Can California’s economy avoid a recession?

There’s little doubt California’s economy is cooling – but will it tumble into recession?

It’s no secret that much of the ongoing business malaise can be tied to the Federal Reserve’s efforts to cool an overheated U.S. economy and tame an ugly bout of inflation. The Fed’s rate hikes are an especially powerful economic depressant to California’s high-cost economy.

Don’t forget, this kind of economic management often ends with a recession. California’s economic downturns of the early 1980s and 1990s, the dot-com crash of 2000, and the Great Recession were all preceded by sharp increases in interest rates.

So can California avoid what might seem like the inevitability of yet another Fed-induced downturn?

How slow?

Look at some signals of the cooldown.

• California’s gross domestic product grew just 0.4% last year. Only coronavirus-chilled 2020 was a more lethargic year for state businesses since the 2008-09 Great Recession.
• California home sales fell to an 11-year low in November 2022, according to a California Association of Realtors index.
• Golden State employers added 432,000 jobs in the year that ended in March. That’s the slowest hiring pace in two years.
• Chapman University’s California Purchasing Manager Index, a measure of manufacturing activity, sits at a low not seen in a decade.

The big questions

Let’s ponder the odds the state enjoys what economists call a “soft landing” – a business cooling that doesn’t end with a crash.

It will take a mix of skill by policymakers, resolve by consumers and CEOs, plus a dash of good fortune. I’ll note that several California economists see a soft landing as a real possibility.

To help you form your own opinion, here are 12 big questions facing the state’s economy. Basically, consider how many things must go right for the state to avoid another recession.

#1: Can the Fed pull off a miracle?

The central bank boosted the pandemic’s economy party with cheap money, then ended the boom with sharp interest rate hikes to meet their anti-inflation goals. Can the Fed throttle business without significant collateral damage for consumers and companies?

#2: Will inflation cool swiftly?

The biggest jump in the cost of living in 40 years turned the Fed into a party-pooper. And it’s working, as inflation has dropped from recent peaks. A continued and quick dip in prices would let the Fed stop handcuffing the economy.

#3 Can tech stumble, not tumble?

California’s tech bosses thought the pandemic boom was forever. That notion was wrong. As a result, we’ve witnessed a series of industrywide layoffs. Were those cuts sufficient trimming for these businesses so critical to the statewide economy?

#4 Will the housing crunch be mild?

It’s no surprise the state’s housing market overreacted to cheap money, as was the rate-hike-powered reversal. Is the sharp downturn in transactions and prices a much-needed correction and not something really ugly?

#5 Can commercial real estate be rescued?

California has lots of empty office buildings and storefronts with plenty of money loaned again those properties. That’s a bad mix. Can owners and bankers amicably temper the brewing debt challenges and other commercial real estate worries?

#6 Do consumers keep spending?

Shoppers haven’t slowed their pandemic era’s spending spree that much, even as the overall economy cooled and consumer debts grew. More shopping sprees could equal more jobs.

#7 Will bills get paid?

Most consumers and corporations continue to make timely payments on their borrowings, another economic plus. Can those good habits continue?

#8 Banking woes: Are we done?

Bank failures are back, especially in California – from Silicon Valley Bank’s high-profile fall to the demise and sale of First Republic Bank. Is the damage limited in scope with the broader banking system in good health?

#9 Can bosses stay rational about staffing?

Many California bosses overstaffed in the pandemic rebound, anticipating future growth or difficulties acquiring and keeping talent. Will second thoughts about labor expenses result in only modest trims?

#10 Does tourism’s winning streak run on?

California has a huge number of businesses that sell fun. These hospitality industries are enjoying a notable rebound from pandemic lockdowns. Will the playtime that powers tourism remain popular?

#11 Can lawmakers not make it worse?

From Sacramento to Washington D.C., legislators have work to do. California lawmakers must juggle a budget deficit. Congress must negotiate with the White House over a looming debt ceiling deadline. Can sanity prevail?

#12 No surprises: Is that possible?

The past few years saw a pandemic, the Russia-Ukraine war, rate hikes, supply-chain disruptions and shortages of labor, commodities and energy. A quiet period would be a refreshing change.

Bottom line

You can count the number of upbeat “yes” answers you had to these questions, then divide by 12. Call the resulting percentage the odds that California avoids a recession.

My six affirmative replies to the quiz translate to a 50% chance California skips a recession. (You can also take the quiz online at bit.ly/casoftlanding)

Look, no matter your thinking, just the existence of this debate – whether the state economy goes into a full reversal (deep or mild) or merely flat-lines for a while – tells you a good deal about California’s short-run economic challenges.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

Source: Orange County Register