Two mainstays of California’s economy — technology and real estate — look shaky at best.
Consider the recent layoff headlines affecting California businesses.
“Twitter is cutting 3,700 workers.” Billionaire Elon Musk has downsized around the world after buying the San Francisco-based social media giant and finding it in poor financial shape. On Thursday, he told staff that bankruptcy was possible, Bloomberg reported.
“Meta cutting 11,000 workers.” Fellow billionaire and CEO Mark Zuckerberg announced even more layoffs (not just in California) at the Menlo Park-based Facebook owner. He admitted to misinterpreting the advertising request and misinterpreting a huge bet on his new “metaverse” communities.
Meanwhile, news is swirling about other tech takedowns or hiring freezes. There was a daunting prediction from Cupertino’s tech titan, Apple. And Mountain View-based Alphabet, which owns Google and YouTube, is cutting hiring plans in half.
The tech crash follows a terrible summer for housing in California.
Soaring mortgage rates have spooked home hunters. Sales have collapsed to lows not seen during the Great Recession. Prices have weakened.
No deals, no loans. So Orange County-based LoanDepot says it’s also cutting jobs. The mortgage lender, which started the year with 11,300 workers nationwide, had 8,500 employees in September and plans to cut to 6,500.
How much will technology and housing pain shrink California’s economy?
It’s not easy to quantify. Industry impact studies suggest that technology and housing account for around a third of all business activity.
Tech work makes up 18% of California’s economy, according to the annual Cyberstates study. The broad scope of housing — from sales to furnishings to construction — accounts for 16% of California’s commercial output, estimates the National Association of Realtors.
I did my own calculations, having my trusty spreadsheet take a historical look at California’s unemployment rate, the Nasdaq Composite Index (barometer of the tech stock market and a marker of the health of the industry) and the California Federal Housing Finance Agency house price index. I looked at 12 month, quarterly changes going back to 1976.
History says that when unemployment in California rose over the past 46 years, the Nasdaq index was rising an average of 5% per year.
Not a bad comeback, huh? Well, when the state’s unemployment rate is down, the Nasdaq has risen 17% on average over the previous 12 months. It is therefore difficult to separate technological success and the California labor market.
Note also that the Nasdaq index fell at an annual rate of 19% this summer, the worst drop since the Great Recession. Twitter shares had halved this year before Musk bought the company. Meta stock is worth a quarter of its 2021 high.
Remember that technology is a volatile business.
Just think of one slice: California’s information workers, like those at Twitter and Facebook.
After the dot-com stock craze collapsed in 2000, the news niche lost 20% of its workers. The Great Recession reduced by 10%. Since then, information work has increased by almost 50%.
It’s a safe bet that tech bosses will keep a close eye on costs for the foreseeable future with profit-minded investors in mind.
Similar patterns are found in the real estate world.
When California’s unemployment rate rises, home prices have risen an average of 1% since 1976. Conversely, when unemployment falls, homes appreciate 9% per year.
It makes sense: you need a good job to afford a home in California. Except when rates reach 20-year highs and a home purchase fits a small family budget.
So the 95% drop in LoanDepot shares from its 2021 high is hardly surprising.
California’s tech and housing headaches come as the state’s economy cools after a hot rebound from Covid-19 lockdown days in 2020.
The state fared poorly in a study by Fitch Ratings, which reviewed economies nationwide for the year ending June.
Personal income in California grew 1.5%, the sixth slowest among states. Statewide gross domestic product grew 0.3%, the 11th slowest. California tax revenue rose 11.9%, No. 30 among states. And by September, California had replaced 99% of the jobs lost during the shutdowns, rebounding No. 24.
When my spreadsheet averaged these state rankings, California’s economy was a modest No. 39.
Remember that technology is a vital cog in just about any economy, as the sector employs highly paid employees. A typical California technician earns $117,000 a year, according to Cyberstates.
These high salaries in turn increase spending across the state, not to mention real estate prices. Additionally, when the Nasdaq index soars, the California government benefits from large capital gains tax recoveries.
Look, California’s economy is famous for its ups and downs.
Unemployment now stands at 4%, close to a historic low, which is pushing up wages but boosting inflation. Statewide news jobs hit a record high in August. And California home prices were breaking price records and appreciating 22% a year this spring.
And while watching the warning signs from technology and housing, it’s surprising how rarely these two industries experience simultaneous problems.
Since 1976, these double dips have only occurred in three periods – at least by Nasdaq and FHFA standards.
There were nine months in 1982 when the Fed also raised rates to stifle inflation. Unemployment in California rose from 8% to 11% during this period.
There were almost two years around the Great Recession. Housing crashed. Global financial markets were in turmoil. And statewide unemployment doubled to 12% between 2008 and 2010.
And the outlier: the winter of 1994-95.
During these six months, again, the central bank played a key role. Fed rate hikes hit stocks, bonds and real estate,
Curiously, this did not prevent California’s economic recovery from a sharp downturn in the early 1990s. Unemployment fell slightly during this period.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at email@example.com
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