California Policy Options 2013

At this writing, we expect the U.S. economy to grow somewhere in the 2.5% range in the second half of 2013. However, we point out that Beacon Economics’ outlook is more optimistic than that of many forecasting organizations. The soft patch in the U.S. economy in mid-2012 seems to us less dire than many other forecasters seem to believe.

There are some dark spots. Economic weakness in the euro zone is not helping the U.S. economy. Problems in Europe have caused the value of the U.S. dollar to rise, and the weak demand for imports from Europe is having a negative effect on the global economy. But the risks from Europe seem overstated. Although European leaders have shied away from taking dramatic policy steps, they have shown resolve in the face of immediate challenges.

On January 1, 2013, the United States will see a sharp increase in taxes and a large decline in federal spending if the two political parties in Congress and the President cannot agree on a budget compromise. The overall shock to the system would amount to roughly $550 billion, or $410 billion in tax increases and $140 billion in spending cuts over the course of 2013. The shock to the country would be substantial, but only if this budget remains in place for a sustained period of time in 2013. In other words, the threat is more of a fiscal hill, where we start down slowly but pick up speed over time. Uncertainty about that issue may have had a retarding effect on growth in 2012. Our view is that it is likely that Congress and the President will find some way to avert a full-blown crisis. Readers of this chapter, of course, will know how that conflict is or is not resolved.

Why does the economy feel so fragile? It has much to do with the fact that we didn’t get the same bounce in growth we typically get after recessions. After the mid-1970s and the early1980s downturns, the economy grew close to 6% for two years erasing economic losses that occurred during those recessions. It didn’t happen this time. We simply moved into a standard private sector expansion with no bounce. California’s pace of recovery in the aftermath of the Great Recession is highly dependent on the larger national economy. We begin with an overview of national trends. Then we turn to the specifics of California.

We are Bruised, But Still Optimistic While economic data available to us at this writing have been disappointing, Beacon Economics sees an improvement in the pace of national real GDP growth. The data are in fact 1 185