California’s lagging economy hinders efforts to close state budget deficit

As Gov. Gavin Newsom and state legislators spend the next few weeks fashioning a state budget that’s plagued by a multibillion-dollar deficit, they can’t count on a booming economy to make their task easier.

California’s recovery from the devastating economic impacts of the COVID-19 pandemic has been sluggish at best, trailing what’s happening in the nation as a whole and in the state’s archrivals, such as Texas and Florida.

According to Employment Development Department data, there are 200,000 fewer Californians in the labor force – those employed or seeking employment – than there were in February 2020, just before the pandemic exploded. There are 500,000 fewer employed, and 200,000 more unemployed.

While California’s unemployment rate of 5.3% in March was just a third of what it was at the height of the pandemic-induced recession, it was still the highest of any state, markedly higher than the national rate of 3.9% and nearly two percentage points higher than it was before the pandemic.

By the federal government’s more nuanced measure of employment called U-6, which counts not only the unemployed, but workers who are “marginally attached” to the labor force and those who are involuntarily working part time, the state’s 9.5% rate of underemployment is also the nation’s highest.

Those numbers imply an economy that’s not even operating at cruising speed, much less accelerating. Even the state’s technology sector, centered in the San Francisco Bay Area, has cooled off as its once high-flying corporations announce layoffs virtually every day.

“California’s civilian employment growth has been essentially flat since the second half of 2022 while the U.S. has remained relatively healthy, resulting in the state’s unemployment rate rising faster than the nation,” the revised budget Newsom unveiled last week acknowledges.

The pandemic erased about 3 million jobs in California as Newsom shut down large segments of the state’s economy. Countless employers, particularly small businesses, never reopened after the health crisis eased and those that did survive have had to contend with inflationary costs, tighter loan conditions and changed consumer habits.

The budget blames stubborn inflation and the high interest rates imposed by the Federal Reserve System to tame inflation for California’s slowdown, but economies of other states have experienced the same factors and prospered despite them.

However, they don’t contend with factors unique to California, such as extremely high costs for housing, utilities and labor that make job creation more difficult here. Until recently, California has been losing population, thanks to outward migration to other states. The state has also seen employment shifts, particularly in technology.

Those conditions underscore the sluggish recovery that sets California apart from other states. For instance, Texas’ unemployment rate, 3.9%, is identical to the national rate while Florida’s 3.2% is even lower.

So, one might ask, where is California’s once-booming economy headed?

Newsom’s Department of Finance says it “has not modeled a recession scenario. However, if inflation takes longer to cool and interest rates remain high for longer than projected in the May Revision baseline forecast, continued tight credit conditions could further discourage economic activity.”

A few days before he released his revised budget, Newsom stood at the top of a Golden Gate Bridge tower to record a video celebrating the tourism industry’s recovery.

Visitors to California spent $150.4 billion last year, he said, surpassing the previous record of $144.9 billion in 2019.

That’s good news, even though an adjustment for inflation would probably reduce the recovery’s relative impact. But while it’s a high-profile economic sector, tourism is scarcely 3% of the state’s overall economy. It’s the other 97% we should be nurturing.

Dan Walters is a CalMatters columnist.