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Blog Post · January 24, 2024

Reconciling Signs of a Strong Economy with California’s Budgetary Woes

photo - Female Employee Counts Inventory in Warehouse

How concerned should we be with California’s economy in 2024? Reconciling a challenging budget reality in Sacramento with the strength of some key economic indicators can provide insight. The overall picture suggests a fundamentally resilient state economy, but policymakers will need to keep a watchful eye on a changing labor market.

 In a summary of California’s budget situation, the LAO highlighted a 20% decline in tax revenue and an additional 200,000 unemployed workers. Unemployment ticked up from 4.9% to 5.1% in December—it is now a full percentage point higher than a year ago. But even as the state faces deficits in the tens of billions of dollars, other indicators suggest economic strength: jobs have continued to grow, more Californians have entered the labor force, inflation is easing, and GDP shows strong growth in California in 2023.

The drop in tax revenue plaguing the California budget reflects the financial situation of top income earners and volatile capital gains, rather than the economic situation facing most Californians. In fact, while the labor market reeled in the first year of the COVID 19 pandemic, the state’s budget saw record revenues and an unexpected surplus driven by gains among the most affluent. The resilient labor market has been somewhat surprising, since the Federal Reserve’s actions to quell inflation typically subdue the labor market (that is, soft landings are rare).

Nonetheless two areas of concern in labor market data are worth monitoring—not drivers of California’s current budget situation, but emerging trends:

First, growth in the labor force and employment has reversed in the past six months. In the prior fiscal year (July 2022 to July 2023), California’s labor force increased by over 180,000 and employment increased by 30,000. These changes compensated for unemployment also rising by more than 150,000. So, although more unemployed Californians were searching for work, more workers were entering the labor force, and more were employed overall.

However, the picture is more negative for the first half of this fiscal year. From July through December, both the labor force and employment are down, and nearly 100,000 more Californians are unemployed and searching for work.

Second, though employers continue to add jobs, some sectors have shrunk in recent months. Specifically, jobs in the information sector dropped nearly 3% since July, following a 5% decline in the prior year. Also, jobs in the professional, scientific, and technical services sector fell 1% since July, after posting reasonable gains the prior fiscal year. These two sectors employ many “tech workers,” who have been the subject of recent reports of layoffs and a hiring slowdown.

Trends in the finance sector have also reversed—from job growth in FY23 to a shrinkage since July. The administrative services and wholesale trade sectors have posted declines in both periods.

On the flip side, health care, construction, and accommodation and food service sectors continue to show strong job growth, with increases of roughly 2% over the last half year.

Taken on net, the data show that California’s economy is quite resilient. In historical context, job growth remains strong overall and unemployment remains relatively low. And despite predictions to the contrary, higher interest rates have not triggered a recession.

From a budgetary perspective, if downward labor market trends worsen, tax revenue may fall further and more unemployed workers may turn to social safety net programs, which may constrain the states’ ability to assist residents and businesses during tough economic times.

Mounting pressures on California’s labor market deserve attention from state policymakers over the longer term, particularly with a shrinking labor force and long-standing barriers to upward mobility. While the country is not in a recession—and even sizable increases in unemployment in large states don’t guarantee a recession—hundreds of thousands of California households may face difficult economic times if recent labor market trends persist.


Economic Trends Economy employment inflation jobs Jobs and Employment state budget unemployment workers