In 2022, analysts forecast the Golden State surpassing Germany in terms of economic growth. Analysts now think the state will lose its No. 5 spot for largest economy, weighed down by population declines and high unemployment.

The California Center for Jobs & the Economy reports California’s slowing economic growth could cause it to fall behind India.

The Golden State’s 2.1% economic growth in 2023 landed it No. 32 among states and below the 2.5% U.S. growth.

California’s 5.3% unemployment rate is the highest in the nation.

And, California’s population from 2022 to 2023 shrank .2%.

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Charlie Dougherty, senior economist with Wells Fargo, says California’s sharp jump in unemployment and shrinking population contribute the most to the state’s slowdown.

“Affordability conditions have become so poor for potential buyers, especially along the coastal areas, which are home to some of the least affordable zip codes in the entire country,” Dougherty said. “That has led buyers to seek more affordable homes, often in other states.”

Affordability Drives Population Growth & Declines

Affordability is the key driver behind population growth — or declines — Dougherty said.

Strong population inflows means more supply of workers and more demand for goods and services.

“If you look at the states that are growing quickly in terms of population, one thing that stands out is those states all tend to have relatively more affordable real estate, both in terms of residential and commercial,” Dougherty said.

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The $859,800 median home price in 2023 for California was more than double the U.S. average.

Construction in the state shrank 13 percentage points year-over-year, according to the U.S. Bureau of Economic Analysis, compared to 4 percentage point growth across the U.S.

Nevada reported a 25 percentage point growth for the year.

Stubbornly high interest rates have discouraged home building, Dougherty said. On the commercial side, declines in office occupancy have discouraged construction in that sector.

While population declines are not the only reason for California’s forecasted budget declines, it plays no small role in what the California Legislative Analyst’s Office forecasts to be a $73 billion shortfall. Gov. Newsom’s office forecasts a $58 billion shortfall.

California Ranks No. 39 for Income Growth

Shortly after the report came out about the risk of California losing its spot as No. 5, Newsom countered with high points for California’s economy.

“California continues to punch above its weight, overperforming all but a handful of the largest countries in the world,” Newsom said in an announcement. “And with our unparalleled combination of innovation, higher education, a talented workforce, diverse industries, and unparalleled natural resources, we will continue to do so well into the future.”

Newsom’s office pointed out that the state added 28,300 new jobs in March, the seventh gain in eight months.

Newsom also cited the fact that India has been the fastest-growing large economy in the world, surpassing the United Kingdom in GDP in 2021.

While some states continue to have low unemployment, California’s unemployment rose above its pre-pandemic numbers, Dougherty said. In March, unemployment remained at 5.3% from February, according the Employment Development Department.

That rise contributed to the state’s lagging personal income growth, Dougherty said. Incomes rose 3.4% in 2023 from 2022, below the 4% average nationwide. That rate landed California in the No. 39 spot for income growth.

“Over the past few months, you have seen employment growth sort of on trend kind of cooling off compared to the rates of growth that we saw maybe a year ago,” Dougherty said. “So this slowdown in terms of hiring indicates that overall GDP growth in the state is likely to moderate over the course of this year.”