Is California already in a recession? Here’s how and when we’ll know
California may or may not be in a recession. But how would you know — and why should you care?
You’ll know and care because if the economy shrinks dramatically and for an extended period of time — the unofficial definition of a recession — it usually means fewer jobs are available. It means skittish consumers don’t buy as much.
“During a recession, fewer goods and services are produced. Overall economic activity and output decreases, jobs are lost and incomes decline,” said Goyce Soydemir, Foster Farms endowed professor of business economics at California State University, Stanislaus.
Some parts of the state could feel a recession’s effect more than others.
“Economically disadvantaged regions such as the Central Valley are impacted more heavily since there is greater abundance of unskilled to skilled labor. Job losses are much greater for the unskilled than skilled workers,” he said.
Republicans insist the country is in a recession. They cite the economic data released by the federal government last week, showing the economy contracted for the second straight quarter. That has long been considered the definition of a recession.
“This morning the government announced what every American has been feeling for nearly a year — we are in a recession,” said House Minority Leader Kevin McCarthy, R-Bakersfield, after the data was reported Thursday.
Democrats — and many economists — say the traditional recession definition doesn’t work this time. Jobs remain plentiful and people are still buying at a healthy clip.
“We are not in a recession at this time. We certainly may be on the eve of recession if the labor markets start to go south over the rest of this year and into next. And factory production slows down because demand slows down,” said Mark Schniepp, director of the California Economic Forecast.
“But in general, many of the U.S. economic indicators are not at levels that would be an easy call for recession today,” he said.
What is a recession?
Here’s what a recession is like — or would be like:
▪ Jobs. They become harder to get and layoffs increase. So far, the picture is mixed. California’s June unemployment rate was 4.2%, historically low but still above the nation’s 3.6% average and the 10th highest rate in the nation.
“California employers have been hearing about an economic downturn, and in response have been freezing hiring, withdrawing job offers and even undertaking layoffs, in some cases. The hiring freezes and layoffs in turn drive an additional downturn,” said Michael Bernick, who used to run the state’s unemployment agency and is now an employment attorney with Duane Morris LLP.
He called this phenomenon the “recession feedback loop,” since developments tend to influence each other..
▪ Consumer behavior. If people keep reading a recession is underway or imminent, they prepare. They stop buying, particularly big purchases.
“If people feel like it’s a recession meaning that their incomes are declining, their job security is precarious, and/or they can’t seem to afford basic necessities or are about to lose their home, then it is a recession to them. Call it what you want,” said Schniepp.
Each month, the New York-based Conference Board surveys consumer confidence, an important barometer of the consumer mood. Its July survey found confidence dropping for the third straight month.
▪ Inflation and interest rates. Consumer prices nationally were up 9.1% over the 12 months ending in June, their biggest annual leap since late 1981. The Federal Reserve, trying to push the number down, raised key interest rates again last week.
Consumers tend to balk at paying higher prices and interest rates, chilling economic growth.
“Inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months,” said Lynn Franco, Conference Board senior director of economic indicators.
▪ Longterm planning. Christopher Thornberg, founding partner of Beacon Economics in Los Angeles, saw more ominous economic danger ahead.
“What people don’t seem to be appreciating is how monetary tightening will inevitably lead to a fiscal contraction as well,” he said.
The nation now has the highest debt to Gross Domestic Product ratio since World War II, and the debt servicing costs will be rising sharply with rates, Thornberg said. That will create bigger federal deficits and even bigger debt servicing burdens. The GDP is the value of the nation’s goods and services.
“This vicious cycle can only be stopped by a sharp decline in spending or a big hike in taxes,” Thornberg said.
The nonpartisan Committee for a Responsible Federal Budget found that high debt levels will mean slower income and wage growth, more interest payments on the national debt and higher interest rates.
It also limits how the government could “respond to an economic recession or other emergencies, put an undue burden on future generations, and heighten the risk of a fiscal crisis.”
Thornberg put it more bluntly: “The recession I’m worried about is going to happen in one, two, three years. I see a lot of unsustainable trends.
“Don’t jump in your bunker,” he said, “but don’t get far from it either.”
This story was originally published August 1, 2022 at 9:47 AM.
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