The California Economy’s Surface Strength Hides Looming Weakness

If you listen to California’s many boosters, things have never been so good. And, to be sure, since 2011, the state appears to have gained its economic footing, and outperformed many of its rivals.

Some, such as Los Angeles Magazine and Bloomberg, claim that it is California — not the bumbling Trump regime — that is “making America great again.” California, with 2 percent job growth in 2016, gained jobs more rapidly than most states. The growth rate was about equal to Texas and Colorado, but behind such growth centers as Florida, Nevada, Oregon, Washington, Utah and the District of Columbia.

Bay Area: Still the tower of power

sanfrancisco3Over the past few years, the Bay Area has grown faster in terms of jobs than anywhere in the nation. But this year, according to the annual survey of the nation’s 70 largest job markets that I do with Pepperdine University public policy professor Michael Shires for Forbes, there is a discernible slowing in the region. For the first time this decade, San Francisco lost its No. 1 slot to Dallas, which, like most other fastest-growing metros, boasts lower costs and taxes, and has created more middle-class jobs than its California rivals.

The San Francisco area, which includes suburban San Mateo, remains vibrant. More troubling may be the weakening of the adjacent San Jose/Silicon Valley economy, which dropped six places to eighth — respectable, but not the kind of superstar performance we have seen over the past several years.

This partly reflects an inevitable slowdown in information job growth. As the startup economy has stalled, and the big players have consolidated their dominance, sector growth has dropped from near double digits to well under half that. Perhaps more telling has been a shift in domestic migration, which was positive in San Francisco earlier in the decade, but has now turned sharply negative. These are clear signs of a boom that is cooling off.

Southern California: Stuck in second gear

Southern California continues to lag. San Diego managed only a mediocre 29th-place finish. That’s better than Orange County, which managed an even less impressive 37th, and Los Angeles, by far the state’s largest job market, which reached only 40th place.

In Southern California, many seem to mistake high housing prices for economic vigor. High prices do create a wealth effect for those who own property, and this creates ancillary jobs in home repair and real estate. The area has also benefited from something of a boom in hospitality, medical and educational jobs.

But this does not make up for less-than-stellar creation of high-wage jobs. Los Angeles has expanded information jobs, much of them tied to Hollywood and the media-oriented “Tech Coast” corridor along coastal Southern California, but it continues to lose blue-collar manufacturing jobs. Professional business growth has been weakening since 2013. Lower-wage jobs in the health and hospitality industries, meanwhile, have enjoyed more robust expansions. Poverty in Los Angeles, particularly in South L.A., is arguably worse than during the riots a quarter-century ago.

Orange County suffers less from poverty but also sees rapid growth in low-end sectors like hospitality, which has grown almost 20 percent since 2011. Unlike Los Angeles, professional and business service employment — the largest of the high-wage sectors — has seen steady growth, up 20 percent since 2011, but information growth has been weak and manufacturing continues to decline.

Perhaps the biggest surprise may be the 14th-ranked Inland Empire, which has benefited from, among other things, the soaring home prices along the coast. Outside of information jobs, which have declined, the region has seen steady growth in manufacturing, wholesale trade and professional and business services. As much as the middle-class economy still exists in Southern California, it is now solidly ensconced in this region.

Future prospects

In the coming years, California’s claim of being the economic exemplar of the country may be further undermined by legislative overreach. The statewide rise in the minimum wage will hit the lower-wage sector, particularly outside the coastal enclaves. Various plans to boost the welfare state, such as a single-payer health care system that includes the undocumented, and a host of union-driven initiatives, seem certain to drive up costs and impose an ever-heavier tax burden on the state’s struggling middle class.

Perhaps most threatening, over time, may be a host of new environmental laws which will impose enormous burdens on affordable housing, energy prices and industrial growth. The slowdown in tech growth, coupled with a looming decline in the markets as the Trump agenda unravels, could weaken the capital gains juggernaut that has sustained the state through the past decade. Gov. Jerry Brown, under whose watch spending has risen 45 percent, is already predicting a large deficit for next year.

So far this decade, California has defied economic logic, largely due to the explosive growth of Silicon Valley, as well as the effects of rapid real estate appreciation. Yet, these gains have failed to reverse, and in some ways have even exacerbated, the state’s highest-in-the-nation poverty rate, growing inequality and a mounting outmigration of middle-class families. These facts suggest that it’s time to end the celebration and start focusing on how create a more expansive, less feudal California.

Originally published in the Orange County Register.

Cross-posted at New Geography.

ditor of NewGeography.com and Presidential fellow in urban futures at Chapman University.