Could California lose its claim as the world's fifth largest economy?
My trusty spreadsheet found that by 2024, the Golden State could fall one notch behind fast-growing India in this theoretical ranking of economic strength as measured by gross domestic product, a broad measure of business performance.
Let's start by noting that California businesses produced $3.86 trillion in goods and services in 2023, according to the U.S. Bureau of Economic Analysis. Now we will put this into a global perspective using figures from the International Monetary Fund.
In 2023, according to the GDP calculation, only four economies were larger than California: the United States at $27 trillion (including California), China at $17.7 trillion, Germany at $4.4 trillion and Japan at $4.4 trillion $4.2 trillion.
But India was not far behind the Golden State at $3.7 trillion in 2023. Then came the United Kingdom with a GDP of $3.3 trillion and France with $3.1 trillion.
Next, let's take a look at the IMF's forecasts for 2024. India's economy is expected to produce $4.11 trillion in goods and services this year. The US GDP is estimated at $28 trillion.
So if California produces the last two years' average share of 14.5 percent of U.S. output, the Golden State would have a GDP of $4.05 trillion in 2024.
That would mean California falls just behind India – a country of 1.4 billion people, 36 times the population of the Golden States. Still, California would be ahead of the United Kingdom with a projected $3.6 trillion and ahead of France with a projected $3.2 trillion.
It's not that California becoming “the sixth largest economy in the world” would be a bad status. However, the potential downgrade should serve as a reminder that California is constantly being pushed to maintain its longstanding position as an economic leader nationally and globally.
Slow year
Yes, 2023 was a balmy year for the business climate in California.
The national economy grew by 2.1 percent adjusted for inflation, as measured by GDP. That ranked it 32nd among states, behind U.S. growth of 2.5 percent. Still, it was a notable improvement from 2022, when California's meager 0.7% growth – No. 41 among states – was outpaced by the country's 1.9% expansion.
For 2023, the nation's best growth was recorded in North Dakota at 5.9 percent. Delaware's 1.2 percent decline was the worst. And California's two major economic rivals were growing quickly – Texas was the second-largest grower in the country at 5.7 percent, while Florida was seventh at 5 percent.
At least the Golden State's economy ended last year a little more robust.
California's business performance grew 3.1 percent annually in the fourth quarter. Still, this state ranked 29th among states, lagging the national business growth of 3.4 percent.
Nevada was No. 1 in the quarter with growth of 6.7 percent and Nebraska was at the bottom with 0.2 percent. Texas was No. 5 with 5 percent and Florida was No. 8 with 4.6 percent.
To be fair, consider a year ago when there was a fairly strong consensus among forecasters that there would be a recession in 2023 – locally, statewide and nationally. So here we are in early 2024, discussing the intensity of California's economic growth.
Look, many California businesses are still recovering from the strict pandemic-era business restrictions. Other companies must adapt to the new normal of post-corona life.
Additionally, California's population continues to shrink. Additionally, last year's high interest rates — designed by the Federal Reserve to contain an overheating economy — were particularly harsh on a high-cost state like California.
Victories and defeats
Consider the performance fluctuations of key California industries in 2023 as measured by these GDP numbers.
On the other hand, there are the state's information companies – these are all the computer know-how and creative minds that turn entertainment into magic. Despite many problems in the technology industry and a long strike in Hollywood, information was the largest contributor to the state's economic growth in 2023.
Retail was No. 2 for growth in California, reflecting an oddly optimistic shopper. Professional services – particularly high-paid employees – also performed well. State and local government spending also provided a significant boost. But this economic niche faces an uncertain future. Many governments assumed they would cut spending to offset large budget deficits.
The downside in 2023 is that California's production of “consumer goods” – for example, food, gasoline, clothing and health products – contracted the most in 2023. High material and labor costs posed a major challenge for these companies.
“Wholesale”—i.e., warehouses—cooled off as delivery channels returned to normal and shoppers decided to shop in-person in stores and rely less on online retailers. The slow return of workers to offices dampened the GDP contribution of administrative services. And high interest rates are dampening the construction industry in California.
Bottom line
California remains the country's economic giant.
The $3.86 trillion worth of goods and services produced in California in 2023 is by far the largest output in the country. Texas was No. 2 with $2.6 trillion, followed by New York ($2.2 trillion), Florida ($1.6 trillion) and Illinois ($1.1 trillion).
And note that California's output dwarfs all the goods and services produced in the country's 25 smallest economies combined. Yes, about half the nation corresponds to the Golden State.
But weight is no guarantee of future success. California leadership — politicians, industry and labor — should ask whether the subpar business results in 2022 and 2023 are a hiccup or a signal of increasing economic hurdles across the state.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at [email protected]
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