Guest Column: California's economy has continued to advance during the past year, with job gains outpacing those in the nation as a whole.
By Lynn Reaser
California's economy has continued to advance during the past year, with job gains outpacing those in the nation as a whole. Unemployment has fallen, home values have climbed, and the state�s fiscal position has strengthened. As 2016 has begun, a tsunami of challenges seems to be lapping at our coastline. China�s economy has slowed, emerging markets have weakened, commodity prices have collapsed, and financial markets have displayed fright. Can California weather the storm?
The California/China Link
Problems in China�s economy could impact California through a number of channels. China accounts for only about 9% of the state�s total exports, but the ripple effects of a major deterioration in China�s economy would weaken other nations� demand for California products. This impact would be exacerbated by a stronger dollar. An increase in Chinese capital controls would also stifle the outflow of investments and funds that have flowed into the state.
While risks persist, consumer demand and the growth of services, along with government support, appear likely to support about a 6.5% gain in China�s real gross domestic product (GDP) this year. This should prevent the damage some now fear both directly and indirectly through other countries.
Commodities and Financial Markets
The plummeting of oil prices will inflict damage on the energy sector in some areas, such as Kern County, but many Californians will benefit from a lower cost of driving. Similarly, while sharply lower prices will hurt other commodity producers, many firms will benefit from lower input costs.
The swoon in stock prices has unsettled many investors and scared many away from risk. This could hurt critical funding for some of California�s entrepreneurs. Consumer and business confidence could drop, with spending cuts to follow. The market�s downturn does not appear to be the forerunner of a new bear market but rather a correction that will be temporary in nature. This is based on a solid U.S. economic base of job and real income gains for consumers, generally lean inventories, stronger housing, and improving government finances. The equity market, despite an ominous start, should end up with a slight gain for the year.
Positives in the State�s Outlook
Looking ahead to 2016, California will benefit from a number of favorable elements:
- Innovation and technology. California remains a global leader in innovation and the boom in technology continues with a full display of new products and applications for both business firms and households. The state’s tech firms and entrepreneurs are leading the “Internet of Things,” which will ultimately allow individuals to communicate or connect with all of the appliances, vehicles, utilities, and other features supporting their way of life. Venture capital investment in 2015 was the biggest year in California since the dot com boom of 2000. It has doubled in the past two years and should remain significant in 2016.
- Homebuilding. Builders are again constructing new homes as they respond to ampler financing and strong demand. Expect further gains in 2016, with increases in both single-family and multi-family housing, notably in the inland areas where land is less expensive.
- Nonresidential construction. Vacancy rates for office, retail, and industrial space have now fallen by enough to trigger more building on the commercial side. Tenants in the technology sector are particularly looking for new and updated space. Public construction should also see gains, with work on roads, water systems, and schools advancing.
- Travel and tourism. Improving household finances, a renewed emphasis on business marketing, and lower gasoline prices should spur additional gains in spending on vacations, business travel, and conventions in 2016. Restaurants, entertainment venues, and sporting facilities can look forward to a strong year.
- Improving government finance. Higher revenue flows from property, personal income, and retail taxes have bolstered financial positions at the state, county, and municipal level. This will mean more spending for education, public safety, health care, and other government functions in the coming year.
The positives should outweigh the negatives in 2016 to allow California to continue to advance. Look for the state to add about 405,000 jobs, which would be the fifth year in a row that various employers have added a total of more than 400,000 positions.