California Could See Sharp Drop in Job Growth, Moderate Recession by 2024: Chapman Forecast

A construction worker pushes his wheelbarrow past a homeless man sleeping on a Hollywood sidewalk in Hollywood, Calif., on Jan. 20, 2023. (Frederic J. Brown/AFP via Getty Images)

California could face a sharp decline in job growth by the end of this year as the state grapples with a moderate recession, according to top economists at Chapman University.

In its latest bi-annual economic forecast released June 22, the school forecast job growth in the state to drop to 1.3 percent by December, compared to 5.6 percent last year.

But that isn’t expected to happen until a national recession is underway.

“In 2023, as we go through a downturn again, California will underperform the U.S. economy,” said economics professor Jim Doti, Chapman University’s president emeritus, during a presentation of the report June 23. “On a year-to-year basis, job growth is slowing. And our forecast indicated that it’s going to continue slowing all the way through the end of the year.”

In 2020, as the COVID-19 pandemic began, California’s unemployment rate reached 8.1 percent, but is now around 4.1 percent, according to the report.

Jim Doti presents Chapman University's economic forecast in Orange, Calif., on Dec. 13, 2022. (Jill McLaughlin/The Epoch Times)

A similar picture was reported in the latest economic forecast by the Woods Center for Economic Analysis and Forecasting at California State University-Fullerton, which reported Orange County jobs were rebounding but remain below pre-pandemic levels by 37,100 jobs.

Los Angeles County was farther behind at 260,000 fewer jobs than in February 2020, according to the Fullerton report.

Home values are also expected to drop significantly by 16 percent over last year’s prices, Chapman economists said. The median, or average, home price at the same time last year in California was $842,000. This year, the experts are predicting a median price of $710,000 by the end of the year.

When looking at the calendar year, instead of comparing fiscal quarters, the forecasted decline is a more moderate 8 percent, according to the report.

People are reluctant to sell their homes after watching mortgage rates inch up to 6.8 percent, which contributes to the decline in prices, Doti said.

“The resale market is so low now, because homebuilders don’t have to compete,” Doti said. “They find they can sell their homes even in a resale market.”

California still maintains a top spot for having some of the nation’s priciest homes, however. In May, a Home Bay real estate company ranked seven of the state’s cities among the top-10 most expensive ZIP codes in the United States. San Francisco metro came out on top with houses averaging $7.36 million.

Building new homes is forecast to slow significantly by the end of the year.

Total residential permits issued for single and multiple dwellings, an important measure of construction activity in the state, could drop to 104,000, representing about a 20 percent decline from the 130,000 permits issued in 2022, Chapman economists reported.

The drop nearly reaches the 100,000 permits issued in 2020 during the pandemic.

Construction workers in Costa Mesa, Calif., on April 21. 2022. (John Fredricks/The Epoch Times)

Losing Residents and Revenue

The most concerning problem is the continued loss of residents to income-tax free states like Texas, Nevada, and Florida, Doti said.

The state has already lost more than 800,000 people, or 2 percent of the population, in the past three years, according to data released by the state’s finance department.

The loss is significant, considering many of those residents leaving are high-income earners, Doti added.

“One percent of the people in California pay 50 percent of the tax,” Doti said.

The loss of these high-income residents equals a loss of about $20 billion in state tax revenue, according to the latest numbers, he said. California already faces a $31.5 billion deficit this fiscal year, which starts July 1.

The revenue is mostly headed to the aforementioned states, Texas, Nevada, and Florida. These states took in more than $13.5 billion as residents relocated, according to tax returns, Doti reported.

“It’s becoming clear—the outflow is not only people, it’s dollars as well,” Doti said.

The economist suggested cutting California’s tax rate by 2 percent across the board. The state’s highest tax rate of 13.3 percent would move to 11.3 percent, for instance. The result would be a decline of $12 billion but it would stem the tide of people moving out of the state, Doti added.

A new survey by Strategies 360, a research and communications firm focused on public affairs, found 40 percent of residents are somewhat or very serious about leaving the state and 24 percent said they were thinking about it.

Affordability was the reason 61 percent wanted to leave. Other reasons included economic uncertainty, expensive housing and living costs, public safety, political polarization, and the education system, according to the study.

Texas welcome sign coming from the east on Interstate 10. (Getty Images)

California, with the world’s fifth-largest economy, remains ahead of Texas and Florida in some rankings, according to professor Raymond Sfeir, a professor of economic research at Chapman. Of the 76 companies worth over $100 billion in the United States, 22 are located in the Golden State. Texas has only seven and Florida had one.

China has 15 companies worth over this amount. The United Kingdom and France have 6.

California also captured 43 percent of the nation’s venture capital investment in 2022, while Texas garnered 4 percent and Florida took in 3 percent, Sfeir reported.

However, California has one of the worst business tax climates in the nation, he said. Only two states are ranked lower—New York and New Jersey.

Recession Ahead

Chapman’s experts are sticking to their prediction of a national recession later this year but are expecting the downturn to be moderate.

The Gross Domestic Product (GDP), or the total market value of all goods and services produced in the United States, is expected to drop in the second half of this year, according to Doti.

“And that’s the stuff of a recession,” Doti said. “Perhaps a moderate one.”

He pointed to four factors: the drop in real GDP for the second half of the year, declining new-home construction, a drop in the national money supply, and a negative interest-rate spread, which is the difference between the interest rate charged by banks on loans to private sector customers and the federal bond rate.

The Federal Reserve (Fed), the country’s central banking system, began increasing interest rates in 2022, only pausing this month to leave rates unchanged as uncertainty swirled during national debt ceiling negotiations. The federal funds rate was held at 5-5.25 percent, ending a streak of 10 consecutive rate hikes. Another rate increase is expected by the end of the year.

This resulted in a mini banking crisis this year as banks across the nation landed under water. Their bond holdings are now worth $500 billion less than what they paid for them, and mortgage holdings are $500 billion less than they’re worth, Doti added.

“So, the banking sector is currently under pressure,” Doti said. “They’re tightening up on their loans and as a result, there’s a mini credit crunch going on.”

Customers wait outside as an employee enters the Silicon Valley Bank branch office in downtown San Francisco, Calif., on March 13, 2023. (Kori Suzuki/File Photo/Reuters)

A stark drop in commercial real estate loans nationally also indicates a slowdown, according to Doti. During the Great Recession of 2008 and 2009, defaults on residential property loans were mainly to blame for sparking a downturn. At that time, commercial real estate loans totaled about $1 trillion to $1.5 trillion. Today, commercial loans are up to around $3 trillion, he said.

Total bank reserves are $3.7 trillion.

“You’re talking about potentially a real problem,” Doti said. “So, the recession, even though it looks like it might be a moderate one ... if this happens, it’s going to be more serious.”

Commercial Slowdown

Office occupancy rates are taking a beating across the board in southern California and San Francisco. San Francisco has entered what many are calling a doom loop—or negative cycle—in its downtown business district, with at least 26 stores, along with two of its largest hotels, leaving the city since 2020.

The commercial property sales slump could turn around, though, when investors start buying the properties at the lower prices, said Doti.

“Don’t be surprised if you see a lot of these buildings falling apart ... and then you start seeing a spike in the transactions in August or possibly by the first quarter of next year,” he said.

Apartment building sales are also dropping because of high rents and public safety concerns, he said.

A pedestrian walks by a commercial property for lease in San Francisco, Calif., on Oct. 27, 2022. (Justin Sullivan/Getty Images)

Also, the industrial and warehouse property market, especially in an area in southern, central California called the Inland Empire, is stabilizing as inventory is meeting demand, according to Doti. The market is expected to see another year or two of positive growth before it settles into a constant growth rate.

Similar to past economic slowdowns, California is expected to fare worse than the rest of the nation, especially in light of its declining housing market.

“California generally suffers more in recessions, but we do better in expansions, generally speaking,” Doti told The Epoch Times. “The reason for that is usually during a downturn, real estate is most affected, and that’s more important to the California economy. So when it’s down, we suffer more than the rest of the nation.”

Orange County is already in a recession, according to Doti.

The county relies heavily on the financial sector, including mortgage banking, escrow services and other housing-related businesses.

“That’s where we are weakest right now,” Doti said. “Literally, we’re in a recession. That’s why Orange County is hurting.”