Is California ‘ready to roar back’ – or will Newsom’s post-pandemic economic boom fizzle?

Practically everywhere he goes these days, Gov. Gavin Newsom seems to brag about California’s economy — how well it withstood the COVID-19 pandemic, its performance compared to rivals like Texas, and the stunning boom that’s still to come.

The reality is somewhat complicated.

It’s true considerable evidence suggests California is poised to make a strong recovery from the coronavirus stay-at-home orders that Newsom all but completely lifted Tuesday.

Californians are sitting on billions of dollars in stimulus payments from Congress that they’re finally able to spend on theater tickets, ballgames and vacations. Newsom has been working with lawmakers on his own California $100 billion stimulus plan, full of grants for small business and direct payments for families.

It’s also true, according to data compiled by economists at UCLA, that California has fared better than states such as Texas, which implemented far looser lockdown protocols.

Further signs of progress emerged Friday. The Employment Development Department reported that statewide unemployment fell a tenth of a point in May, to 7.9%, as 104,500 nonfarm jobs were created. It was the fourth straight month in which employers added at least 100,000 jobs, and the state generated nearly 19% of all the new jobs in the United States.

Sacramento-area unemployment fell three-tenths of a point, to 6.3%, as 4,300 jobs were added to the region’s payrolls.

“California has reopened, and we’re ready to roar back,” said Dee Dee Myers, director of the Governor’s Office of Business and Economic Development, in a prepared statement.

But the California comeback is far from complete — the state has recouped just slightly more than half of the 2.7 million jobs that vanished in the first two months of the pandemic. At 7.9%, unemployment remains considerably higher than the 4.3% rate the state enjoyed just before the pandemic started.

And the recovery faces stumbling blocks, beginning with the fact that “the small business economy has been decimated,” said Michael Bernick, a labor lawyer with the Duane Morris law firm in San Francisco and a former director of the California Employment Development Department. “To me, that is the central issue. The small business economy of the state has been decimated, and it hasn’t shown any improvement.”

Part of what’s hobbling the small business sector is a labor shortage that’s making it harder for restaurants, retailers and others to recover fully. The labor force has shrunk in part because of $300 in additional unemployment benefits, which run through September, and the inability to secure child care until schools fully reopen for in-person instruction this fall, said Sung Won Sohn, a business economist at Loyola Marymount University in Los Angeles.

The labor force has shrunk by about a half-million Californians since before the pandemic started, according to Employment Development Department data.

“More and more people have decided simply to retire and not rejoin the labor force,” Sohn said. ““Labor shortages may be a barrier to stronger economic growth.”

Sohn said relatively low wages paid to retail and restaurant workers aren’t helping. “When you have labor shortages, people gravitate to better jobs and higher paying jobs,” he said. “Many small businesses are going to be suffering as a result of that.”

The state has taken some steps to try to get more Californians back into the workforce. This week the Employment Development Department said it was reinstating rules — which had been suspended early in the pandemic — requiring Californians to show they’re looking for work in order to stay eligible for unemployment benefits. The reinstatement takes effect July 11.

Newsom got an earful about labor shortages earlier this week in Oakland, where he twirled pizza pies in the air with Davina Dickens, owner of Graffiti Pizza at an event designed to showcase the California comeback.

“I know, from firsthand experience, a handful of people who don’t want to work because they’re getting unemployment,” Dickens told the San Francisco Chronicle.

The governor, though, was adamant that his policies — including his decisions to stick with tough lockdown protocols as COVID-19 infections surged — are helping fuel a robust recovery.

“Texas we outperformed. Florida we outperformed,” he said in Oakland. “This is just not getting the attention I think it deserves because those states seem to get all the attention on their economic strategies, when in fact, California is a tent pole for the American economy in terms of job creation.”

Newsom is facing a recall election later this year, driven in large part by resentment over his comparatively tough stance on shutting down the economy.

The closely-watched UCLA Anderson Forecast supports the governor’s claim. Examining the economic performances of the major states, lead economist Jerry Nickelsburg found that states like California, which had stricter lockdowns, had “better health and economic outcomes ... with very few exceptions.”

Still, Nickelsburg acknowledged that California’s unemployment rate has been stubbornly high, compared to many other states. It’s well above the national unemployment rate of 5.8%. That’s largely because California has “a disproportionate number of low-income households and small businesses who have been left behind,” he wrote.

Much of California’s economic pain resides in its restaurants and shops — the very businesses that have been slow to come back. For instance, the Sacramento area restaurant scene has lost nearly 18,000 of its jobs since before the pandemic began, a decline of about one-fifth.

One reason why the downtown restaurant scene is still struggling is because the state has been slow to call workers back into their offices. That’s a problem that could linger as Newsom has directed agencies to develop strategies for permanent tele-working.

“The downtown market is still struggling because there’s a lack of daytime population,” said Dave Herrera, a commercial real estate broker with Colliers International.

Beyond downtown, Herrera said leasing activity by restaurants is perking up in recent months. A spot on J Street in midtown he’s been struggling to fill — a former dry cleaner that was empty well before the pandemic started — is about to be turned into a brewpub and multi-tenant spot.

But as they recover, restaurant owners are adapting — sometimes in ways that could create further drags on payrolls. Herrera said restaurant owners are veering toward “smaller concepts with less staff.”

Some owners have decided not to come back, such as Brian Knadle, who closed the Marly & Moo gastropub in old-town Folsom last summer. The location has been taken over by another restaurant, called Plank Craft Kitchen, but Knadle has decided to leave the restaurant industry.

Between labor shortages and rising costs, “it’s a hard business to be in,” he said.

This story was originally published June 21, 2021 at 5:00 AM.