California Sleeping

What’s up with California?

Long the home of bleach-blonds and beach boys, California has been in an economic funk that has hit harder and lasted longer anywhere else in the nation. In 2007, unemployment averaged 5.4%, before rocketing to 12.4% in 2010. And it’s still at 10.7%–well above the national average, and twice that of New Hampshire at 5.4%.

This is important, because California’s economy is one-eighth of the nation as a whole. If California were a country, its $1.9 trillion economy would be the 9th largest in the world—just below Italy, and ahead of Canada and Spain. Output from the California economy exceeds that of Norway, Sweden, Finland, and Denmark combined.

Even today, there are areas of California—the agriculturally rich Central Valley or Imperial County—where unemployment is above 15%, or even 20%. For a state with a world-class university system, with global leaders in the technology, entertainment, and defense industries, that has seen double-digit growth in its population every decade since the 19th century, this is remarkable. What has gone wrong?

Certainly California was especially hard-hit by the housing boom and bust. The Central Valley has a lot of land and is an extended commute from San Francisco and Silicon Valley. So prices for starter homes roared and crashed. It’s no surprise that it was hit much worse than the Bay Area, where construction is restricted. But the rest of the State still seems to be doing so poorly.

A related issue has to do with energy and agriculture. If you look at a county-level map of unemployment in the US (http://www.bls.gov/lau/maps/twmcort.pdf), one striking feature is the low level of unemployment down the Great Plains. These areas are much more oriented towards commodity agriculture (wheat, corn, soybeans) that are capital-intensive, rather than California’s specialty products like wine and nuts that are labor-intensive. Low interest rates really help farmers buy tractors—but they don’t help them hire seasonal grape-pickers. In addition, restrictions on energy production have kept the State from benefitting from the trebling of oil prices since the mid 2000s.

California’s economic funk is an outgrowth of the labor-intensive nature of its economy. It doesn’t help that its political system seems dysfunctional, at least from the opposite coast. The US economy won’t feel like it’s doing much better until this huge portion of our country begins to get back on its feet.

Douglas R. Tengdin, CFA
Chief Investment Officer
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