Last week, the Federal Reserve increased interest rates by a quarter percentage point, marking a 22-year high in the federal funds rate. This action aims to slow the economy and temper inflation, building on recent cooling of consumer spending, business investment, and wage growth. Meanwhile, unique and persistent pressures in the post-COVID economy still create uncertainty around California’s economic outlook. Where does California stand, and what’s ahead?

Since peaking one year ago, growth in prices has slowed considerably. In the Pacific region (which includes California, Alaska, Hawaii, Oregon, and Washington), prices were growing at nearly 8% annually in summer 2022 but have eased to 3.4% growth. While this shows progress, inflation still remains above the Federal Reserve’s 2% target. High inflation puts pressure on wages, consumers, and businesses throughout the economy.

figure - Inflation has cooled substantially over the past year but remains above target

Indeed, Californians feel the pressure from more than two years of higher than usual inflation. Between January 2020 (just before COVID) and June 2023, prices increased by 17.9%, climbing consistently with no sign yet of a turnaround. Medical care and housing prices rose relatively less, but food and beverages are up by more (24%), as are energy and gasoline prices (38% and 42%, respectively).

Lower-income families spend a greater percentage of their budget on essential items like food and transportation, and these persistently higher prices create severe strain. Over half of the state’s residents (57%) say inflation has caused financial hardship, according to PPIC’s Statewide Survey in June; 76% of those in households earning $40,000 or less indicate hardship due to prices. One-third of residents feel their finances are worse off as of June, compared to just one year ago.

figure - Prices have consistently increased, especially in energy and food categories

This may explain why a majority of Californians (59%) think we’re in a recession, according to PPIC’s June survey. Even more state residents (69%) expect economic times will be bad in the year ahead.

But economic indicators do not suggest we are in a recession: GDP is growing, albeit at a slower pace than in the second half of 2022 and at a slower pace than nationally (California annualized growth was 1.2% in Q1 compared to 2.0% in the US). Also, the labor market remains strong, with jobs growing 2% in June compared to last year, faster than in the three years before the pandemic. The job market does show signs of cooling a bit, however, with the pace of hiring and wage growth slowing as layoffs and unemployment tick up.

Uncertainty about California’s economic outlook is not likely to go away any time soon. Californians may be right that “bad times” are ahead: the Fed’s actions to control price growth could slow the economy to the point of contraction. Or the Fed’s actions may already be slowing the economy enough to improve inflation while skirting a recession. Either way, a continued slowdown of growth is likely ahead for the US and California. The Anderson Forecast sees indicators that California is likely to fare better than the US economy.

Ultimately, even if California does not experience a recession soon, consumers, employers, and businesses will continue to feel the pinch as price levels remain high even as inflation gets tamped down. That pinch may be sharper now that the economy is facing headwinds from tighter credit conditions, which are likely to weigh on economic activity and hiring. These uncertain macroeconomic times may heighten challenges and opportunities as regional economies adjust to new post-COVID patterns.