California sees China impact, soft job growth but no sign of recession, say economists

Key Points
  • California is showing early signs of pain from China tariffs with sales of certain farm commodities to China and Hong Kong down more than 40 percent in June.
  • At the same time, the state had anemic job growth in June and there was a dip in homebuying in a key market.
  • But economists insist there's no cause for alarm and don't see a recession on the horizon.
  • Gov. Jerry Brown, though, told reporters last week that a recession could happen within two years and he cited tariffs and "the natural [business] cycle."
A cargo ship is loaded with shipping containers at the Port of Long Beach, Calif.
Harriet Taylor | CNBC

California's $2.7 trillion economy may face pain from the U.S.-China trade spat and show signs of slowing job growth but economists don't see a recession in the cards.

The Golden State added a mere 800 new nonfarm jobs in June after picking up 7,200 jobs in May and more than 39,000 in April. In the past year, the data show Texas is now beating California in job growth. California's Employment Development Department is set to release July figures next week.

At the same time, there's been a recent decline in homebuying in California where prices are already sky high in many markets. One example is the Southern California market, which experienced double-digit percentage declines in new and existing home sales in June, according to CoreLogic.

Economists, though, caution not to read too much into the data. They suggest the slower pace of job growth and the real estate hiccup in the world's fifth-largest economy doesn't warrant alarm.

"We just don't think there's a real reason to have alarm about a recession anytime soon," said Edward Leamer, an economist and director of the UCLA Anderson Forecast.

Californians can expect that there will be "forces that are going to weaken home prices over the next couple of years," Leamer added. "People have had a great run with their home values rising and that kind of appreciation can't continue indefinitely."

However, the U.S.-China trade war is raising concerns given California's exports to the world's second-largest economy are significant. Last year, China was California's third-largest export market after Mexico and Canada and ranked first as an import partner.

The twin Los Angeles/Long Beach port complex in Southern California handles about 40 percent of the nation's containerized import trade with China.

"Our industry doesn't handle uncertainty very well," said Gene Seroka, executive director of the Port of Los Angeles, the busiest container port in North America. "We estimate at least 20 percent of the goods that move through the ports of LA and Long Beach could be affected by tariffs."

Gov. Jerry Brown believes the state could be in a recession within two years' time and he cited trade impacts as one of the possible reasons.

"At some point, the tariffs and natural [business] cycle will kick in," Brown told reporters last week. "I know people always think, 'would we have a recession.' It's going to happen, and I would say no more than two years, if we're lucky."

In April, U.S. nuts, fruit and wine — major exports from California — were hit with a 15 percent tariff by Beijing. The Chinese government followed it up in early July with additional duties imposed on nuts and fruit. Dairy and alfalfa hay also have been penalized with new tariffs.

"You saw a trade slowdown — there's no doubt about it," said Christopher Thornberg, founding partner of Beacon Economics, a Los Angeles-based economic consulting firm. "The California economy is linked in many ways to China's economy."

According to Beacon Economics, June shipments of California almonds to China and Hong Kong were down 47.5 percent from a year ago. California's exports of agricultural commodities fell 7 percent in the second quarter to $2.95 billion from $3.17 billion, reflecting the impact of China's new duties.

The trade skirmish with China could get uglier in the months to come as President Donald Trump has threatened to ratchet up the pressure on Beijing with a new round of tariffs on more than $200 billion worth of Chinese goods.

"If you have just a full-out meltdown with China, it would have an influence on the economy," said Thornberg. Such a scenario could "ricochet through the system" and trim economic growth although it "wouldn't rise to the level of recession causing."