Opinion: The coming economic dip - nothing like the last one
California’s economic Jeremiahs regularly predict an imminent major economic downturn, some saying it has already begun. The reality, though, is that while a dip is likely, it will not do a fraction of the damage inflicted by the last similar hit to this state.
That one came in the late spring of 2020 and saw unemployment here leap from 4.1 percent to 15.9 percent in just two months as businesses by the thousands shut down amid hordes of layoffs in the worst days of the COVID-19 pandemic.
But California rebounded swiftly once vaccines became available and both hospitalizations and deaths from the virus dropped considerably. As the state heads into what might be a new downturn, unemployment levels are back to just about the same as pre-pandemic and California seems well situated to make this a fairly brief decline, far short of a major disaster — unless it’s your business that’s hurting as the perpetual economic roller coaster heads downward for a bit.
For sure, even though the state budget has a rainy day fund in the tens of billions of dollars at the ready, there are signs of trouble, although that could be eased if President Biden’s compromise recovery plan gets through Congress.
Oracle Corp., whose headquarters moved to the tax haven of Austin, Tex. when its founder Larry Ellison relocated full-time to the Hawaiian island of Lanai, has already laid off hundreds of workers in Silicon Valley, its former headquarters and still home to most of the gigantic software company. Oracle will reportedly lay off more droves in Texas, Canada, India and Europe amid a $1 billion-plus cut in expenses.
If that weren’t enough of a sign that Silicon Valley is not immune from national and international economic crises, Google paused hiring in late July and Facebook parent Meta reported its first-ever yearly revenue downturn. Plus, many high-tech startups recently stopped hiring or made layoffs.
At the same time, the year seems to be seeing a drop in capital gains for Californians invested in stocks. Hints of this can be found in a report from the nonpartisan state legislative analyst’s office, which reports California may collect as much as $25 billion less in capital gains taxes than expected when the current $308 billion budget was adopted in June.
Rising inflation and higher interest rates, along with supply chain issues, are identified by state budgeteers as the major current bugaboos.
Said Gov. Gavin Newsom, in opposing Proposition 30, a November ballot initiative seeking to raise taxes on anyone with income over $2 million per year, “California’s tax revenues are famously volatile, and this measure would make our state’s finances more unstable.”
Another sign of a likely downturn: Inflation has led to rising rents here and nationally; while real estate sales prices are down slightly this summer, rents are not dropping.
This is not only a California problem: Yahoo Finance predicts there will be no letup in rent increases nationally until at least 2024. That’s partly because most home and condominium owners who paid high prices in recent years are so far not inclined to sell at today’s slightly lower levels. That has led to a drop in available housing stock — from here to New York to Tennessee, North Carolina and Florida — which in turn means more demand for rentals. That makes widespread rent decreases extremely unlikely.
At the same time, the national Consumer Price Index — the most watched indicator of inflation — reached a 43-year-high this summer, almost matching levels of the late 1970s, when Jimmy Carter was president.
The good news is that most Californians have also seen their earnings rise, especially because of increases in the minimum wage. That baseline figure will reach $15.50 per hour in January. The new cash flowing to even the least skilled workers makes Californians better equipped than ever to cope with inflation.
All these realities explain why there has been no great drop in retail sales even as inflation and other indicators of a downturn appeared. All of which points to a dip, but nowhere near as severe as what this state endured just over two years ago.
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Email Thomas Elias at email@example.com. His book, “The Burzynski Breakthrough: The Most Promising Cancer Treatment and the Government’s Campaign to Squelch It,” is now available in a soft cover fourth edition. For more Elias columns, visit www.californiafocus.net.