Tech Sector Propels California’s Economy Faster than the Nation’s

New economic indicator allows forecasters to monitor the state's performance more closely

California’s economy grew at a strong clip through July 2019, even as national Gross Domestic Product growth slowed, according to a new economic indicator created by UCLA Anderson Forecast. The indicator, which measures California GDP monthly, reflects continued growth in the state’s large, highly productive technology sector.

The UCLA indicator shows California extending a roughly seven-year run of robust economic growth, even as worries about a national downturn build. Estimates by the UCLA Anderson Forecast that cover July data showed a three-month average GDP growth rate of 4.0% for the state, following 4.1% in the second quarter and 2.7% in the first. These surprising numbers are driven by rapid growth in high-productivity tech sectors. By contrast, U.S. GDP growth rates dropped to 2% in the second quarter, after a 3.1% growth rate in the first quarter.

The new indicator allows economists to make timelier assessments of California’s economy than was previously possible.

Although the state is the fifth largest economy in the world, and by far the largest in the U.S., its growth is officially tracked as if it were Vermont. The U.S. Bureau of Economic Analysis releases estimates of California’s GDP every quarter, just as it does for every other state. Because the figures are quite dated on release (its latest available estimate pertains to first quarter 2019 growth, published almost a month into the third quarter), they are more useful to historians and statisticians than to economic forecasters.

To reduce the delay, said Jerry Nickelsburg, director of the Forecast, UCLA Anderson economists constructed a monthly measure of California GDP that can update these estimates with less than a month’s lag. The Forecast’s formula consistently produced quarterly growth estimates close to those published by BEA. By extending government estimates months out, the Forecast’s California GDP indicator provides insights into the state’s current economy that can’t be seen in the more dated data.

The data the Forecast team uses to compute timelier estimates has long been available from official sources. The U.S. Bureau of Labor Statistics provides monthly updates on the number of jobs in each industrial sector, although not the number of hours spent on the job. BLS, however, publishes monthly national averages of hours worked by payroll employees for each sector. The Forecast researchers reasoned that variations between states in average hours per worker by sector, unlike state-by-state variations in workforce growth, likely are small. This was verified by the more aggregated average weekly hours collected for the state.

To fill in the missing months and quarters beyond the last BEA estimate, the researchers extrapolate trends in growth over the most recent six quarters. This technique generally produces the same results as more complex formulas for productivity, they found.

The methodology highlights a key reason California’s economy often remains stronger than the nation’s at large: It has a larger percentage of highly productive businesses than most states. California’s labor productivity growth — both in 2016 and the average of the nine years prior — far outpaced most states, according to an experimental study published by the U.S. Bureau of Labor Statistics released in June.

California’s tech sector, which bolsters GDP faster than other industries, has been growing faster than the state’s other major industries, Nickelsburg notes. Restaurants and hotels, for example, have added workers, but the productivity of those workers measured in the market value of the services they provide is much lower.

The new monthly indicator, with state growth estimates through April, was introduced in the June 2019 edition of UCLA Anderson Forecast, a quarterly publication. At the time, the latest BLS data available reflected the quarter ending December 31, 2018. The Forecast team plans to offer monthly updates and commentary on the state’s economic growth shortly after state and national employment data is released in the future.