Business in California, The Economics of the Golden State

California, often hailed as the golden state, would be the 5th largest economy in the world if it were a country. The state's economic prowess is underscored by a growth trajectory that consistently outpaces the rest of the United States. According to the Bureau of Economic Analysis and the Bureau of Labor Statistics, California’s economy ranks 1st in size among states and Washington, DC. In October 2023, the unemployment rate in California was 4.8%. The state’s GDP was $3.641 trillion in 2022, and its GDP per capita was $93,305 in 2022. The state’s economy grew in real terms by 16.69% over the 5 years ending in 2021, at a compound annual growth rate of 3.13% per year. Real California GDP, at $3,356.631 bn in 2021, is at the highest level recorded to date. However, beneath the glittering surface lie challenges that shape the complex economic landscape of this influential region.

Source: Rich States, Poor States 2023

The economic tapestry of California is woven with threads of resilience and diversification. From the historic gold mining boom, the state transitioned into a thriving community with a focus on agriculture, trade, and strategic investments in education. These investments laid the foundation for prestigious universities and the globally influential film industry, particularly Hollywood. Hollywood’s importance is made particularly clear when realizing the recent union strikes caused a potential loss of $5bn to the state economy. California's economic success is anchored in world-leading industries, such as entertainment and technology, attracting skilled individuals and investments. However, the state grapples with a declining population, high personal income taxes, soaring housing costs, over-regulation, and social issues, each posing a potential threat to its economic prosperity.

Agriculture, a historical cornerstone, continues to play a pivotal role in California's economic narrative. The tech industry, fueled by proximity to research institutions like University of California- Berkeley, has been a catalyst for economic growth, giving rise to iconic companies like Apple. The film industry, centered in Hollywood, contributes not only to the state's cultural influence but also significantly to its economic success.

Navigating California's business landscape requires an understanding of its unique laws and regulations, with employment laws being the most far-reaching in the United States. Businesses face challenges such as high taxes, the most complex regulations in the country, and compliance with laws like the California Consumer Privacy Act. The state's competitive labor market adds another layer of complexity.

California is home to over 4 million small businesses, comprising up to 99.8% of all businesses in the state and employing more than 48% of its workforce. While small businesses are the backbone of California's economy, they grapple with challenges such as high taxes, complex regulations, and a fiercely competitive labor market. The best industries for starting a business in California span real estate, property services, sustainability, technology, and even cannabis.

Recent indicators provide a nuanced perspective. While the state experiences the second-highest unemployment rate in the United States at 4.6%, a quick pace of job recovery suggests resilience. However, a recent survey reveals that 7 in 10 Californians feel the pinch of rising prices, contributing to financial hardships for residents. The effects of these hardships can be seen with the state’s recent demographic changes.

California's population decline, driven by exorbitant housing costs, has spurred a notable shift in migration patterns. With a 34% surge in median single-family home prices to $815,340, many Californians are seeking affordability in sunbelt states like Texas and Arizona. Suburban areas are experiencing a resurgence as remote work allows for lifestyle flexibility. While the nine-county Bay Area has seen a substantial loss of 292,050 households, recent data suggests a slowing exodus. Notably, wealthier, white-collar workers are contributing to the departure, creating challenges for local tax bases but also presenting investment opportunities. Savvy investors can explore real estate in affordability hotspots, suburban development, and businesses catering to remote work trends, finding potential amidst the evolving landscape of California's housing market.

For investors and businesses eyeing California, the state offers both promise and complexity. With a GDP per capita around $90,000, comparable to countries like Norway and Switzerland, California presents significant economic opportunities. However, challenges such as a potential overdependence on specific industries and the current regulatory landscape should be considered.

For companies not based in California, if they're found to be "doing business" in the state—even without a physical location—it can bring about responsibilities like registration, reporting, and taxes. So, even if a company only has mild or remote ties to California, it's crucial to carefully check if it needs to follow California laws. The term "doing business" lacks a clear definition, and different California agencies see it differently based on the business activity. This means companies should be aware of and follow various rules. Forbes has a detailed guide on starting a business in California, covering topics like types of businesses, funding sources, registering, and getting the right permits. The California Governor’s Office of Business and Economic Development provides resources on incentives, like tax credits and training programs, to help investors kick start their business in California.

In navigating California's economic landscape, one encounters a state that mirrors its diverse topography — filled with peaks of success, valleys of challenges, and an ever-changing terrain. As businesses, investors, and residents tread this dynamic landscape, understanding the intricate balance between economic strengths and potential pitfalls is essential. California's ability to capitalize on multiple industries and resources has been key to its economic success, and as it continues to evolve, the golden state remains a compelling destination for those seeking to thrive in the heart of innovation and economic vibrancy.

References: 

5 charts that explain the California and Bay Area exodus. (2023, May 23). The Mercury News. https://www.mercurynews.com/2023/05/21/5-charts-that-explain-the-california-and-bay-area-exodus/

California. (n.d.). Rich States, Poor States. https://www.richstatespoorstates.org/states/CA/

California’s economy is heating up. Here’s what economists have to say about a recession. (n.d.).The Sacramento Bee. https://www.sacbee.com/news/california/article280071954.html

DOING BUSINESS IN CALIFORNIA: A GUIDE FOR EMPLOYERS. (n.d.). 404 Not Found. https://foxrothschild.gjassets.com/content/uploads/2023/11/eBook_DoingBusinessInCalifornia_0123.pdf

Making Sense of California’s Economy. (n.d.). https://www.ppic.org/publication/making-sense-of-californias-economy/

Novak, J. (2023, August 1). How to start a business in California (2023 guide). Forbes Advisor. https://www.forbes.com/advisor/business/how-start-business-california/

Something Weird is Happening in California. (2023, August 30). YouTube. https://www.youtube.com/watch?v=VRPjLSobdJY

Uzialko, A. (2019, May 21). How to Run a Business in California. Business News Daily. https://www.businessnewsdaily.com/8729-the-state-of-small-business-california.html