The California Economy Isn’t Just a U.S. Powerhouse

(Bloomberg Opinion) -- California has one-eighth of the U.S. population of 327.7 million. It’s a third the size of Japan, half of Germany and not quite two-thirds of the U.K. But its economic strength looms larger than any of them.

Just about every measure of growth shows that the Golden State is peerless among developed economies for increasing population, expanding gross domestic product, improved joblessness, rising personal income, investment in innovation, and wealth created by its stocks and bonds.

Few of the 34 nations in the Organization for Economic Cooperation and Development come close to California’s 3 percent average annual growth rate for the most recent five-year period — more than 2.2 percent for the 50 states and the 2.4-percent average for the 19 countries sharing the euro currency.

Such vitality catapulted the largest U.S. state to No. 5 last year behind Germany, Japan, China and the U.S. It overtook the U.K. two years after Britain voted to leave the European Union, triggering economic struggles including a record devaluation of the pound.

As the U.S. recovered from the 2008 financial crisis, California has been leapfrogging economies of nations with greater populations, such as Brazil and France. The British currency’s depreciation accelerated the trend. Within the U.S., where critics never tire of accusing the state of undermining business with abundant taxes and regulations, California GDP is 60 percent bigger than No. 2 Texas. None of the Group of Seven highly industrialized nations could beat California’s annual 3 percent growth in the most recent period for which such statistics are comparable, according to data compiled by Bloomberg.

Despite droughts, floods, forest fires, epic traffic congestion and the skyscraping living costs that are responsible for the nation’s highest poverty rate, California’s population increased 19.3 percent the past 20 years, the most of the five largest economies and a percentage point more than the U.S., according to data compiled by Bloomberg from the U.S. Census Bureau. China grew 9.8 percent while Japan and Germany lost 0.3 percent and 2 percent, respectively.

Being the most diverse and most populous state helps explain why California benefits from the most-improved labor market, with unemployment declining to 4.2 percent from 12.1 percent since the end of 2009, according to data compiled by Bloomberg. The 7.9 percentage-point margin beats the 6.1 point decline for the U.S. during the same period, and dwarfs the 0.5 point decline for China, Japan’s 2.8 point decrease and Germany’s 3.1 point improvement.

California’s prosperity owes much to its appeal as a destination for worldwide companies pursuing innovation, especially in the technology and health-care industries. Of the 5,440 corporate locations in the state, 17 percent are research and development facilities, according to data compiled by Bloomberg. That ratio easily beats the 10 percent for the U.S., China’s 13 percent, Japan’s 11 percent and Germany’s 16 percent.

Investors in stocks and bonds are reaping a unique bonanza from California. Debt securities sold by the government of California returned (income plus appreciation) 4.7 percent during the past 12 months. That’s equivalent to 6.5 percent after adjusting for the tax benefit and handily beats the 3.9 percent total return from the U.S. Comparable debt for China, Japan and Germany lost 0.3 percent, 2.9 percent and 5.5 percent during the same period, according to the Bloomberg Barclays Indexes.

During the past decade, California’s publicly traded companies returned 420 percent. By comparison, the S&P 500 gained 239 percent, China’s CSI 300 index advanced 57 percent, Japan’s TOPIX climbed 70 percent, and Germany’s DAX appreciated 121 percent. The California shares also outperformed markets in those four countries over five years, three years, two years and one year. Lest anyone think the performance of Golden State shares is only about technology, they will find that California energy companies outperformed the Russell 3000 by 26 percent; communications firms by 23 percent; industrials by 11 percent and the consumer industry by 7 percent, according to data compiled by Bloomberg.

And if anyone wonders why corporate California does so much better with investors than its counterparts elsewhere in the U.S. and the world, they will find the answer in superior margins. Revenue for more than 800 publicly traded companies in California during the past year increased 23 percent, beating the 14 percent for the rest of the U.S., 19 percent for China, 10 percent for Japan and 3 percent for Germany. When California companies turned $100 of sales into $57 of gross profit, they topped the $49 average for the U.S., $35 for China and $39 for Japan and Germany. What did corporate California do with its robust earnings? It created more jobs, increasing its employees by 15 percent, twice the average for corporate America, almost double China’s 8 percent, more than seven times Japan’s 2 percent and almost quadruple Germany’s 4 percent.

Canada, France, Germany, Italy, Japan, U.K., U.S.

--With assistance from Shin Pei and Tom Lagerman.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler is a Bloomberg Opinion columnist. He is the editor-in-chief emeritus of Bloomberg News.

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