Dollars and Sense: A tale of two California economies

California dreamin’. I’ve been in Los Angeles this week, and I’ve discovered an economy that is Dickensian: It’s the best of times and the worst of times. Here in California, they like to say that if the state was its own country, it would be the 10th largest economy in the world. Most of the rest of the world doesn’t see that size and diversity, but they do see the movie business. And for the movie business, last year was the best of times. The film industry had a record or near record year, and it’s not just the stars who benefit. The movie industry employs hundreds of thousands of people in Southern California, and a lot of them are trades people who are decidedly middle class.

The other California. But that’s not the only industry in California. The big news here is the drought. It’s having a devastating effect on agriculture, which is another huge component of the state’s economy. And even if California gets rain, the drought’s effects likely will be around for years to come. Lots of California’s crops are not row crops such as corn or soybeans. During a severe drought, a farmer can simply choose not to plant those crops. But when your crops are grapes or almonds or oranges—crops on trees or vines that grow and mature year after year—you can’t simply let the field lie fallow for a short time. You have to spend the money on water to keep those trees alive even if the drought is dramatically reducing their yield.

Weather-related recession? Weather is also having an effect in other areas, although for the rest of the country it’s cold and snow. Thursday brought that notion into focus. Retail sales in January dropped 0.4 percent, which was worse than expected, and economists are saying that at least some of the drop was likely weather-related. This week’s jobs report was also worse than expected, and also likely weather-related. First-time jobless claims for last week rose 8,000 to 339,000. These weak reports caused Barclays Bank to cut its final estimate for fourth-quarter GDP growth from 2.6 percent to 2.2 percent. That number barely keeps up with population growth and inflation, and—if Barclays is right—indicates the economy barely grew at all in the fourth quarter of last year. Few people think the weather is going to kill that remaining 2.2 percent growth and send us into recession, but the weather is definitely having an effect.

Any bright spots? So with all this bad news, is there any good news? Yes, the markets were up this week a bit. And Janet Yellen, the new head of the Federal Reserve Bank, testified before Congress that she would not raise interest rates and that overall things would continue as they had under her predecessor, Ben Bernanke. Wall Street seemed to like that. And overseas, trade growth in the Chinese economy accelerated in January. Fears about a slowdown in the world’s second-largest economy caused much of January’s stock market declines. That may be a part of the reason that so far in February, the Dow is up more than 500 points. It’s not enough to make up for January’s losses, but it’s a step in the right direction.

The week ahead. Earnings season is all but over, and generally reports have been good, but they didn’t move the markets much. And they certainly won’t in the weeks ahead. We’ll see a lot of government reports next week, but none of them generally move the markets unless several of them taken together are either very good or very bad. Perhaps the most significant report will be the Consumer Price Index, which is one of the best indicators we have of inflation. With all the money the federal government’s printing to buy bonds, inflation worries are always in the back of analysts’ minds. Any sign of inflation will create concern. So far, though, while assets such as stocks and real estate have inflated, consumer prices have remained pretty steady through this recovery.