For one thing, those job gains have been pretty darn small, and they haven’t been enough to drive down the unemployment rate.  Outmigration and a shrinking labor force are the reasons that California’s unemployment rate is declining.

We’ve also seen this picture before.  Almost a year ago, we commenced five months of increasing jobs, and stronger growth than we are currently seeing.  Then, the growth stopped.  We saw three out of five months with declining jobs.

This is what data looks like when an economy is bouncing along the bottom.  Long sustained periods of positive data, or negative data for that matter, just don’t happen.  We get some good data, sometimes very good.  Then some bad data comes along.  The key is not to let the good data get you too excited, nor do you want to let the bad data depress you too much.

Absent a new recession, caused by, say, the collapse of the Eurozone or an oil supply interruption, California is in for a long slow recovery.

This reality is reflected in demographic data.  Just last week, the Los Angeles Times had an article with the headline “Proportion of California’s transplant population reaches 100-year low.”  People go where the opportunity is, and unfortunately, it isn’t in California these days.

We only need a few numbers to demonstrate that California is clearly on the wrong track:

• California’s unemployment rate is over 12 percent, about a third higher than the United States.
• Only eight of California’s 58 counties have unemployment rates in single digits.
• California has lost jobs in four of the past six months for which we have data, while the United States has gained or had no change in jobs in each month over that period.
• California’s poverty rate is 16.1 percent compared to the United States 15.1 percent.  The rate goes way up when adjusted for the cost of living.  For example, the respected Public Policy Institute of California estimated that Los Angeles County’s 2007 poverty rate increased 11 percentage points from 15 to 26 percent, when adjusted for cost of living.
• Two California cities, Fresno and San Bernardino, are among the ten poorest American cities with populations over 200,000.  In fact, San Bernardino’s 34.6 poverty rate is the second highest of these cities, exceeded only by Detroit.
• Unemployment among college educated is 34 percent higher in California than in the United States, while Los Angeles’ college educated unemployment rate is almost a whopping 80 above the United States’.
• According the California Department of Education, California’s public colleges and universities graduate over 150,000 students a year, while California’s Economic Development Department is forecasting less than 50,000 openings a year for jobs that require a college degree.

Of course, that’s not the future that Time was selling.  Time’s future was a “dream state,” a magical place where enlightened pioneers, guided by their superior vision and funded by venture capital, would lead the world in innovation and environmental bliss.  California firms, like Solyndra, would lead the competition to a competitive new green economy.  No kidding, they named Solyndra:

“It’s (California) building massive power plants for utilities, as well as roof panels for big-box stores, complete subdivisions and individual homes. Prices are plummeting, and competition is fierce, most of it from California firms like BrightSource, Solar City, eSolar, Nanosolar and Solyndra.”

Along the way to this brave new world, there would be a new, “green” gold rush “beckoning dreamers who want to cook Korean tacos or convert fuel tanks into hot tubs.”

That vision turned out to be about as real as Disneyland — but not as profitable.

Time wasn’t alone.  Brett Arends had a similar piece, The Truth about California, in November 2010, and the ever-optimistic duo of Bill Lockyer and Stephen Levy had a December 2010 piece, California isn’t Broken.

Visitors can be forgiven for seeing California as a bit of paradise on earth.  It is.  I  am a native myself who could not wait to return from my job at the Federal Reserve in Washington DC.  I remember going to Santa Barbara in October for my UCSB job interview.  Santa Barbara was magical to me, after enduring weeks of dreary and increasingly cold East Coast weather.  Santa Barbara was warm and sunny, and people were wearing the minimum legal requirements, and State Street was alive and vibrant with a happy energy I hadn’t seen since I’d left California for my East Coast job over a year before.

I wanted that job.

You can still have that experience in certain spots in  California.  There’s no doubt, California has abundant charms.  It can seduce almost anyone.

But, there is a lot of California that visitors don’t see.  They don’t see the many communities in California’s central valley where unemployment rates of over 15 percent are typical, where people live in substandard housing and face the prospect of a lifetime in an ignored underclass.

Well, they are not exactly ignored.  They receive food stamps and other subsidies, but they are denied opportunity, social mobility, or the confidence and pride that come with self-sufficiency.

You don’t have to leave Santa Monica or Santa Barbara to see poverty without opportunity though.  Just blocks from Santa Barbara’s State Street or Santa Monica’s Third Street Promenade, over-crowded units , packed sometimes by several families, are the norm, because Coastal California’s housing prices are not related to the local economy. Statewide, 28 percent of California’s children live in crowded housing.  This is the highest rate in the nation, tied only with Hawaii.

When you live here, you can’t avoid the signs of California’s decline.  Beaches I walked with High School dates are no longer safe at night.  Water lines in Los Angeles burst with alarming frequency.  Our roads are approaching gridlock and are littered with potholes.  Electrical cutbacks are common in hot weather.  Water is increasingly scarce, except in very rainy years.  Our primary schools are clearly in decline.  Even California’s higher education system, once the envy of the world, has passed its prime. Places like the University of Texas or University of North Carolina are now real competitors.

It wasn’t always this way, and it doesn’t have to be in the future.  When I started my career, California was a place of opportunity.  One could have a career, own a home, and raise a family.

Not any more – not unless you have a trust fund or a secure pensioned public employee job.

That’s why California’s middle class is leaving, looking for opportunity and affordable housing.  The evidence is in the migration data.  Domestic migration has been negative for over a decade.  Perhaps even more telling, only 23 percent of U.S. illegal immigrants are coming to California today, down from about 42 percent in 1990.  Even the lowest skilled newcomers know there’s shrinking opportunity here.

California has a problem, and it’s high time the political class accepted the fact.

Two steps need to be taken before any problem can be solved.  You need to recognize you have a problem.  Then you need to identify the problem.  Unfortunately, it appears that among Sacramento’s leadership, only Gavin Newsom even recognizes that California has a problem.  Governor Brown gives lip service to jobs, but like Schwarzenegger before him, identifies the failed command and control policies of the green movement as the source of the new jobs.  Solyndra has become the poster child for this fantastical policy failure.

California’s economic future is pretty grim, until Sacramento takes off the blinders and admits it has a problem. Until then, things are likely to get much worse before they get better.

This appeared previously at newgeography.com

I mentioned in the United States Highlights essay that the fourth quarter consumption growth rate of 4.1 percent, the strongest in five years, was a surprise given weak economic fundamentals. I also discussed the evidence of significant heterogeneity across U.S. regions. I would argue that California has these incongruities even more than the United States does.

California has places like Santa Barbara and Monterey, places where politicians on both sides of the aisle embrace strong “slow-growth” principles. Not far from Monterey, California has the Silicon Valley, the world’s premier location for information technology businesses. In addition, California also has places, eight counties, that have an unemployment rate greater than twenty percent. California has 27 counties where the unemployment rate is greater than fifteen percent. Bill discusses in his California essay that its DURT’y policies are effectively driving businesses and people away noting that net domestic migration has been negative for the last 20 years.

The weak fundamentals that exist for the United States exist for California but more acutely. They include: a high revolving-credit debt level as a share of income, a high mortgage-debt level as a share of income, a high residential default rate and foreclosure rate, a high banking charge-off rate, a high long-term unemployment rate, a high home ownership rate, a low construction activity rate, a low small-business profit rate, a significant structural imbalance in the labor market (too many construction workers), and a low job creation rate.

Many of the 27 counties with high unemployment rates mentioned above are suffering from the weak fundamentals more than the state as an average. In addition, some of the 27 counties are located some distance from large job centers. Some of the counties in the San Joaquin valley have been negatively impacted by not just state regulations, but federal regulations as well, where a large number of farms experienced water supply restrictions by federal order, and have discontinued operations.

In this context I present our forecast.

California’s year-on-year job creation rate has been lower than that for the United States for most of the last 48 months. In addition, California has a much higher unemployment rate than the United States.

California’s rate of construction activity has dropped to a very low level due to an over-supply of housing. Because real estate markets are still adjusting to a lower level of home demand, driven by the weak fundamentals described above, we forecast weak construction activity for at least the next two years. The residential chart is shown here, the commercial forecast has a very similar pattern.

The lack of participation of the housing market in the recovery is partly what makes the recovery so weak. A new home has what economists call a large “multiplier” effect on the economy. I am referring to an Input-Output multiplier. This is where production in one industry has impacts on other industries due to the demand for intermediate products and materials. These products and materials create demand in other industries adding to total economic activity.

A new home has large impacts on other industries both when it is being built and right after it is sold. While it is being built the inter-industry demand for intermediate products and materials (furnaces, windows, carpet, cabinets, etc) creates significant stimulus. When sold, the new inhabitants often embark on a spending campaign lasting many months, one that brings in the desired furnishings, furniture, appliances, etc. Many of the purchases are large in dollar volume.

Because California’s housing market is in worse shape than the United States’ housing market our forecast of California building activity and job creation is weaker than it is for the United States. With slower GDP and with more of a construction worker over-supply, California’s job market will be weaker than the U.S.’s.

California’s somewhat slower economic and job growth implies that the unemployment rate will not decrease very quickly.

It appears that California residential real estate is in the second dip of a double-dip decline. California home prices, and sales, crashed at the beginning of the recession. Then, last year they picked up in the first half of the year, a result of temporary government programs and optimism unsupported by economic fundamentals. Talk of green shoots and a real estate recovery was all over the internet and traditional media. Then, like air slipping out of a balloon, the optimism disappeared, as predicted gains failed to materialize. Finally, we started seeing declining prices again.

California led the original real estate collapse, though California home prices remain well above prices in most other markets, and California appears to be leading the new decline. In fact, this decline is very unlikely to be as widespread among states as was the previous decline. Home prices here are likely to decline more than in most other states because California is now seeing an economic feedback from economic activity to real estate prices. States like Texas and North Dakota are unlikely to see residential real estate markets anywhere near as weak as California’s.

While home price declines originally caused economic declines, economic weakness is now contributing to yet more California’s home price declines. California is almost unique in its weak economic prospects, a result of almost continuously bad policy initiatives over the past couple of decades. This weak economic activity, particularly weak job growth is providing a new source of weakness in California home prices.

The impact is not universal. Upper-tiered markets remain stronger than more affordable markets. This is a reflection of the fact that demand for many of California’s most desirable areas is independent of local economic activity. Monterey, Santa Barbara, and Napa are really national, perhaps international markets.

By contrast, demand for many of California’s inland areas is only driven by local economic area job creation, within a remarkably large commuting radius. No job growth; no housing demand. End of story.

California’s commercial markets were hit much later than its residential markets, because it was falling economic activity that caused the decline. Commercial lease rates and property values are directly tied interest rates and the economic activity the property generates. As economic activity declined, vacancy rates increased and lease rates fell. Unfortunately, California’s economic recovery will almost surely lag the United States recovery. This implies that commercial prices are unlikely to significantly increase within the forecast horizon.

Retail properties, in particular, are likely to be very weak for a very long time. Besides weak economic activity, brick and mortar retailers are facing increasingly tough competition from internet sellers. Ultimately, it is likely that we will need less retail space per unit of population. California industrial space may also see long-term weakness, as the State continues to de-industrialize.

Office space markets are a harder call. California retains its natural and cultural amenities, even as its economic vigor subsides. Because of new communications technology, many, particularly top end, office jobs can be located just about anywhere. That would allow, say an executive suite in Santa Barbara or an engineering unit in Orange County, while much of a company’s workforce is in Texas, or even China.

Construction of residential and commercial properties has collapsed, a result of the weak demand we’ve outlined above. We see nothing that would cause any significant change in construction activity.

With few exceptions, it appears that 2011 will be another tough year for those who make their living in California real estate markets.

California remains mired in something like a zombie state, not quite dead, but certainly not vigorous, moving but with no clear direction. Perhaps, jobs and migration data best show California listless nature.

Jobs have been increasing in almost every sector, but that job growth has been anemic. We saw only 0.6 percent job growth in the past year, leaving us still down over 1.2 million jobs since the recession started. Consequently, the State’s unemployment rate remains over 30 percent above the national rate, and difference has been growing.

Similarly, California’s population has been growing, but extremely slowly compared to California’s golden past. Net domestic migration remains negative, as it has for most of a couple of decades now. Even net international migration has fallen, to less than 170,000 in 2009, the most recent year for which we have data.

Some parts of California are worse than others. California’s great Central valley is in terrible economic shape, by every measure, and unemployment rates in excess of 20 percent are not uncommon. Southern California’s once-thriving Inland Empire, Riverside and San Bernardino Counties, languishes with unemployment rates over 14 percent and decimated housing markets.

Some regions are doing better, most only modestly. San Diego, Orange County, and San Francisco are examples. Only one region the Silicon Valley is doing well enough to generate real enthusiasm. This strength is due to its famous tech sector and to the region’s high density of venture capital firms.

Sectorally, healthcare continues to lead in job creation, recently followed closely by wholesale trade. Natural resources and mining is a small sector that has recently shown strong gains, driven mostly by rising oil prices.

Local government has been California’s weakest sector, which is contrasted by the State government’s continuing job increases. Invariably, in downturns, Sacramento is able to pass most of the pain down to local governments.

California ports have been another bright spot, benefiting from California’s location on the Pacific Rim and serving as a gateway to the vast United States markets.

Of course, the logical question is: why is California’s economy doing so much worse than is the United States economy? Some will answer that California’ has had another idiosyncratic shock. This time, California was ground zero for the collapse of the housing bubble. At the previous recession, California was ground zero for the collapse of the dot-com bubble. In the 1990’s California was ground zero for the downsizing of the United States defense industry.

California has been hit with some shocks. No doubt about it. Between the shocks, however, California has also shown weaker growth, particularly outside of the Silicon Valley. This is an indication that something else is at play, something is wrong, and it has costs.

California is an expensive place to do business, but it not just taxes. The cost of operating in a state is what I call the cost of DURT: Delay, Uncertainty, Regulation, and Taxes. It is the sum of these that helps to determine a state’s job-creating competitiveness, and economic vigor. California DURT is expensive, and it is hurting the State’s economic performance. As long as DURT remains a force of reckoning in California, I expect that the state’s long-term economic structure will continue to slip away from vitality and growth.

The January 25, 2011 DataQuick press release shows that both foreclosures and notices of defaults have fallen almost everywhere in California. Statewide foreclosures have fallen 21.9% from last quarter and more than 30% from the fourth quarter of 2009. The large drop in foreclosures may indicate lenders’ hesitancy to take large losses. After the initial run on foreclosures, banks have been focused on obtaining the best possible price for the home at the lowest possible cost. As a result, the banks are cooperating in more short sale programs. In many cases, sellers are being asked to participate in the pain as they are released from their mortgages, particularly second mortgages, where the sellers may be asked to bring in cash and/or sign a note for a portion, if not all, of the outstanding debt.

According to DataQuick many of the homes foreclosed on had multiple loans out on the property. In other words the homes had the primary loan and additional lines of credit, i.e. home equity lines of credit. This is logical since many homeowners had refinanced their homes when interest rates were at all time lows using said loans to renovate their homes, go on expensive vacations, fund a more lavish lifestyle, and more generally, use their home as a credit card.

DataQuick indicated that foreclosures are still more frequent in zip codes with an average home price of $200,000 or less versus in zip codes where the average home price was $800,000. The less affluent zip codes also averaged more foreclosures per 1,000 homes than the state average. This market consists of lower income families and when the interest rates were lower a large number of low-income families entered the housing market. Traditionally these families had never owned homes because their credit scores acted as barriers to entry. Now, some of them are also losing their jobs, and in this case, default and foreclosure are almost inevitable.

NODs (Notices of Default) have also been falling. Last year at this same time the question of a “W” recession had come up. In reviewing 2008 and 2009 where NODs dropped off severely in the fourth quarter of 2008, and picked up again in 2009 we wondered if 2010 would repeat the pattern. That was not the case and 2011 is looking like it will continue the trend of fewer homes starting the foreclosure process. There are a number of reasons for this. Banks, through the encouragement of the government, have been working with homeowners to avoid the foreclosure process and seek alternatives such as short sale and loan modification. This is mutually beneficial for banks and homeowners. The banks take smaller losses when they go through the short sale process and the homeowner’s financial situation is much less disrupted.

The bottom line is that it looks like 2011 will be a better year in the real estate market but do not expect a rapid bounce back. While foreclosures and NODs will likely continue to decrease, they are still at a level that is abnormally high, too high for a healthy housing market.

California governor-elect Jerry Brown’s slide show supporting his “Budget Discussion” is an example. On slide 15 he shows state revenues per $100 of personal income with the headline “California Ranks 15th in Taxes and Fees Compared to Other States.” The implication is that California is a relatively tax-friendly state. It’s not.

Similarly, many Oregonians were encouraged when this report came out. Figure 2 ranks states by the ratio of business taxes to government expenditures, implying that Oregon is a tax-friendly state. It’s not.

With one caveat, average taxes don’t matter, whether expressed as a ratio to income, a ratio to spending, or in any of the myriad ways we see it. Businesses make decisions based on marginal tax rates, not average taxes. Averages are only useful in comparison to marginal rates, because a big difference between the two is an indication of a poorly designed tax system.  In particular, high marginal tax rates and low average revenues are signs that the state is both sacrificing revenue and hurting its economy.

Oregon has, along with Hawaii, the nation’s highest personal marginal tax rate, but it ranks low on average taxes. It is  clear that the state’s tax structure is flawed. Oregon’s major problem is that it has no retail sales tax. It could increase state revenue and economic activity if it implemented a retail sales tax while cutting its top marginal tax rates.

California has a different problem. It has among the nation’s highest retail sales taxes, and it has a very progressive personal income tax with high top marginal tax rates. California could increase state revenue and economic activity by lowering retail sales taxes and top marginal rates, while increasing property taxes and broadening its income-tax base by decreasing the progressiveness of its tax rates.

For states with inefficient tax structures, changing the tax structure can result in the equivalent of free lunch. A well-designed tax structure will increase revenues, decrease revenue volatility, and increase business activity. What’s not to like?

Should California incur the costs and delays of economic impact studies?

California should, because political decisions matter and too many California politicians don’t believe it. I’ve had a State Legislator, sitting in her office in the Capital, tell me in essence that decisions made in this building won’t impact California’s economy.

She’s not alone. It is common to hear politicians or their advisors claim that “California will come back” or something similar. They believe that California’s climate and abundant amenities are enough to guarantee prosperity. They are wrong.

Consider North Dakota, and its booming economy. As of July 2010, North Dakota’s unemployment rate was 3.6 percent, and in 2008, the most recent year for which we have data, its economy grew at a 7.3 percent rate. California’s unemployment rate was 12.3 percent in July 2010, and its 2008 economic growth rate was an anemic 0.4 percent.

That’s a very big difference. If California had North Dakota’s unemployment rate, it would have over 1.3 million jobs than it has today. That is almost the entire population of Sacramento County and 30 percent more than the entire population of Northern California’s Contra Costa County.

Why the big difference? Why is North Dakota booming, as the United States suffers its most devastating economic decline in over 70 years? Why is California’s economy, with almost 30 percent higher unemployment than the United States, performing so poorly?

Does North Dakota have some naturally endowed advantage over California? If so, nobody has noticed it before. It is not climate. California has a friendly Mediterranean climate, while North Dakota has a Northern Continental climate. North Dakota’s mean minimum temperature is below freezing six months of the year, and it gets as low as -60F! Many Californians, living on the coast, can go decades without witnessing a freezing temperature. I remember when we had a multi-day freeze in my hometown of Ventura, sometime in the 1980s. I was freezing; a North Dakotan would be walking around in a t-shirt.

California has oil and gas. North Dakota has oil and gas. California has over 2,000 miles of beaches. North Dakota doesn’t have beaches. California has magnificent mountains. North Dakota doesn’t have any mountains and only a few hilly areas. Over 20 species of trees reach their largest size in California. Most of North Dakota doesn’t naturally grow many trees.

Let’s face it. Most Californian’s consider North Dakota to be a cold, windy, God-forsaken piece of dirt best left to the bison. North Dakota’s natural endowment doesn’t explain why it has been growing with vigor while California has been stagnating.

Maybe North Dakota has been lucky while California has been unlucky? Luck can play a part in economic performance, and North Dakota has almost surely been luckier than California over the past few years, but that can’t be the only explanation.

It’s hard to point to a single source of North Dakota’s prosperity. Its taxes aren’t particularly low. It has a reasonable safety net for the unfortunate. It does have a booming oil and gas business. Its agriculture sector is doing well. It has a small, but dynamic, tech sector. Its universities remain well funded since the state is actually running surpluses. It has a hardworking, well educated, Midwestern population. Governments and politicians in both parties tend to be business friendly, willing to support business and enter into occasional partnerships. North Dakotans have done lots of things right, and they’ve probably also been a bit lucky.

It’s just as hard to point to a single source of California’s dismal performance. California hasn’t maximized the economic potential of its oil and gas resources, but its economy is large, and oil and gas alone can’t explain the differences between California and North Dakota. California hasn’t updated its ports to accommodate the most recent and planned ships, but those ports see lots of activity. Many California communities are not business friendly, but some are, particularly some smaller ones inland. California has lost some military bases, but many remain. California is a relatively expensive place to do business, because of taxes and regulation, but California’s workers are more productive, even after adjustment for industrial composition and capital, and California’s consumers still constitute a huge market.

California’s economy is dying the death of a thousand cuts: a tax here, a regulation there, an unfriendly city council in Coastal California, a lack of infrastructure investment everywhere. These things add up to a significant net negative for California, its businesses, and its workers.

Californians have done lots of things wrong, and they’ve been a bit unlucky.

That’s why AB 2529 is a good idea for California, why it’s worth the costs and delays. The analysis will require regulators to consider the economic costs of regulation, something many green activists and Sacramento politicians simply ignore. Perhaps if this regulation had been in place over the past few years, some of California’s 2.2 million unemployed workers would have jobs and once Golden State would not be on the verge of becoming, as historian Kevin Starr has noted, “a failed state”.

his article originally appeared at newgeography.com

California’s month-on-month non-farm job growth rate worsened from a 0.16 percent fall in July (2 percent annualized) to a 0.24 percent fall (2.9 percent annualized) in August. According to this measure, California has experienced a double-dip in job growth. Month-on-month non-farm job growth was negative from May 2008 to December 2009 (excepting 1 month), then turned positive from January 2010 through May 2010, and has been negative again since June 2010. The year-on-year measure of non-farm job growth rate fell from 0.9 percent in July to 1.0 percent in August.

Most industrial sectors were down in August, whether measured month-on-month or year-on-year. The weaker sectors in August were: construction, manufacturing, trade, information, and government, with the government sector declines the largest at a loss of 9,200 jobs from July to August.

California’s economy will grow slowly due to this weak jobs report. Households will consider purchases carefully due to the lack of a job or the difficulty of finding a job. The current government sector weakness is one that could persist for a long time, and in this case will weaken the jobs recovery whenever it begins.