California's economy is the eighth largest economy in the world and the largest of any state in the U.S. As of 2009, the gross state product (GSP) was approximately $1.82 trillion, which is 13% of U.S. gross domestic product (GDP). As of 2010, California, along with Texas, leads all other states in the number of Fortune 500 companies headquartered in its state, with 57 companies domiciled within each (April 2010, Fortune Magazine).
Examining California's growth prospects from a global perspective, the IMF defines high growth ("HG") countries as those achieving GDP growth of over 3% for three consecutive years, while low growth ("LG") countries register growth of less than 3% over the same measurement period. Current HG countries include China, India, and Korea, while certain other countries such as Brazil, Mexico, and Chile have oscillated between the HG and LG classification over the last five years. The U.S. economy recently slid from HG to LG status; IMF forecasts predict the country will experience modest economic growth over the medium term, in line with the European Union and Japan.
The answer as to whether growth in the U.S. continues to moderate, accelerate, or subside will be significantly influenced by the performance of California's economy. Historical evidence suggests that that state's economy leads the national economy out of recessions, given its dominance in a multitude of business sectors (i.e. aerospace, entertainment, technology, and agriculture). With a loss of 1.34 million jobs since December 2007 currently weighing on the state's economic health, job creation in these critical sectors will determine the pace of recovery in California.
The table below highlights the current consensus of several economists regarding the state's economic indicators and drivers. In terms of effect to GSP, the expected growth in personal income of 3.50% will be partially offset by the state's population growth of 1.11%. However, anticipated tax increases and higher savings rates among individuals are expected to generate 2.25% to 2.50% growth in GSP over the 2010-2015 timeframe.
Normally a primary contributor to the state's employment growth, Government-related employment is expected to decline by 0.33% from 2010-2015. Efforts to reduce state and local expenditures will likely continue to translate, to varying degrees, in the near to medium term to reductions in payrolls and the service workforce. While the Government sector is the only sector expected to experience declines in employment, it is the state's largest job source, making aggregate state employment figures subject to its behavior. Other sectors forecast to experience muted job growth (less than 1%) are Education, Healthcare, Agriculture, Leisure, and Hospitality.
In contrast to prior periods, the Professional and Business Services sectors are expected to lead total employment growth of 0.93% for the state. Professional & Business Services jobs are anticipated to increase by 251K (in absolute terms) over five years as investment, consulting, legal, and accounting firms continue to grow. Growth in highly skilled and technical jobs will complement increases in part-time/temporary hiring by business services firms (University of the Pacific Business Forecasting Center, July 2010).
Economists do see recovery in annual housing starts (45K in 2010 to 174K in 2015), which suggests a healthy housing market over the next five years. Recent improvements in inventory sales ratios (a measure of housing supply versus demand) and housing affordability indices lend support to this forecast (Wells Fargo Securities Economics Group, July 2010). Additionally, Tourism is forecast to jump back to its 2007 levels by 2015, accounting for $120B, or 7%, of GSP. The baby-boomer population, who controls 60% of personal wealth in the U.S., along with international travel to the U.S. by emerging middle classes in China and India will provide support to this sector.
Retail Trade, Manufacturing, Financial Services, Construction, and Transportation & Warehousing are expected to generate 275K jobs over five years as firms become more confident about both growing inventories and seeking capital to do so. Construction hiring is expected to be a notable contributor to employment growth in 2012 and beyond as new home building begins to normalize. A return to a steady-state environment for international trade flows (NAFTA partners and Asian countries) encourages the balance of these growing sectors to continue hiring.
Sources: The following sources were utilized to construct the table and are referenced throughout the balance of the article: a) Public Policy Institute of California (PPIC), California Economy Report; b) University of the Pacific (UOP) Business Forecasting Center, July 2010 California & Metro Forecast; c) Wells Fargo Securities Economics Group, California Economic Outlook: July 2010.
