Newsom May Not Be So Lucky on the Economy

Outgoing Gov. Jerry Brown offered a pithy observation about the nature of politics during a wide-ranging interview before the Sacramento Press Club this month, to wit:

“A lot of politics is timing, circumstances and luck.”

While predecessor Arnold Schwarzenegger contended with the state’s worst recession since the Great Depression, which clobbered tax revenues, recovery was underway when Brown was inaugurated in 2011 and he enjoyed an expanding economy for the next eight years. It allowed him to close a $27 billion budget deficit, sharply expand spending – although not as much as the Legislature wanted – and create a multi-billion-dollar “rainy day fund” to cushion effects of a future recession.

Brown acknowledges that luck played a big role in re-floating the underwater budget, but his successor, fellow Democrat Gavin Newsom, may not be so lucky.

Brown has warned repeatedly that California is overdue for a recession that would, his own fiscal advisors say, cut revenues by $60 billion over three years. It appears that a slowdown is already occurring, although whether it will build into a recession is unknown.

California may think of itself as an island, but in fact it is more affected by global economic forces than most other states, and the international economy is already cooling for a variety of reasons.

An Ever-Increasing Shortage of Housing

California also has its own headwinds, most notably an ever-increasing shortage of housing that sends housing costs skyward and makes it difficult for employers to find skilled and unskilled workers, thus discouraging investment and slowing job growth.

“Job growth in California has exceeded national job growth for the past 80 months through October, a testament to the continued strength of the state’s labor market,” Bank of the West’s chief economist, Scott Anderson, says in a new analysis.

However, Anderson also sees job growth slowing and concludes, “Higher interest rates, tighter financial conditions, a slowing global economy, high costs of living and doing business compared to surrounding states, net outmigration, and technology industry headwinds are all factors underpinning the slowdown forecast.”

“Despite the tailwind of accelerating economic growth for the nation, economic growth across the Golden State has been slowing,” economists at California Lutheran University say. “After experiencing annual growth of greater than 3 percent from 2013 until mid-2016, statewide growth is now hovering near two percent.”

Both Anderson and Cal Lutheran focus on a growing outflow of job-seeking Californians to states with lower living costs, with the latter saying, “California currently exhibits a style of net domestic migration that would properly be characterized as mass exodus” and adds, “There is simply more opportunity somewhere else. This important indicator of demographic change is a powerful signal of underlying economic weakness.”

Newsom Will Unveil His First Budget

A few miles down Highway 101 from Cal Lutheran, economists at UCLA’s Anderson School of Management also see California’s economy cooling.

Anderson Forecast Director Jerry Nickelsburg cites a trade war with China as another risk for California’s international trade and “could adversely affect the logistics industry, one of the fastest growing sectors in California this past year.”

Newsom will unveil his first budget just three days after being inaugurated on January 7, and it’s likely that he’s been getting the same kind of input from economists.

After making lavish promises of new spending for health care, education and other high-dollar services during his campaign, since election day Newsom has been trying to lower expectations and pledging to emulate Brown’s fiscal prudence.

That would be wise, but would disappoint those in his own party who were energized by his promises.

CALmatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to Commentary.