The Breakdown

Explaining Southern California's economy

Could California handle a downturn in exports?

41522 full
41522 full

It's not really correct to do this, but you can compare the economy of California to the economy of an entire country. If California were a country, it would be the world's ninth largest, at about $2 trillion, according to some data compiled by the LAEDC. This sounds great — Bravo, Golden...Nation! — but as we learned from the most recent UCLA Anderson Forecast, released this morning, this means that global economic events can affect California more than other U.S. states, and even entire U.S. regions.

This from Anderson Forecast economist Jerry Nickelsburg's contribution to the report, "California Exports: How Much Do They Matter?", in which he considers the impacts, both positive and negative, that exports have on the state economy:

How sensitive is the California economy to changes in the world economy? ...Chinese growth, if not negative, is in retreat.  In many parts of Europe, growth is indeed negative as a double dip recession has set in and the future of the Eurozone remains a risk of our U.S. forecast.  As it turns out, California has considerable exposure to China and Europe.  Together they make up one quarter of all direct exports from the state.

According to Nickelsburg, when exports have fallen in California, they've fallen hard: 27 percent in the 2001 recession, due largely to a collapse in demand for computers and software and all the services related to them; and 25 percent in the 2008 Great Recession (against 27 percent for the U.S. as a whole, in a recession that wasn't localized to the high-tech industries that proliferate in California).

Hard falls are followed by robust recoveries, however. California export increases have outpaced the U.S. as a whole since the 2008 recession officially ended: 44 percent versus 34 percent.

This is where things get tricky. Nickelsburg pointes out that California is indeed highly exposed to the international economy. And on that front, there are two major looming problems: a breakup of the eurozone or ongoing struggles to contain the sovereign-debt crisis in Europe; and a significant slowdown in China's torrid growth of the past decade. 

BUT...while this would be bad for California, it wouldn't be devastating. In the context of an unemployment rate that's currently at a dispiriting 10.7 percent, well above the national rate of 8.1 percent, it would be more of a disappointment, and ultimately a delay to recovery rather than a derailment. Here's Nickelsburg:

California’s exposure to the international economy is substantial, the sensitivity of the California economy to international risk is only marginally above the national risk. To put this in perspective, a 1% decline in U.S. GDP due to a Eurozone collapse and a 20% decline in U.S. exports to the Eurozone, would only result in an increase in California’s unemployment rate of 1.1% and an expected increased differential between California’s unemployment rate and the U.S. of only 0.1%.

Bottom line: A hit to U.S. and California exports wouldn't be something that the state can't handle. In fact, this in one of those instances when being the world's ninth largest economy is a huge plus.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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