California May Be Casting A Shadow Over The U.S. Economy

Since the recession ended some 30 months or so ago, one question has obsessed economists and bewildered policymakers: Why won't the economy grow faster? Two oft-mentioned culprits: brutal corporate restructurings and slowing federal spending. But now, some economists are pinning more of the blame on the California slump. "If California isn't doing well or is in recession, that goes a long way toward explaining why the national economy won't pick up," says Mark Zandi, economist at Regional Financial Associates Inc.

Take jobs. Excluding the Golden State, employment is up by 2% year-over-year. But California is down by a crushing 1.6%, pulling down the rest of the economy (chart). Indeed, at this point in past turns of the business cycle, California would have added 1 million jobs rather than lose more than half a million, says RFA's Zandi. Look also at housing: Over the past year, housing permits are up 22.7% for the country as a whole but down 10.9% in California.

It's hardly surprising that California's slump would have such a powerful impact on the national economy. The Golden State accounts for about 12% of the nation's gross domestic product, and it's the country's most populous state, with some 30 million residents.

The state's recession has been led by the defense-driven devastation of its aerospace industry and manufacturing sector. Declines in home prices and weak commercial-construction markets are further exacerbating the downturn. Right now, no region of the state is showing job growth, and nonfarm incomes have fallen by 0.2% from the first quarter of last year, after adjusting for inflation. Net migration from the rest of the country into California has swung from a positive 207,000 in fiscal 1989-90 to a negative 150,000 in fiscal 1992-93, says David Hensley, economist at Salomon Brothers Inc.

When will the California economy pick up a head of steam? Hensley believes it may happen by spring of next year, perhaps earlier if the defense meltdown abruptly cools off. Yet even when California leaves its recession behind, RFA's Zandi believes that its long-term problems, such as the high cost of working and living in the state, will constrain growth through the rest of the decade--a hindrance to more rapid economic growth elsewhere in the economy.

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