California’s Economic Problems

On June 17th, California “celebrated” the three-month anniversary of Governor Gavin Newsom’s “shelter-in-place” order.  The good news is that we’re serious about dealing with the COVID-19 pandemic; the bad news is that the combination of the pandemic and “shelter-in-place” order has had a devastating impact on the California economy.

So far, California has more than 167,000 COVID-19 cases and 5300 deaths.  We haven’t “flattened the curve” yet; we’re adding more than 3000 new cases per day, mostly in Los Angeles County and the surrounding counties, such as Orange and Riverside.  This means that California is gradually opening up but we have to be careful.  On June 18, Governor Newsom ordered all Californians to wear masks when in public or “high-risk settings.” (https://www.latimes.com/california/story/2020-06-18/california-mandatory-face-masks-statewide-order-coronavirus-gavin-newsom)

The pandemic-induced “shelter-in-place” order has had several noticeable economic impacts:

Unemployment: California has 40 million residents and a labor force of approximately 18 million workers. Governor Newsom expects the state’s unemployment rate to peak around 25 percent later in the year (with the rate for 2020 expected to be 18 percent). The Public Policy Institute of California (https://www.ppic.org/wp-content/uploads/ppic-statewide-survey-californians-and-their-government-may-2020.pdf ) describes a dire situation: “More than one-third of adults (35 percent) report that they or someone in their household have been laid off or lost their job due to the coronavirus outbreak, and half (51 percent) report someone in their house having work hours reduced or pay cut.” [Emphasis added]

According to the Public Policy Institute of California (https://www.ppic.org/blog/early-insights-on-californias-economic-downturn/?),  “The lion’s share of job loss (more than 80 percent) occurred in three service sectors: arts, entertainment, and recreation; accommodations and food; and ‘other services’ (a category that includes automotive repair, personal care, and dry cleaning).”  These sectors fell significantly faster than they did during the first month of the great recession — December 2007 through January 2008.  (In contrast, during the great recession, the sector experiencing the most impact was construction.)

As California counties learn to manage the pandemic, more businesses are permitted to open.  Here in Sonoma County, we’ve begun to open restaurants, tasting rooms, bars, movie theaters, fitness centers, galleries and campgrounds — we’re preparing for “cautious” tourism.  As this happens, more furloughed employees will return to work.  Nonetheless, not everyone who had a job will return to the same job or hours.

California outlook: Significant unemployment for the rest of the year —  more than 15 percent.

Tourism: In 2019, California made $145 billion from tourism. This year, by mid-April, the Golden State’s tourism business had stopped.  This abrupt halt cost the jobs of most of the Golden State’s 600,000 travel industry employees. It also had a secondary impact: reduction of state revenues — travel taxes are a key source of revenue for California cities, amounting to $12 billion in 2019.

As California counties begin to manage the pandemic, intra-state tourism is restarting.  For example, in Sonoma County, residents of other California counties are beginning to travel here to visit our wineries and parks.  Nonetheless, we’re not seeing visitors from other states or countries and it’s unclear when we will.

California outlook: Out-of-state tourism is dead for the rest of 2020, resulting in a continued negative economic impact.

Budget Deficit: On June 15th, the California legislature passed a pandemic-crisis budget (https://www.bloomberg.com/news/articles/2020-06-15/california-assembly-passes-budget-that-depends-on-federal-aid).  Bloomberg News reported that California lawmakers “passed a $143 billion general-fund budget for the next fiscal year that counts on federal aid before triggering spending cuts… The bill they approved is a placeholder of sorts for the fiscal year beginning July 1 as they said they will continue to negotiate with [Governor] Newsom and can make changes later in the summer… California is grappling with a $13.4 billion budget shortfall this year and $40.9 billion in the next as pandemic-related shutdowns slam the economy of the most populous U.S. state.”

If the California budget is not bailed out by Federal aid, then California will be forced to cut funds to education and other critical services.  (Most California schools have yet to reopen and many seek additional funds because of pandemic-related health-safety requirements — such as smaller class sizes and increased cleaning procedures.

California outlook: Later in the summer, Congress will probably pass a stimulus bill that provides funds for hard-hit states and cities.  This will help alleviate California’s 2020 budget pain, but the Golden State’s 2021 outlook is also grim.

Agriculture: Although accounting for only 2 percent of California’s economy, agriculture produces $47.1 billion in revenue. Over a third of the United States’ vegetables and two-thirds of the country’s fruits and nuts are grown in California — it’s the leading US state for cash farm receipts, accounting for over 13 percent of the nation’s total agricultural value.

Since Governor Newsom’s March 17th shelter-in-place order, California farmworkers have been declared “essential” workers and have remained in the fields and packing sheds.  Unfortunately, they are beginning to get sick.

Hispanics/Latinos are 57 percent of California’s infected population — 92,000 of 167,000.  Most of the “essential” farmworkers are Hispanic and more than 50 percent are undocumented (https://www.nytimes.com/2020/04/02/us/coronavirus-undocumented-immigrant-farmworkers-agriculture.html).  So far, the pandemic hasn’t caused major disruptions in California’s agricultural production, but it seems inevitable that there will be problems.

California outlook: As the summer progresses, the pandemic is likely to disrupt aspects of California’s food supply.

Summary: As a result of the COVID-19 pandemic, California’s economy has taken a big hit.  We’re working our way through the crisis but the big problems won’t be solved quickly.