Two pillars of California’s economy – technology and real estate – are looking wobbly, at best.
Think about the layoff headlines of recent days affecting California companies.
“Twitter cuts 3,700 workers.” Billionaire Elon Musk slashed staffing worldwide after he bought the San Francisco-based social media giant and found it in poor financial shape. On Thursday he told the staff a bankruptcy is possible, Bloomberg reported.
“Meta cutting 11,000 workers.” Fellow billionaire and CEO Mark Zuckerberg announced even more layoffs (not just in California) at the Menlo Park-based owner of Facebook. He admitted he misread advertising demand and misplayed a huge bet on his new-fangled “metaverse” communities.
Meanwhile, news swirls about other tech pullbacks or hiring freezes. There was a discouraging forecast from Cupertino’s tech-titan, Apple. And Mountain View-based Alphabet, which owns Google and YouTube, is cutting hiring plans by half.
The tech tumble follows an awful summer for California housing.
Soaring mortgage rates scared off house hunters. Sales collapsed to lows last seen during the Great Recession. Prices weakened.
No deals, no loans. Thus, Orange County-based LoanDepot says it’s trimming jobs, too. The mortgage-maker, which started the year with 11,300 workers nationwide, had 8,500 employees in September and plans to cut to as low as 6,500.
How deeply will technology and housing pain cut into California’s economy?
It’s not easy to quantify. Industry impact studies suggest tech and housing represent roughly one-third of all business activity.
Technology work equals 18% of the California economy, according to the annual Cyberstates study. Housing’s broad reach – from sales to furnishing to construction – is 16% of the California business output, the National Association of Realtors estimates.
I did my own math, asking my trusty spreadsheet to take a historical look at California’s unemployment rate, the Nasdaq composite index (tech’s stock market barometer and one marker of the industry’s health), and the Federal Housing Finance Agency’s California home-price index. I looked at 12-month changes, quarterly, dating back to 1976.
History says when California unemployment is rising during the past 46 years, Nasdaq’s index on average was growing 5% a year.
Not a bad return, eh? Well, when the state’s unemployment rate is falling, Nasdaq rose 17% on average in the previous 12 months. So, it’s hard to separate tech success and California’s job market.
Let’s also note that the Nasdaq index fell at a 19% annual rate this summer, the worst dip since the Great Recession. Twitter shares had been halved this year before Musk bought the company. Meta stock is worth one-quarter of its 2021 high.
Remember, tech is a volatile business.
Just ponder one slice: California’s information workers, like those at Twitter and Facebook.
After the dot-com stock craze crashed in 2000, the information niche lost 20% of its workers. The Great Recession cut 10%. Since then, information work has grown almost 50%.
It’s a good bet technology bosses will keep a keen eye on costs for the foreseeable future with profit-watching investors in mind.
Similar patterns are found in the real estate world.
When California’s unemployment rate is rising, home prices averaged 1% gains since 1976. Conversely, when joblessness is declining, homes appreciate 9% a year.
That makes sense: You need a good job to afford a California home. Except when rates hit 20-year highs, and a home purchase fits few family budgets.
So, LoanDepot’s 95% stock plunge from its 2021 high is hardly surprising.
California’s tech and housing headaches come as the state economy cools following a hot rebound from the Covid-19 lockdown days of 2020.
The state fared poorly in a study by Fitch Ratings, which reviewed economies nationwide for the year ending in June.
Personal income in California grew 1.5%, the sixth-slowest among the states. Gross domestic product statewide expanded 0.3%, the 11th slowest. California tax revenues were up 11.9%, No. 30 among the states. And as of September, California had replaced 99% of the jobs lost during the lockdowns, the No. 24 rebound.
When my spreadsheet averaged those state rankings, California’s economy was a lowly No. 39.
Remember, tech is a critical cog for just about any economy because the sector employs highly compensated employees. A typical California tech worker makes $117,000 a year, says Cyberstates.
Those hefty paychecks in turn boost spending statewide, not to mention home prices. Also, when the Nasdaq index soars, California’s government benefits from large collections of capital gains taxes.
Look, California’s economy is famous for its peaks and valleys.
Unemployment now runs 4%, near an all-time low, pushing up wages but boosting inflation. Information jobs statewide hit a record high in August. And California home prices were breaking price records and appreciating 22% a year this spring.
And while watching the warning signals from tech and housing, it’s surprising how rarely these two industries have simultaneous woes.
Since 1976, such double-dips have only happened in three periods – at least as measured by the Nasdaq and FHFA yardsticks.
There were nine months in 1982 when the Fed was also raising rates to quash inflation. California unemployment went from 8% to 11% in that period.
There were nearly two years surrounding the Great Recession. Housing crashed. Global financial markets were in turmoil. And statewide unemployment doubled to 12% between 2008 and 2010.
And the outlier: The winter of 1994-95.
In those six months, again, the central bank had a key role. The Fed’s rate hikes smacked stocks, bonds and real estate,
Oddly, it didn’t deter California’s economic recovery from a harsh, early 1990s downturn. Joblessness fell slightly in this period.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]