The California Economy – A Report Looking Back at 2013

The California Economy – A Report Looking Back at 2013
By Dr. Bill Watkins
Edited by Gary Wartik
December 17, 2013

We were recently treated to a celebration of California’s new population data.  Headlines enthusiastically informed us that California’s population was now over 38 million!  The highest it’s ever been!  California had grown by over 300,000 people in the past year!

Where to start?  First, population growth in California is not new, and it was expected.  We have data going back to 1900, and during that time, California’s population never declined.  We don’t have data, but I’m guessing that California’s last population decline was when Europeans introduced smallpox to the state.

Maybe California’s population growth was exceptional?  No.  California’s population growth rate from July 2012 to 2013, according to California’s Department of Finance (DOF), was 0.88 percent.  For context, I note that prior to 1994, California’s population growth had never fallen below one percent.  Indeed, prior to the 1990s, population growth rates in excess of two percent were the norm and four percent rates were common.

The real story in California’s population data is that its population growth has been anemic for about a decade.  Some people welcome the change.  We believe it is an indicator of declining opportunity.  The components of California’s population change are more revealing.  Domestic migration (migration between California and other states) was negative, again, for the 13th consecutive year according to DOF numbers.  That is for 13 years, more people have left California for other states than have come from other states.  The Census reports an even longer history of negative domestic migration.

California’s domestic migration data really disturbs us.  This is the clearest indicator of opportunity in California versus opportunity in other states.  The fact that people have been consistently voting with their feet tells us that Californians need to have a serious conversation about opportunity.  California’s birth rate (births per thousand population) is declining, and it has been declining for over 20 years.  This is a worldwide trend.  In fact, California’s birth rate is above the United States birth rate.

There was good news in the data.  International immigration, immigration from other countries, was about three times the 2011 number and was up about 50,000 from 2012.  That’s great news, actually, and we at the Center for Economic Research Forecasting hope it continues.

One final note on the demographic data:  Thirteen of California’s 58 counties lost population in the year ended July 2013.  Each of those counties was inland or in Northern California.  Population growth continues to migrate mostly towards California’s long coastline where weather is consistent, innovation continues to grow and where, as a result, a majority of new jobs may be found.

Jobs data are loosely tied to demographic data, with causality running both ways.  In the twelve months ended October 2013, California gained 207,300 jobs.  State officials are very proud of this number.  What they don’t tell us is that with two more years of 207,000 job growth, we still will be short about 40,000 jobs from California’s pre-recession high in October 2007.  Based upon current data, California still has about 460,000 fewer non-farm jobs than it had prior to the recession.

California’s post-recession job gains have been concentrated in the Bay Area.  In fact, the region is now down fewer than 7,000 jobs from its pre-recession level.  Two metro areas within the region are up a notable number of jobs.  The San Francisco-San Mateo-Redwood City area is up over 40,000 jobs, while the San Jose-Santa Clara area gained almost 25,000 jobs.

Southern California, by contrast, is still down over 360,000 jobs from its pre-recession high.  The Central Valley, California’s slowest growing region, is down over 120,000 jobs.

California’s growth by sector has also been uneven.  Manufacturing is still losing jobs.  Most sectors have gained jobs over the past year, but are still below pre-recession levels.  Three sectors are up significantly since the recession:  Education and Health Services is up almost 240,000 jobs.  Leisure and Hospitality is up over 120,000 jobs.  Professional and Business Services is up about 45,000 jobs.

The pattern of job growth appears to be changing though.  Over the past year, the leisure and hospitality and construction sectors have been California’s fastest growing sectors, each with over four percent growth.  In fact, leisure and hospitality, with about 75,000 new jobs over the year, and construction, with about 26,000 new jobs over the year, combined to generate about half of the state’s job growth.

Some find the growth of leisure and hospitality jobs disconcerting.  They accurately point out that these jobs are low paying, while California’s cost of living is high.  That’s true, but low-human-capital workers were hurt the most by this recession, and I for one am very glad to see these people finally have some job growth.  Housing for them is, however another issue.  It is in short supply.  What can we make of the changes in job composition?  We think that California is seeing a transformation from being primarily a producer of tradable goods, goods that are produced in one place and consumed in another, to being a producer of non-tradable goods.

Producers of tradable goods have difficulty remaining competitive in world markets with California’s cost structure.  Non-tradable goods producers don’t face those competitive pressures.  They are only competing with other local producers, producers who face the same cost structure.  Since non-tradable goods production is a much smaller market, California is likely to continue to see its share of United States jobs decline.

Which brings us full circle, back to demographics.  If California’s share of jobs declines, many Californians will go elsewhere for opportunity.  Expect continued negative net domestic migration.  Could California stop its transformation from a tradable goods producer to a non-tradable goods producer?  Sure, but this is unlikely.  It appears that the majority of voters are satisfied with the current direction of California’s economy.  So, the transformation will likely proceed.

If you have any questions or comments about this update, please contact Vision Economics at 805-987-7322.

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