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Guest Column: California is Building Momentum
Guest Column: California is Building Momentum
Published January 9, 2014
By Lynn Reaser, Ph.D.
California's economy has continued to show more favorable signs, refuting claims that the state has lost its ability to grow. Although the path has not been straight upward, jobs, incomes, and retail sales are again expanding, while home prices climb. The state's fiscal picture has also brightened significantly. Although not without hurdles and risks, look for California to show more of its resilience in 2014.
Job growth in California is now tracking the nation's relatively closely on a year-over-year basis. While the state's unemployment rate remains well above the U.S. average, it has dropped more rapidly than in the rest of the country over the past year. Job gains have been widespread and especially pronounced in construction, real estate, professional and business services, transportation, trade, health care, and leisure and hospitality.
Looking ahead to 2014, California will benefit from a number of positive elements:
- Technology continues to lead: California remains a global leader in innovation with a full display of new products and applications for both business firms and households. Ranging from social media to biotechnology to the emerging field of 3D printing (additive manufacturing), the state is a hub of creativity.
- Housing is on the rebound: Soaring home prices have shored up home equity values and transformed housing from a buyer's market into a seller's one. Delinquency rates and foreclosures have dropped sharply. Although higher mortgage rates along with rising home prices will dampen affordability to some degree in 2014, look for sizable gains in home sales, prices, and new building.
- Travel and tourism are on the rise: The coming year should see further gains in both business and leisure travel. Businesses are beginning to slowly ramp up their budgets for sales and business development. Convention and trade shows should increase further. Consumers, who slashed spending for vacations during the recession, are taking more holidays away from home. Foreign travel should pick up in 2014 and California will be a favored destination.
- Exports will advance: Demand for the state’s technology and agricultural products will be particularly strong. On the services side, in addition to tourism, California’s higher education system will continue to attract foreign students, while its entertainment sector has deep appeal abroad.
- Lower gasoline prices will be a plus: In light of California's car culture and its reliance on automobiles, lower gasoline prices will boost household buying power and will also be a positive for transportation firms. Because gasoline prices are also a major factor affecting consumer confidence, their decline will be particularly constructive.
Some major barriers will limit the state's ability to grow in the coming year:
- Federal budget cuts will hurt: Cutbacks in funding for defense, research and development, education, social services, and other programs will negatively impact California.
- Electricity prices remain high: While Californians have embraced the principle of a cleaner environment, consumers and businesses will bear some cost of that decision. The requirement for utilities to generate one-third of their electricity from renewable sources (wind, solar, and geothermal) will continue to make electricity prices here significantly higher than in the rest of the nation. The state will also not be able to benefit as greatly as the rest of the country from the boom in natural gas development and production.
- Immigration Reform Delays: Congressional delays in implementing immigration reform could aggravate worker shortages in industries ranging from technology to agriculture. This could crimp growth in some sectors or encourage others that are more mobile to expand out of state.
The positives will outweigh the negatives in 2014 to allow California to continue to advance. Look for the state to add about 265,000 jobs, following the estimated 220,000 new positions created in 2013. (See Figure 3.) Job growth should be enough to drive the unemployment rate down more than a full percentage point toward about 7.5% by year-end 2014.
It should be emphasized that California suffers from large gaps in income inequality, such as between the coastal and inland areas, including much of the mostly rural Central Valley. Disparities in incomes trace largely to differences in skills and education levels. Times of economic improvement should be used to address some of these inequities.
California's Budget Steadies
Increases in jobs, incomes, home prices, and capital gains from the stock market’s surge have refilled the state's coffers. The turnaround in California's economy has particularly boosted personal income tax receipts, which comprise about 70% of the state's total revenues. As consumers release pent-up demand, auto sales and other retail spending are also generating higher tax receipts. Tax increases approved by voters in November 2012 have further boosted the revenue numbers. Spending restraint has been seen, especially in terms of the cost of state operations.
Lynn Reaser, Ph.D. , is chief economist of the Controller's Council of Economic Advisors, and chief economist of Fermanian Business & Economic Institute at Point Loma Nazarene University. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the authors and not necessarily the Controller or his office.
Figure 3: California Hiring Steps Up
December change over prior year, thousands
Source: FBEI