull down the U.S. economic recovery and that the Fed will tighten too quickly, which could lead us into a mild recession. We do not expect this to be the case: a recession has become more possible, but it is still not likely,” he said.

While prices are increasing at their steepest levels in about 40 years–an average of 9.2% in the state this spring–the forecast saw a leveling off. It predicted increases of 5.8% in the summer quarter and 4% in the fall quarter. Next year, the forecast sees a 3.5% increase..

Can businesses rebound?

Unemployment remains somewhat above the national average. The state’s jobless rate was 4.6% in April, while the national rate was 3.6%.

The UCLA forecast saw the state rate averaging 4.5% this year, dropping to 4.1% in 2023. That would still be higher than the 3.8% national rate UCLA predicts.

Disruptions caused by the pandemic are waning, Nickelsburg said. “But it is not over yet. Importantly, the waning of the economic impact of the pandemic is more about changes in domestic consumer behavior than an easing of supply chain constraints,” he said.

China’s pandemic lockdowns continue to interrupt key supply chains, which in turn keeps the economy from erupting with rapid growth for the moment.

The forecast does see strong hiring in retail trade, health care and social services, technology and construction. Demand for technology and more defense spending will also help spur employment growth.

What could hold back growth are several other factors.

“The concentration of tech and office related employment in the state creates a situation where work-from-home is more prevalent than in many other states,” Nickelsburg said. “When offices are empty, so are the restaurants and stores nearby. Without offices to visit, business travel to these employment centers is lacking as well.”

The state also needs a rebound in tourism from Asian, Canadian and Mexican visitors.

“There has been some return of tourists from the countries adjacent to the U.S. but a return of the large number of tourists from Asia to the levels prior to the pandemic appear to be at least a year away,” Nickelsburg said.

“Key to this return, if it occurs, will be the easing of zero-COVID policies in China and the expansion of exit visas from the Chinese government.”