Is California Heading Into A Recession?

Predictions regarding the economy should always be taken with a pinch of salt. We get things wrong all the time and there’s no one to blame for that. After all, as much as certain economic indicators are useful, an unexpected event can change anything. An ‘event’ may be something as minor as an immediately-reversed political decision (as has happened in the UK) or as big as a war or pandemic.

It is for this reason that experts have consistently predicted for most of the year that we’re about to tip into a recession. This has been on a state, federal, and global level. As such, asking whether California is heading into a recession can feel like a fool’s errand. Nonetheless, the signs of a coming recession are now clearer than ever.

California’s economy could soon be mired in a recession that will require a long and difficult recovery. For individuals, it will mean, among other things, that improving your credit score won’t be the cure all it once was. Loans will come with high-interest rates no matter what, and it will be tough to counteract debt with job losses across the state.

What are the indicators and how did we get here? Is this a knock-on effect of the 2020 recession?

The 2020 Recession

If we do enter a recession in California, it will be for the second time in just over two years. In 2020, California’s economy went into a recession, as was the case in most states and countries. That recession was caused by the pandemic. Lockdowns led to millions of jobs lost and the collapse of many businesses. Grants provided by the state and federal governments only went so far.

The 2020 recession goes some way to explaining our current position but ultimately falls short. We saw an incredible recovery after lockdowns were lifted. The main factors causing the recession were eliminated and things went back to something resembling normal. While the world has been in a state of semi-constant chaos ever since the economy stayed strong for a long time.

What is so disturbing about a potential recession in 2022 is that there are no factors as clear-cut as there were in 2020. If we do enter a recession, there will be no fix as ‘easy’ as ending lockdowns. Yes, hindsight is 20/20, and nothing about 2020 was easy. But at the very least we could all envision an end to the problem.

With the details of 2020 in mind, let’s take a look at the signs of a recession in 2022.

Signs of Recession in 2022

According to analyst Gabe Petek, the following are all indicators of a coming recession:

  • high inflation
  • a national decline in economic output
  • dropping home sales

We can see all of these signs at present. While the first two have been present most of the year, the dip in home sales has been very recent. This could be the tipping point that leads us into a recession.

The problem is that there’s no real answer as to how to get out of a potential recession. Here’s why.

No Easy Solutions

What ended the last recession was an end to lockdowns, leading to millions of new jobs, more spending, demand for housing, and more. In 2022, things are trickier. That is because there are many contrasting factors causing issues, and some of them are completely out of our control.

Inflation was high at the start of the year due to large amounts of federal spending upsetting the supply/demand balance. Higher interest rates were meant to counteract this. But Russia’s invasion of Ukraine, followed by sanctions on Russia and an interruption to the supply chain of goods from Ukraine, led to a low supply of energy and other consumables. The effect this had on the gas price in particular caused prices across the board to skyrocket.

Meanwhile, the Federal Reserve has continued to hike interest rates in the hopes of lowering inflation. This has had the knock-on effect of making mortgages difficult to afford. Since homes were already overvalued in California and throughout the US, this could lead to a massive crash. At the moment, we are only seeing a correction and have to hope that it stays this way.

There is clearly no easy solution here. Raising interest rates was the Fed’s trump card and it hasn’t worked through no fault of their own. Russia’s invasion of Ukraine could not be prevented by the US and global interventions. It may be ended by sanctions, but there is no guarantee that that will happen. We also cannot go back in time and prevent housing prices from shooting up as they did.

With all of this in mind, how concerned should we be?

Riding It Out

The good news is that California’s economy has a strong foundation. The immense amount of innovation within the state means that there will always be a demand for the output of our businesses. Furthermore, the abundance of natural resources always sets California in good stead to survive economic downturns.

There is not much we can do to prevent a potential recession. If it does come – which seems increasingly likely – we can only do our best to ride out the storm.

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