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Amid jitters, experts eye potential California recession

A 3D rendering of stock indices in open space. (Image: Vitaly Sosnofsky)

There are clouds on California’s economic horizon, but whether they herald a coming recession is uncertain. The experts agree that there is a slowdown, but there is little consensus beyond that.

The respected UCLA Anderson School of Management’s report on the state’s economy had this to say on June 5:

“While the U.S Department of Commerce’s release of a 3.1% growth rate for GDP in the first quarter was celebrated as evidence there is no recession in the near future, a closer look at the details behind that 3.1% number leaves little reason for celebration.”

“The effect of the first quarter of 2019 data is to increase the recession probabilities from near zero to 15% for the next year and to between 24% and 83% for the year after that,” UCLA Prof. Emeritus Edward Leamer writes.“Don’t worry about the coming year; worry about the year after that.”

“Although we’re not predicting a recession, there are items out there that bear watching.”  — H. D. Palmer.

The California Chamber of Commerce is more optimistic.

“California defied naysayers by putting in another solid economic performance in 2018, but has gotten off to a slower start in 2019,” its May 31 “Alert” says. “This is not indicative of a pending recession, but rather the result of long brewing problems with labor force growth and rising housing costs, both of which require time to solve.”

Wells Fargo Economist Charlie Dougherty and Senior Economist Mark Vitner also expressed optimism, writing in a May 17 report:

“Hiring in California appears to be holding strong against a series of external shocks threatening parts of the economy. Trade tensions, disastrous wildfires and the ever-worsening housing shortage are no doubt significant challenges for the state’s economy to overcome. Employers appear to be taking these challenges in stride.”

Conventional wisdom tells us the effects of a recession, if one comes, would vary widely depending on where a California resident is on the socioeconomic scale, whether one is a homeowner and the nature of a resident’s job.

California’s heavy reliance on the tourism industry would make the state especially vulnerable to a recession.

In theory, prices on most goods would drop. Homeowners could refinance their homes to take advantage of the lower interest rates that usually accompany a recession.  Homeowner retirees with relatively high pensions would be in an advantageous position, all things being equal. But with a recession-inspired slowdown in housing construction, renters could pay more. There would be fewer jobs, and families would tighten spending, causing a multiplier effect as consumers cut back, inventories increase, and companies resort to layoffs.

California’s tourism industry could also suffer the impacts of a recession, although a report by the Economic Development Department covering the 12-month period starting in 2009 —  during the Great Recession — showed that leisure and hospitality employment actually increased by about 44,000 jobs during the year.

The California Department of Tourism’s “Visit California” reports that direct travel-related spending in California totaled $140.6 billion in 2018, a 5.4 percent increase from the previous year. Direct travel-generated employment neared 1.2 million, a 1.7 percent increase over 2017.

“Although we’re not predicting a recession, there are items out there that bear watching, California Finance Department spokesman H. D. Palmer told Capitol Weekly in a telephone interview.

“This report begins with the assumption that California will face a recession in the none-too-distant future.” — PPIC

“The main risks to the California economic outlook have intensified, including a stock market correction, federal policy, slower global growth, and an eventual U.S. recession. Structural vulnerabilities such as large federal deficits, increased risks from natural disasters, an aging population, and increasing consumer debt levels may hamper a response to shocks,” the Department said in its “May Revise” report on the state budget.

Fears of a slowing economy prompted the chair of the Federal Reserve this week to discuss a possible rate cut.

““Many on the committee do see a strengthened case for cutting rates,” Fed Chair Jerome H. Powell said Wednesday. “News about trade has been an important driver of sentiment. … We’re also looking at global growth,” he told the Washington Post.

Robert Reich, a former Labor Secretary in the Clinton Administration and now a UC Berkeley professor and Democratic pundit, told MSNBC on May 7:

‘There is a slowdown, there’s no question about that. But if you add on to the slowdown, all of the direct and ancillary damage that comes from these tariffs, tariffs against China, retaliation from China, and tariffs that are threatened against Mexico, I mean you could easily find the American economy in a recession, certainly before the election.”

In a May report on the state’s economic outlook and the possibility of a recession, the Public Policy Institute of California was blunt:

“This report begins with the assumption that California will face a recession in the none-too-distant future. When that recession comes, the state will most likely experience a fall in revenue over multiple years.’

Filling the gaps in state revenues triggered by a major recession “would likely cause considerable hardship for the state’s residents,” the report observed.

The months to come will demonstrate who was more prescient, which is probably cold comfort to Californians.

Editor’s Note: Recasts 11th graf to show that employment increased during Great Recession in leisure and hospitality segments of the economy.

 


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