California Economy Is On Edge After Tech Layoffs And Studio Cutbacks

LOS ANGELES. California has often been at the forefront of the national economy. Now that fears of a national recession continue to grow, the state is hoping not to go down that path.

While California's economy maintains its powerhouse status, outperforming even the economies of many countries, the state's most influential industries, including technology companies and logistics, are struggling to stay afloat due to high interest rates, investor fears, labor disputes and other shocks. .

Even the weather didn't help. For much of the winter, severe flooding caused by atmospheric rivers devastated agricultural communities in the Central Valley, resulting in hundreds of millions of dollars in crop losses.

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Thousands of Californians have been laid off in recent months, the cost of living has become astronomical, and Gov. Gavin Newsom said in January that the state will face a $22.5 billion deficit in fiscal year 2023-24, sharply below $100. billion surplus a year ago.

"It's an ECG," Newsom said at the time, comparing the state's income curve to the peaks and troughs of the heart's electrical activity. “This sums up California's tax structure. It sums up boom and bust."

A structure that relies heavily on taxing the income of richer Californians often leads to recessions when Silicon Valley and Wall Street are in the same trouble they are now. The parent company of Google, one of the state's largest companies, announced in January that it would lay off 12,000 employees worldwide, and the Silicon Valley Bank, a major tech startup lender, filed for bankruptcy last month, leaving the federal government. hold back the fall.

This coincided with a decline in venture capital funding as rising interest rates and fears of a recession forced investors to take on less risk. That money, which has fallen 36% worldwide from 2021 to 2022, according to Bain & Co. the consulting firm is critical to Silicon Valley's ability to create new jobs.

"The tech sector is the backbone of the state's economy," said Sun Won Soon, professor of finance and economics at Loyola Marymount University. “These are people with high incomes who may not be able to run the state as before.”

Entertainment, another pillar of California's economy, is also in decline as studios adjust to new viewing habits. In February, Walt Disney Co. from Burbank announced the reduction of 7,000 jobs worldwide.

In California alone, the number of jobs in the information sector, including technology and entertainment, fell by more than 16,000 between November and February, ahead of the latest wave of job cuts in March, according to the latest data from the Bureau of Labor Statistics.

A recent poll by the non-partisan California Public Policy Institute showed widespread pessimism about the economy. Two-thirds of respondents said they expect bad economic times for the state next year, and a vast majority, 62 percent, said they believe the state is already in recession.

When Newsom announced the deficit earlier this year, he pledged not to use $37 billion of government reserves and instead called for a halt to child care funding and cut climate change initiatives.

California Treasury Director Joe Stevenshaw said in an interview that in the second half of last year, he and leading economists began to see trouble spots — persistent inflation, high interest rates and a rising stock market — on the state's horizon. year year

"These risks have become a reality," said Stevenshaw, the gubernatorial candidate.

He acknowledged that the problem is primarily related to the lower wages of well-paid workers, including through market compensation such as stock options and bonus payments. As activity slowed, interest rates rose and stock prices fell, he said.

But the problems of the state are not limited to the technological sphere.

California's powerful supply chain, which accounts for almost a third of the state's economy, continues to weaken due to pandemic stress and ongoing labor battles between ports and port operators along and across the West Coast, pushing many companies away from shipping and relying on ports instead. . Gulf Coast and East Coast. Cargo traffic at the Port of Los Angeles, the main entry point for goods from Asia, fell 43% in February from a year earlier.

“The longer this goes on, the more cargo will be diverted,” said Geraldine Knatz, a professor of political practice and engineering at the University of Southern California, who served as chief executive of the Port of Los Angeles from 2006 to 2014.

However, wherever the business cycle leads, California enters it with some strengths. Although the unemployment rate in February, at 4.3%, was higher than in most states, it was lower than a year ago. The unemployment rate in the San Francisco and San Jose metropolitan areas was below 3.5, higher than the national average.

For decades, California's economy has experienced some of its highest and lowest recessions, part of the state's boom and bust history. During the recession of the early 1990s, fueled in large part by cuts in aerospace spending following the end of the Cold War, California was hit much harder than other parts of the country.

In March, UCLA Anderson Forecast, an economic analysis provider, released forecasts for both the country and California, pointing to two possible scenarios: one in which a recession could be avoided and another in which a recession would occur later this year. year . .

“Even in our recession scenario, we will have a moderate downturn,” said Jerry Nickelsburg, director of Anderson Forecast.

Whichever scenario unfolds, California's economy is likely to outperform the national economy, the report said, citing increased demand for defense programs and products in which California leads the way. Nickelsburg also said the state's rainy day fund was healthy enough to weather the tax cut.

But that shortcoming could complicate how quickly Newsom can implement some of his more ambitious and progressive policies. By announcing the deficit, Newsom cut funding for climate proposals from $54 billion to $48 billion.

The budget forecast casts a shadow over progressive proposals widely supported by Democrats, who have an overwhelming majority in the Legislative Assembly.

The state black California reparations commission is expected to release a final report by the middle of the year. Economists predict reparations could cost $800 billion to offset excessive policing, housing discrimination and disproportionate prison populations. Once the commission releases its report, Sacramento lawmakers will have to decide how much state revenue the refund will support, a concept that Newsom espouses.

Despite all this, one thing remains unchanged. Many Californians say their biggest economic problem is the cost of housing.

The median price of a single-family home in California is about $719,000, up nearly 1 percent from last year, according to Zillow, and the latest census data shows that some of the state's major metropolitan areas, including Los Angeles and San Francisco continue to rise. . decreased. (In Texas, where many Californians have moved, the median home value is about $289,000.)

However, some Californians remain optimistic.

Zeeshan Haq, a former Google software engineer, learned in January that he had been fired. His last working day was March 31st.

“It came out of nowhere and very suddenly,” said Huck, 32, who recently moved to Los Angeles from the Bay Area.

In February, he bought a house in the city's Chatsworth neighborhood for $740,000 and spent time renovating it. However, in recent weeks he has begun looking for a new job. He recently updated his LinkedIn profile photo with the hashtag #opentowork and said he hopes to find a new job soon.

“Competition is very high right now due to the high number of layoffs,” he said.

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