Is the California economy healthy?

David Kersten
Kersten Institute for Governance and Public Policy

Job creation and economic growth continues to a top concern for voters, but recent economic indicators suggest that the California economy is declining relative to the national economy.

In recent political history, Governor Jerry Brown and the California Democrat Legislature have continued to take credit for what they claim continues to be a “strong” California economy, but to their great dismay, the economic evidence suggests that the national economy is now significantly outpacing economic growth in the State of California.

To be perfectly candid, the last thing California Democrats want to see is President Donald Trump succeed with the national economy, while their stewardship of the California economy falls short—but that appears to be exactly what is happening as the 2018 midterm elections approach.

The Orange County Register recently ran a piece that cites “more evidence of a cooling California economy:  The state has slipped down the rankings of overall business growth,” states the report.

While it’s difficult to summarize the health of a $2.7 trillion annual economy in a few metrics, it appears that most of California’s economic metrics are declining, while things appear to be looking up nationally.  Of course, that can all turnaround in a short period, but here is what a few key economic indicators tell us.

National real gross domestic product (GDP) increased at an annual rate of 3.3% in the third quarter of 2017, up slightly from the 3.1% recorded in the 2nd quarter, according to a recent report by the federal Bureau of Economic Analysis (BEA).

Third quarter state-by-state figures are still pending, but California’s economy grew at 2.1% in the second quarter of 2017, up from a dismal 0.6% in the first quarter of 2017—both rates significantly below the United State’s average of 2.8% in the second quarter and 1% in the first quarter, according to BEA data.

California’s second quarter growth rate ranked the state 35th in the states.

This is a dramatic turnaround from 2016, when California recorded 3.3% GDP growth, compared with the 1.5% national average, according to BEA figures.

What’s responsible for the dramatic reversal in these figures?  As much as Democrats don’t want to hear it, the undeniable difference can be summed up in three words:  Donald J. Trump.

The Trump economy is rolling, and while that could change at any time, the sense of optimism and positive thinking about the economy is much different than what many business leaders and economists have seen in a very long time.

As Shawn Lewis with the National Federation of Independent Business (NFIB) in California pointed out in a recent column, at the federal level small business optimism is at a peak not seen since 1983.  Small businesses are responsible for roughly 2/3 of all business activity, and their optimism, combined with strong consumer confidence is what is helping drive the Trump economy.

The UCLA Anderson Forecast recently released an updated forecast that anticipates 3% growth in the national economy, citing strong equipment spending, the likelihood of a major tax cut, and an uptick in consumer spending.

But cites clouds on the horizon in 2019, when growth is projected to slow to 1.5% nationally, due to the “enigmatic consequences of the Fed’s reducing its balance sheet and the potential failure of the ongoing NAFTA negotiations,” according to the Anderson Dec. 6 report.

In California, the forecast is also cloudy due to a potential dampening in the housing market, due to the federal tax bill, and the investment incentive, which will bring forward investment from the ability to expense in 2018, but reduce growth slightly in 2019.

An earlier release based on the Anderson figures, cited the increasingly tight California housing market as a key impediment to growth, but report was apparently revised.  Nevertheless, most California business leaders cite housing costs as a key limitation to economic growth and recruiting and retaining a quality workforce.

California’s forecasted GDP growth for 2017, 2018, and 2019 is 1.2%, 1.5% and 1.1%, respectively, according to the forecast.

Alternatively, the Trump Administration is projecting national GDP growth to equal or exceed 3% for the next several years, which is more than double the projected growth for California.

Nobody knows what the future will bring for both the national and state economies, but it does appear that the Trump Administration deserves at least some credit for the improvement in the national economy relative to California.

Governor Jerry Brown and California Democrats have been so busy opposing everything the Trump Administration does, but could well learn something from this President’s handling of the economy.

Needless to say, I don’t expect any California Democrat to face the possible new economic “normal” in California—that their policies are stifling economic growth, while those of the Trump Administration are encouraging economic growth.

“Elections have consequences,” as one key Democratic steward of the economy has said.

While it’s still early in the Trump Administration, in economic terms it looks like the 2016 national election has served to bolster the national economy, and helped shed light on some potential shortcomings of the California economy which are, at least in part, the responsibility of California Democrat politicians.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

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