California’s Economic Outlook in the Governor’s May 2020 Revise
California had a GDP of $3.1 trillion in 2019 for its population of about 40 million (about 12% of the nation’s population). California had a pandemic plan (shelter in place for all but essential workers) and put it in place the earliest of any state; California now represents about 5% of all US Covid infected cases and 3% of all US deaths, but its new cases and new deaths are only now trending down, but quite slowly.
4.8 million Californians have filed for UI (Unemployment Insurance); there has been a huge unmet demand for the small business PPP loans. It is projected that 25% of Californians will be unemployed during the second quarter, diminishing to 10-11% unemployment in the fourth quarter. Personal incomes are projected to fall by 9% and inflation will fall from 3% to 1%.
GDP fell by 5% in the first quarter, is projected to fall by 26% in the second quarter, and fall 5.4% for the entire year. If a vaccine is developed, normal growth will return in 2021. The key to a return to normal growth is a return of consumer confidence and spending. In the interim, government spending (transfer payments) to replace the loss of economic activity, and the rise in unemployment will be crucial.
Hit hardest by Covid 19 will be the leisure and hospitality industries, followed by retail; construction will be badly hurt as well, but it will bounce back more quickly due to our state’s big need for much more affordable housing. Low wage service sector jobs will take the biggest hits; higher wage professional jobs will be relatively little impacted due to the ability to work from home. The health care and education sectors will be little impacted by job losses and may see some job gains. Full recovery of all the lost jobs will not occur until 2026. Wages, property incomes, dividends and proprietor’s incomes will all be badly hurt over the next year; only government transfer payments (UI and PPP) will counteract these losses.
The expectation in the budget is that normal economic growth will gradually return beginning in 2021. However the May Revise warns there are risks that the Covid 19 recession could turn into a long lasting Depression from which we would not recover until 2027. Slow development of a vaccine would play a part in this. So would repeat closures of the economy if and to the extent we fail to maintain social distancing needed to control the spread of the virus.