Two pillars of California’s economy — technology and real estate — are looking shaky at best.
Consider the layoff headlines that have hit Californian companies over the past few days.
“Twitter cuts 3,700 workers.” Billionaire Elon Musk has cut staff worldwide after buying the San Francisco-based social media giant and finding it in dire financial shape. On Thursday, he informed employees that bankruptcy was a possibility, Bloomberg reported.
“Meta cuts 11,000 workers.” Fellow billionaire CEO Mark Zuckerberg announced even more layoffs (not just in California) at the Menlo Park-based owner of Facebook. He admitted he misunderstood advertising demand and misplayed a huge bet on his newfangled “Metaverse” communities.
Meanwhile, news of other tech pullbacks or hiring freezes swirls. 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 in half.
The tech tumble follows a terrible summer for California housing.
Rising mortgage interest rates deterred those looking for a home. Sales collapsed to lows last seen during the Great Recession. prices weakened.
No deals, no loans. So does Orange County-based LoanDepot, which says it’s cutting jobs. The mortgage provider, which started the year with 11,300 employees nationwide, employed 8,500 people in September and plans to reduce the number to as many as 6,500.
How deep will technology and housing shortages cut into 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.
Technology work accounts for 18% of California’s economy, according to the annual Cyberstates study. The reach of homebuilding — from sale to furnishing to construction — accounts for 16% of California’s business output, the National Association of Realtors estimates.
I did the math myself and asked my trusty spreadsheet to take a historical look at the California unemployment rate, the Nasdaq Composite index (the tech industry’s stock market barometer and an indicator of the health of the industry), and the Federal Housing Finance Agency’s California home price index. I looked at the 12 month changes, quarterly, going back to 1976.
History has it that as unemployment rose in California over the past 46 years, the Nasdaq index rose an average of 5% per year.
Not a bad return, right? Well, when the state’s unemployment rate falls, the Nasdaq is up 17% on average over the past 12 months. So it’s hard to separate tech success and the California job market.
Also note that the Nasdaq index fell at a 19% annual rate this summer, its worst drop since the Great Recession. Twitter shares had been halved this year before Musk bought the company. Meta stock is worth a quarter of its 2021 high.
Remember that technology is a volatile business.
Just think about one piece: California’s information workers, like those at Twitter and Facebook.
After the dot-com stock craze collapsed in 2000, the information niche lost 20% of its employees. The Great Recession fell 10%. Since then, information work has grown by almost 50%.
It’s a good bet that tech heads will be keeping a close eye on costs for the foreseeable future, with for-profit investors in mind.
Similar patterns can be found in the real estate world.
When California’s unemployment rate rises, home prices have risen an average of 1% since 1976. Conversely, home prices rise 9% per year when unemployment falls.
That makes sense: you need a good job to be able to afford a house in California. Except when interest rates hit 20-year highs and buying a home only fits a few family budgets.
So LoanDepot’s stock plummeting 95% from its 2021 peak is hardly surprising.
California’s tech and housing woes come as the state economy cools after a hot recovery from 2020’s Covid-19 lockdown days.
The state fared poorly in a Fitch Ratings study that reviewed economies nationwide for the year ended June.
Personal income in California grew 1.5%, the sixth slowest among states. Gross domestic product rose 0.3% nationwide, the 11th slowest. California tax revenue increased 11.9%, ranking 30th among states. And by September, California had replaced 99% of the jobs lost during lockdowns, recovery #24.
When my chart averaged this state ranking, California’s economy was a low 39th.
Keep in mind that technology is a critical cog for almost every economy as the sector employs highly paid workers. A typical California tech worker makes $117,000 a year, Cyberstates says.
Those hefty paychecks, in turn, boost spending across the state, not to mention house prices. Additionally, when the Nasdaq index soars, the California government benefits from large capital gains tax levies.
Look, the California economy is famous for its peaks and troughs.
Unemployment is now at 4%, near an all-time low, pushing up wages but fueling inflation. In August, information jobs nationwide hit a record high. And California home prices broke price records, rising 22% a year this spring.
And while observing the red flags from tech and housing, it’s surprising how seldom these two industries struggle at the same time.
Since 1976, there have only been three periods of such double dips, at least by Nasdaq and FHFA standards.
There were nine months in 1982 when the Fed also hiked interest rates to quell inflation. California unemployment rose from 8% to 11% during this period.
There were almost two years surrounding the Great Recession. case crashed. The global financial markets were in turmoil. And national unemployment doubled to 12% between 2008 and 2010.
And the outlier: the winter of 1994/95.
The central bank also played a key role in these six months. Fed rate hikes have hit stocks, bonds and real estate
Oddly enough, it didn’t stop California’s economic recovery from a severe downturn in the early 1990s. Unemployment fell slightly during this period.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at [email protected]