While U.S. GDP grew faster in 2012 than in 2013, in the 4th quarter of 2012 it
slowed a meager 0.1%, indistinguishable from no growth. Our forecast is for
average growth in early 2013 to be slow as a consequence of the changes in the
U.S. Fiscal environment. Nevertheless, economists have taken heart in the
continued growth in employment. Total non-farm employment in the U.S. has been
increasing at an average of 200,000 jobs per month. The pattern for California
is similar, albeit at a slightly faster rate. Yet one wonders with all of the
changes in California since the beginning of the Great Recession, has it lost
its competitive edge and is the current weakness in U.S. economic growth
revealing an even slower recovery in the Golden State's future?
To peel back the layers of this puzzle we look at the differential growth rates
between California and other states as the economy slows and the trade patterns
between California and its foreign trading partners. What we find is that
the recent data on non-farm employment does not show any indication of a
widening gap between California and other states. Moreover, over the last 10
years California exporters have held their own in the world marketplace. This
leads us to continue our outlook of slow steady but unexceptional economic
growth in the current year and gradually accelerating growth the following two
years. With the expectation that the past pattern of outperforming the U.S. will
be the future pattern, our fore-cast for the unemployment rate is for a
continued closing of the gap for the next three years.
THE SLOWING OF CALIFORNIA GROWTH
As we approached the end of 2012, California growth began to slow. There are a
number of reasons for this slowing, notably a slowing of U.S. growth (GDP is
estimated to have grown at only 0.1%) and a continuation of recession in Japan
and throughout most of Europe. Though it is no surprise that employment growth
in California slowed, what is something of a surprise is that it did not slow to
the same extent in the U.S.
Through the first nine months of the year, growth in non-farm employment in
California has been at a rate exceeding all but a few states. The annual growth
rate as measured by the change between employment in Q3 2012 versus Q3 2011 in
California ranked 8th in the U.S. and 4th among states with populations
exceeding 5 million. By Q4 2012 California's ranking had fallen to 12th overall
and 6th for large states. This shift in the rankings is not significant however
as the growth rates are quite close one to another.
More important is the slowing in the growth rates. The Q3 2012 rate was 2.2% and
it has now fallen to 1.9%. At the same time, U.S. non-farm payroll growth rates
slowed, but only marginally. What this reflects is the changing nature of the
recovery. The strength of the U.S. expansion, such as it is, lies in the
increased production of automobiles and homes. California is not sharing
proportionately in either of these. Thus, one would expect the kinds of
employment numbers we have been seeing.
None of this is particularly surprising. Though much has changed in the last
year, we observed in December 2011 that there were significant headwinds to an
accelerating recovery in 2012. In particular we were concerned about uncertainty
in the U.S. economy with the end of the Bush and Obama tax cuts (the Fiscal
