Commentary: Is economic recession on the horizon for California?

We live in volatile economic times, with global markets reacting moment by moment to the latest bits of data and the utterances of central bankers and politicians — even the tweets from the White House.

California’s economy is much too big — the fifth largest in the world, we are constantly reminded — to avoid that volatility. Agriculture and the state’s high technology sector, for instance, are directly affected by trade conflicts between the U.S. and China.

California, meanwhile, generates its own economic x-factors, such as shortages of housing and workers, and wildfires’ impacts on electric utilities’ financial stability.

Volatility makes forecasting California’s diverse economy particularly difficult, leaving an overarching question: Will our nearly decade-long economic expansion continue into the 2020s or is a severe recession inevitable?

The cautious tones of recent economic surveys attest to the syndrome.

Opinion

The Legislative Analyst’s Office (LAO) has created what it calls the “State Fiscal Health Index” – a basket of specific economic indicators – in a valiant effort to chart what’s happening more or less in real time.

“Knowing when the state’s next budget slowdown will happen is impossible,” the LAO says in its most recent report. “Many economic factors outside the state’s control influence state revenues. Despite this, certain data points can help us understand whether shifting economic conditions are likely to lead to growth or declines in state revenues in the coming months.”

Although the index was “near historic highs in June,” the LAO said, “it has declined for three straight months. Declines of this magnitude have not been observed since the last recession.”

“While a three-month trend is not enough to draw firm conclusions,” the report continued, “each additional month of decline in index increases the risk that an economic slowdown is on the horizon.”

A similar appraisal comes from UCLA’s Anderson Forecast, which has created its own month-to-month indicator in hopes of tracking real-time effects of volatility on California, saying it “will be as current as the most current economic data.”

At the moment, Anderson sees California’s historically low unemployment rate, generally a positive factor, as a potential negative because employers cannot create new jobs if there’s no one there to fill them.

“As predicted, the California economy is slowing down,” the latest Anderson report says. “The state is, quite simply, running out of people to be employed.”

Beacon Economics has a more positive outlook than the LAO or Anderson, but expresses similar concerns about labor and housing.

“California defied naysayers by putting in another solid economic performance in 2018, but has gotten off to a slower start in 2019,” Beacon says. “This is not indicative of a pending recession, but rather the result of a slowdown in labor force growth and rising housing costs, both of which require time to solve.”

“California continues to exhibit a dynamism that is found in just a handful of other places around the country and the world,” Beacon continues, with a final caveat. “One can only imagine how much growth might be unleashed if the state can successfully address its housing challenges. Solutions must be both economically and politically viable, but will take time to achieve.”

With the Legislature now in the final month of its 2019 session, lawmakers should grasp that doing something about housing is absolutely vital if California is to weather these volatile economic times.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.