Two mainstays of the Californian economy, technology and real estate, look shaky, at best.
Think of the headlines of recent layoffs affecting California businesses.
“Twitter cuts 3,700 workers.” Billionaire Elon Musk has slashed staff worldwide after buying the San Francisco-based social media giant and finding it in bad financial shape. He told staff on Thursday that a bankruptcy is possible, Bloomberg reported.
“Meta cuts 11,000 workers”. Fellow billionaire and CEO Mark Zuckerberg announced even more layoffs (not just in California) at the Menlo Park-based Facebook owner. Lui admitted that he misread the advertising question and misplayed a huge bet on his new “metaverse” communities.
Meanwhile, reports of more tech pullouts or hiring freezes are circulating. There was a daunting prediction from Cupertino-based tech titan Apple. And Mountain View-based Alphabet, which owns Google and YouTube, is cutting hiring plans in half.
The tech fall follows a terrible summer for housing in California.
Soaring mortgage rates have spooked home-hunters. Sales have plummeted to the lows last seen during the Great Recession. Weakened prices.
No deals, no loans. Therefore, Orange County-based LoanDepot says it is also cutting jobs. The mortgage maker, which started the year with 11,300 workers nationwide, had 8,500 employees in September and plans to cut to 6,500.
How deeply will technology and housing pain impact California’s economy?
It’s not easy to quantify. Industry impact studies suggest that technology and housing account for about a third of all business activity.
Tech jobs account for 18 percent of California’s economy, according to the annual Cyberstates study. The broad scope of housing, from sales to furnishings to construction, accounts for 16 percent of California’s commercial output, according to estimates from the National Association of Realtors.
I did the math, asking my trusty spreadsheet to take a historical look at California’s unemployment rate, the Nasdaq Composite Index (the tech stock market barometer and a gauge of industry health), and the Federal Housing Finance Agency California Home Price Index. I looked at 12-month, quarterly, changes dating back to 1976.
The story goes that when unemployment in California has increased over the past 46 years, the Nasdaq index has grown by an average of 5% a year.
Not a bad comeback, huh? Well, when the state’s unemployment rate is falling, the Nasdaq has risen an average of 17% over the previous 12 months. Thus, it is difficult to separate technological success and California’s job market.
We also note that the Nasdaq index fell at an annual rate of 19% this summer, the worst drop since the Great Recession. Twitter’s shares had been halved this year before Musk bought the company. The meta stock is worth a quarter of its 2021 high.
Remember, technology is a volatile business.
Think about just one slice: California’s information workers, like those at Twitter and Facebook.
After the collapse of the dot-com stock craze in 2000, the news niche lost 20% of its workers. The Great Recession cut 10%. Since then, information work has grown by almost 50%.
It’s a good bet that tech bosses will be keeping a close eye on costs for the foreseeable future, while keeping profit-conscious investors in mind.
Similar patterns are found in the real estate world.
When California’s unemployment rate is rising, home prices have risen an average of 1% since 1976. Conversely, when unemployment is falling, homes appreciate 9% annually.
It makes sense: You need a good job to afford a home in California. Except when rates hit 20-year highs and buying a home fits within a few family budgets.
So, the 95% drop in LoanDepot shares from its 2021 high is hardly surprising.
California’s tech and housing headaches come as the state economy cools after a warm rebound from the Covid-19 lockdown days of 2020.
The state fared poorly in a study by Fitch Ratings, which surveyed economies nationwide for the year ending June.
Personal income in California grew 1.5%, the sixth slowest among the states. Statewide gross domestic product grew 0.3 percent, the eleventh slowest. California tax revenues increased 11.9%, no. 30 between states. And in September, California had replaced 99% of the jobs lost during the lockdowns, rebounding number 24.
When my spreadsheet averaged those state rankings, California’s economy was a modest number 39.
Remember, technology is a vital cog for almost any economy because the industry employs highly paid employees. A typical California tech worker makes $117,000 a year, says Cyberstates.
Those hefty salaries in turn drive up statewide spending, not to mention home prices. Also, when the Nasdaq index rises, the California government benefits from large collections of capital gains taxes.
Look, California’s economy is famous for its ups and downs.
Unemployment is now at 4%, near a record low, pushing up wages but driving up inflation. News jobs across the state hit a record high in August. And California home prices were breaking price records and appreciating 22% annually this spring.
And while you watch the warning signs from technology and housing, it’s surprising how rarely these two industries have simultaneous problems.
Since 1976, such double declines have occurred in only three periods, at least according to Nasdaq and FHFA metrics.
There were nine months in 1982 when the Fed also raised rates to suppress inflation. Unemployment in California rose from 8% to 11% during that time.
There were nearly two years around the Great Recession. Housing crashed. The global financial markets were in turmoil. And statewide unemployment doubled to 12 percent between 2008 and 2010.
And the outlier: the winter of 1994-95.
In those six months, once again, the central bank played a key role. Fed rate hikes hit stocks, bonds and real estate,
Strangely, it hasn’t deterred California’s economic recovery from a harsh recession in the early 1990s. Unemployment decreased slightly during this period.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]