Fed rate hikes chill California GDP growth to 16th-worst in US

The “Looking Glass” ponders economic and real estate trends through two distinct lenses: the optimist’s “glass half-full” and the pessimist’s “glass half-empty.”

Buzz: Only 15 states started 2023 with slower economic growth than California.

Source: My trusty spreadsheet looked at the past two years of economic growth, as measured by annualized changes in state gross domestic product tracked by the Bureau of Economic Analysis. GDP is an inflation-adjusted gauge of overall business output.

Debate: How resilient are state and national economies in the face of a Federal Reserve determined to chill an overheated business climate?

Half full

California’s economy grew at a 1.2% annual pace in the first quarter. That GDP expansion rate looks lethargic compared with the 2% US expansion pace.

Yet nationally speaking, this year started surprisingly robust considering all the fears that the Federal Reserve’s attempt to throttle business activity would create a recession.

Ponder that every state had GDP growth for the first time in 10 quarters. The swiftest expansion was found in North Dakota, rising at a 12.4% annual rate. Then Nebraska at 12.3%, South Dakota at 10.1%, and Kansas and Montana at 6%.

Slowest states? Alabama and Rhode Island with only 0.1% growth, then Arkansas, Illinois and West Virginia at 0.2%.

Oh, and among California’s key rivals, Texas growth ranked No. 14 at 3% and Florida was No. 10 at 3.5%.

Still, do not forget the sheer size of the California economy, which was creating business at a $3.76 trillion-a-year clip as of March. That massive GDP is …

• No. 1 in the nation. No. 2 Texas is roughly one-third smaller at $2.44 trillion.
• 14% of all U.S. output and slightly bigger than the combined GDP of 25 states.
• No. 5 in the world behind the entire U.S., China, Japan and Germany – and just ahead of India, using International Monetary Fund GDP calculations for this comparison.

Half empty

The fast start to 2023 masks economic pain. Let’s take a slightly longer-term view to gauge how the Fed’s rate hikes worked.

Start with California. Its GDP growth over the last four quarters averaged 1.7%, a middling 21st among the states and just below 1.8% growth nationally.

Tops? Texas at 5%, then North Dakota at 4.4%, Nevada at 3.8%, Alaska at 3.4% and Florida at 3.2%. Two states had declines: Connecticut was off 0.5%, and Indiana, off 0.3%. 

These expansions are quite a chill from the previous toasty 12 months that saw inflation build momentum toward levels not seen in four decades. Remember, a soaring cost of living forced the central bank to start rate hikes early in 2022.

So look back to swift economic growth in the 12 months ending March 2022. This period included the last significant government stimulus and historically low interest rates. These actions were engineered to repair economic damage from the pandemic’s business limitations.

Yes, California’s economy grew an uninspiring 2.7% over these four quarters – the 13th-slowest among the states. But look elsewhere just as the Fed was slamming on the economic breaks.

There was a hefty 3.8% US increase. And look at the top economic momentum among the states: Nevada was expanding by 8.1%, Florida by 7.1%, New Hampshire by 6.1%, Idaho by 6%, and New York by 5.8%.

Bottom line

Let’s measure the Fed freeze by thinking about the percentage-point differences between annual growth rates during these last 24 months.

That math tells you the Fed helped chill GDP performance in 40 states – yet we’re not near recession territory.

Consider the California slowdown. It looks modest, as tallied by this math: Only a 1 percentage-point dip in its GDP expansion pace. Somehow, going from meager 2.7% growth to a meek 1.7% was actually the 15th-best performance among the states.