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California Is Signaling a Recession. Will the Rest of the Country Follow?

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California Is Signaling a Recession. Will the Rest of the Country Follow?


The U.S. unemployment rate has fallen to historically low levels in the past two years, even as the Federal Reserve has ramped up interest rates to tamp down inflation. But record-low unemployment isn’t the case any more in California, the nation’s most populous state, where a steadily climbing unemployment rate might be moving beyond normalization and into treacherous territory. 

It is tempting to write off California’s unemployment spike as a localized effect of the tech industry’s rebalancing. Yet, based on at least one economic indicator, the state’s labor outlook is signaling that a nationwide downturn could be in the offing. 

California’s unemployment rate increased from 3.83% in August 2022 to 4.5% in May 2023; the national unemployment rate was 3.7% last month. That means California’s three-month moving average rose by 0.63 percentage points relative to its low in the past year, putting the state in or near recession territory, according to the well regarded Sahm rule. 

The rule is named for economist Claudia Sahm, whose research found that when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more, relative to its low during the previous 12 months, it signals a recession.

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The Sahm rule can be applied to state economies, too. Although state unemployment data haven’t been tracked as long as national statistics, the Sahm rule generally holds up on a state level, says Julia Pollak, chief economist at the employment site ZipRecruiter. Once the rise in the unemployment rate exceeds the 0.5 percentage-point threshold on a three-month average, it tends to climb by another 1.5 to two percentage points in the coming months, she has found. 

“A cycle sets in whereby rising unemployment—either through people staying unemployed longer and finding it harder to find new jobs, or more layoffs—keys people to cut back on their spending, which leads to further reductions in demand for labor,” Pollak says. 

Sahm tells Barrron’s that California’s current unemployment rate, and particularly the changes in that rate in the past year, are “blinking yellow.”

California’s rising unemployment has been driven, in part, by the tech sector’s recent stumbles after years of exuberant growth. That weakness has been spilling into other industries. Finance, for example, is seeing a dearth of initial stock offerings and deals. Industries dependent on advertising are also experiencing a contraction.

Four broad employment sectors in California are either shrinking or stagnant, says Chris Tilly, an economist at the University of California, Los Angeles, who focuses on labor trends. They are construction, durable goods, wholesale, and information, which includes media and entertainment jobs. “The big hit is in residential construction,” he says.

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Related industries, such as furniture, wood products, architecture, and structural metal also have seen some weakness, he says.

The normalization of interest rates after an era of nearly free money helped quash technology stocks — and the tech sector’s rampant spending. Hybrid work and work-from-home schedules adopted during the Covid pandemic also are darkening the employment picture in California. “This is kind of a remote-work-related, local recession,” Pollak says. 

Of the estimated 6.9 million remote workers in the U.S., the largest concentration by far is in California, according to research from Revelio Labs. That has hurt the state’s downtown businesses, including restaurants and retailers, leading to knock-on job cuts far from Silicon Valley.

Beyond rising unemployment, California is grappling a reputation for regulation, high corporate tax rates, and a housing affordability crisis. Conning’s State of the States municipal-credit-quality rankings scored California No. 42 out of 50 this year, 14 spots lower than in 2022. While the growth rate of the state’s gross domestic product per capita was stronger than that of most other states last year, as was its personal income per capita, tax collections lagged dramatically. 

As Tilly says, it’s difficult to call California a “bad economy.” The state economy, the largest in the U.S., grew by an annual rate of 0.4% in 2022. With GDP still positive, he says, “California is not in a recession at this point, but it is a risk.”

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California isn’t the only state whose unemployment trends crossed the Sahm threshold. Unemployment trends in Oregon, Virginia, and Washington also triggered the Sahm state rule in recent months. But unlike California, the other three states recorded a drop in the unemployment rate in May.

Sahm says she would recommend using a six-month moving average of the unemployment rate to gauge whether a state economy is in or approaching recession, particularly in the case of smaller states. California’s unemployment picture has triggered the Sahm rule based on both a three- and six-month moving average.

The Sahm rule reflects more of a historical pattern than a “law of nature,” Sahm says. But in a handful of cases, state economies have triggered the Sahm rule ahead of a national recession, in effect acting as a bellwether. 

“When there is a national recession, typically the state with a disproportionate share of jobs in the industry most affected during that particular recession triggers the rule first,” Pollak says.

Ahead of the 2008-09 recession, for example, Pollak says Florida’s rising unemployment rate triggered the Sahm rule — no surprise, perhaps, given its significant exposure to the subprime housing market, whose problems helped set off the financial crisis of that period.

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In California’s case, the state’s current divergence from national trends is the largest since the state unemployment data series began in the 1970s. “In principle, an unemployment rate that has risen notably is worth keeping an eye on because there are cases in which it is the precursor to a larger national recession,” Sahm says.

Additionally, many of the positive labor trends peaked last fall in California, Tilly says. “What that says to me is, California may be a leading indicator for what’s happening elsewhere,” he says. “California looks less like an outlier, and more like a leader in a downturn that could end up in a soft landing or a recession.”

There have been instances in which state economies triggered the rule without a corresponding nationwide recession. Usually, on a state level, the rule tends to correspond with a localized labor downturn or natural disaster. Louisiana and Mississippi, for example, triggered the rule in 2005 with Hurricane Katrina. Texas has also hit the Sahm threshold without any national downturn in the past, due to its ties to the volatile energy industry. 

So far, national data don’t mirror California’s economic trends. The national unemployment rate rose in May from April’s record low of 3.4%, but remains historically low. So long as that is the case, Sahm believes the U.S. won’t enter a recession. 

Yet, with many economists predicting a recession starting later this year or early in 2024, indicators like California’s unemployment merit more attention nationally. “Where we are headed is unclear, but regardless, we should be ready to help people,” Sahm says.

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Write to Megan Leonhardt at megan.leonhardt@barrons.com



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California schools seeing fewer kids as birth rates fall

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California schools seeing fewer kids as birth rates fall


California saw a decline in public school enrollment for an eighth consecutive year, amid falling birth rates and the migration of families with children out of state.

Why It Matters

Declining enrollment in California has been an issue since before the COVID-19 pandemic.

It is an indicator of some of the issues facing the state, including falling birth rates, high housing costs pushing families out of the state and lasting impacts from the pandemic

On top of this, lower enrollment has major financial and social consequences for California’s public schools.

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What To Know

In the academic year 2024-25, California schools had a total of 5,806, 221 students enrolled, according to data released by California’s Department of Education on Wednesday. This is a 7 percent decrease from the 6,235,520 recorded a decade ago.

There is also more than a 20 percent difference between the size of the number of students leaving school (488,295) and those starting it (384,822).

Stanford University education professor and economist Thomas Dee told The Los Angeles Times: “These losses largely reflect the fact that there are now substantially fewer school-age children in the state.

“This demographic decline is due to both lower birth rates and net migration of families with children out of California — e.g., due to housing costs and the growth of work-from-home employment.”

Indeed, California, like much of the rest of the United States, has a declining birth rate.

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In 2023, the most recent year for which the California Department of Public Health records birth data, there were 400,129 births. This is down almost 100,000 births from a decade ago, when there were 494,392 births.

A file photo of John Marshall High School in Los Angeles, taken on March 13, 2020, shows students waiting outside after being let out early following an announcement of a district-wide closure caused by the…


AP

The state’s fertility rate was 49 per 100,000 residents in 2023—down from 60.6 per 100,000 residents in 2013.

However, California State Superintendent of Public Instruction Tony Thurmond stressed that there has been growth in transitional kindergarten (TK) enrollment—a new grade that serves four-year-olds.

What People Are Saying

Thomas Dee also spoke about “the students who fled public schools at the beginning of the COVID-19 pandemic who still have not returned.”

“The public school enrollment losses also reflect an enduring increase in private and home-school enrollment,” he added.

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Tony Thurmond said: “While we have more work to do, the dramatic growth in TK is inspiring and shows that providing rigorous and quality programs can be a key ingredient to bringing more families back to our schools.”

What Happens Next

It remains to be seen whether enrollment will continue to decline in California and what impacts that will have.



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California to sue over U.S. Senate revoking state’s EV mandate, strict emission standards

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California to sue over U.S. Senate revoking state’s EV mandate, strict emission standards



California to sue over U.S. Senate revoking state’s EV mandate, strict emission standards – CBS Sacramento

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California is fighting back a day after the U.S. Senate voted to put the brakes on the state’s clean vehicle policies.

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Democrats warn GOP is weakening filibuster as Senate moves to nullify California’s electric vehicle mandate | CNN Politics

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Democrats warn GOP is weakening filibuster as Senate moves to nullify California’s electric vehicle mandate | CNN Politics




CNN
 — 

The Republican-led Senate moved Wednesday to overturn key Biden-era waivers allowing California to set its own vehicle emissions, a major blow to that state’s effort to regulate pollution from cars and trucks that could have broad environmental impacts for the rest of the country.

And they will do it bypassing the 60-vote threshold typically needed to approve such a measure, infuriating Democrats who warned Republicans — despite their promises not to — were weakening the legislative filibuster. Republican leaders denied that was their intent and vowed to preserve the filibuster forever.

Republicans were livid when at the end of former President Joe Biden’s term, the Environmental Protection Agency greenlit California’s plan to phase out the sale of gas-powered cars by 2035, shifting the state towards electric vehicles. Republicans say the California plan will hurt the US economy and impact the rest of the country because other states follow its emissions rules.

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In response, they readied action under the Congressional Review Act, which allows Congress to claw back agency rules without needing 60 votes to overcome a filibuster.

Tensions have built for weeks as Senate Republicans deliberated behind closed doors about whether to push the measure through despite a finding from the House’s Government Accountability Office that the CRA could not be used to nullify the California emissions waiver. Senate Republicans don’t believe the GAO has the authority to determine that.

The Senate parliamentarian — the neutral arbiter of Senate procedure — deferred to the GAO viewpoint. Despite that, the Senate took a series of votes to put it on a track to pass these CRAs in the coming days.

California has for many years set its own emission standards separate from the federal government. For decades, federal law has granted California the authority to do so, but the waiver has become a partisan football in recent years. President Donald Trump revoked that authority during his first term in 2019, before Biden reinstated it in 2022.

In one of the Biden administration’s last major actions on climate, the EPA in 2024 finalized California’s waiver – effectively greenlighting the state’s plan to phase out sales of new gas vehicles by 2035, the first regulation of its kind in the US.

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California’s vehicle regulations matter a great deal to the auto industry because close to 20 other states and the District of Columbia have adopted them. And they have a big impact on climate policy; emissions from vehicles are one of the largest sources of planet-warming pollution in the US.

Senate Majority Whip John Barrasso called California’s efforts a “fantasyland” that will hurt ranchers and farmers in his home state of Wyoming.

“California’s EV mandates ban the sale of gas-powered cars and trucks. They threaten the freedom of every American to choose what they drive,” he said on the floor. “EVs currently make up 7 percent of the U.S. market. Even in California, they account for only 20 percent of vehicle sales. And sales are stalling. Yet California’s radical mandates require 35 percent of all vehicle sales to be electric by 2026 – 6 months from now. By 2035, it jumps to 100 percent.”

Senate Democrats have argued that not accepting the parliamentarian’s guidance sets a dangerous precedent, and they are particularly concerned that the GOP may do it again as she sets some of the perimeters of what will be allowed in the massive tax, spending cuts and immigration reconciliation bill moving through Congress now.

“It’s going nuclear, plain and simple. It’s overruling the parliamentarian. And second, what goes around comes around,” Senate Democratic Leader Chuck Schumer told reporters on Tuesday, referring to the so-called nuclear option, which is when the majority party changes Senate rules on a party line vote instead of 67-vote supermajority typically required to make a change.

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Democrats insist that the Californian regulations were created as “waivers” under the Clean Air Act, meaning that they are not considered “rules” that can be overturned through the CRA. The GAO — which weighed in on the issue when that chamber passed these CRAs recently with bipartisan support — agreed.

However, Senate Republicans insist that they are not defying the parliamentarian and have said that Democrats’ concern for weakening the filibuster is hypocritical, coming from the party that has expressed opposition to the filibuster’s role in recent years.

“The only people that have attempted to get rid of the legislative filibuster – the Democrats – every single one up there that’s popping off and spouting off has voted, literally, to get rid of the legislative filibuster,” Senate Majority Leader John Thune told reporters at a press conference on Tuesday.

“This is a novel and narrow issue that deals with the Government Accountability Office and whether or not they ought to be able to determine what is a rule and what isn’t, or whether the administration and the Congress ought to be able to make that decision,” he added.

Sen. Martin Heinrich of New Mexico, the top Democrat on the Senate Energy and Natural Resources Committee, echoed Schumer’s concerns in a statement ahead of Wednesday’s vote.

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“If Senate Republicans force a vote on the California Clean Air Act Waivers, they set a precedent that will allow Congress to overturn nearly any agency decision nationwide,” he warned. “I urge my colleagues to reject this gross overreach.”

“By opening this door, Republicans threaten to destroy our permitting and regulatory system, leading to higher energy costs for Americans and making it impossible for new developments to come online. Indeed, nearly every major and minor project the federal government touches could be stalled, creating significant uncertainty if not complete chaos. That is not what the American people want, and it cannot be what Senate Republicans want, either,” continued Heinrich.



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