California’s economy is booming. According to the Congressional Joint Economic Committee, the Golden State’s GDP grew 4.2% in 2015, the highest growth rate among states and more than double the national rate. Over the 12 months to June 2016, California businesses added nearly 400,000 jobs, with strong gains in leisure and hospitality, construction and professional and business services. California is now the world’s sixth largest economy, surpassing both France and Brazil in 2015, according to the Center for Continuing Study of the California Economy.
Because California’s economy continues to undergo a structural shift toward services and high value-added sectors, these numbers reveal only a part of the state’s economic story. While tech and entertainment have typically dominated the state’s economic narrative, other service sectors are also experiencing growth. Additionally, although the state continues to shift manufacturing jobs to lower-cost states in the South and Midwest, certain high-tech production industries are thriving. However, California still has its challenges; the state’s unemployment and poverty rates are higher than the national averages, and it consistently ranks low on business climate indices due to regulation and high taxes.
To make sense of the state’s economic rise, IBISWorld has highlighted the sectors and industry clusters that are driving California’s growth, and analyzed the shifting makeup of the state’s manufacturing base.
Professional and Business Services
The professional and business services sector includes a wide range of industries such as the Law Firms, Engineering Services, Environmental Consulting, Scientific Research and Development, Public Relations and Accounting Services industries. A highly skilled labor force characterizes these knowledge-based industries, with industry wages accounting for 38.6% of total revenue within the sector. They also realize relatively high profit margins, reflecting their high value-added nature; in 2016, IBISWorld expects profit to account for 17.3% of total revenue within the sector. From Silicon Valley’s technology corridor to Los Angeles’ media and entertainment clusters, California offers fertile ground for operators in these industries. In fact, based on the number of industry establishments, California houses more architects, lawyers, graphic designers, environmental consultants and computer systems designers than any other state.
One of the sector’s blooming industries is the Scientific and Economic Consulting industry, which, in 2016, is anticipated to generate over $34.9 billion. California’s large agricultural output means that there is significant demand for consulting services related to horticulture, agrology and agronomy, while a significant number of private companies and startups demand technical and security consulting. California is home to over 28.0% of total Scientific and Economic Consulting industry establishments, a share that has increased over the past five years. In 2012, for example, California housed 25.0% of total industry establishments.
Leisure and Hospitality
California’s rich geography and notable metropolitan areas have been a boon to the state’s leisure, tourism and hospitality sector, which includes industries such as Hotels and Motels, Casinos, Bars and Nightclubs, Chain Restaurants and Campgrounds and RV Parks. According to Visit California, the state’s nonprofit tourism agency, direct travel spending in the state totaled $122.5 billion, which represents a 3.4% increase from 2014, and supported over 1.0 million jobs in 2015. Data from the Bureau of Labor Statistics (BLS) reveals steady gains in California’s leisure and hospitality employment since 2011, with a 4.5% increase over the 12 months to June 2016.
The statewide raise on the minimum wage to $15.00 per hour is conceivably one of the most impactful pieces of legislation affecting the hospitality and accommodation sector in recent years. This is because about 70.0% of minimum wage earners are in the leisure and hospitality and retail sectors, according to a Pew Research study conducted in 2013. Moreover, according to IBISWorld data, average wages are about $25,900 for the Hotels and Motels industry and just over $18,800 for the Chain Restaurants industry in 2016. So far, high demand in the sector has allowed operators to absorb the wage hike, while others have increased prices for food and amenities; nonetheless, this could very well change in the future.
California’s healthcare sector has grown strongly alongside population growth and an aging workforce. This sector spans a large number of industries, from Dentists, to Emergency and Other Outpatient Care Centers and Home Care Providers, as well as Retirement Communities and Day Cares. In California, several factors have driven the sector’s growth, including new technology, which improves healthcare delivery; a growing baby boomer retiree population, which requires home care and retirement communities; and the Affordable Care Act. BLS data indicates a 4.3% increase in the state’s educational and health services employment over the 12 months to June 2016.
Broadly speaking, California’s manufacturing sector has not achieved the success of professional and business services, hospitality and tourism and healthcare. Despite claiming the nation’s largest manufacturing base, California’s manufacturing sector has grown slower than, for example, the manufacturing sectors in South Carolina and Michigan. This is because operators are choosing to relocate to regions with lower taxes, rent and land costs, as well as less-stringent regulation. Between January and June 2016, BLS data indicates a consistent decline in the state’s manufacturing employment compared with the same time last year.
A deeper look into the sector, however, reveals a more nuanced picture. California’s manufacturing sector continues to shift toward high-technology, high value-added production industries, largely due to the proximity to tech and research clusters as well as adequate access to skilled labor and capital. These industries are typically marked by high average wages, significant research and development costs and rapid technology change. For example, California alone accounts for 36.3% of all Semiconductor and Circuit Manufacturing industry establishments and 20.2% of all Medical Device Manufacturing facilities. California also houses over 31.0% of the country’s Space Vehicle and Missile Manufacturing facilities, due in part to the numerous research sites within the state, including the Ames Research Center, the Dryden Flight Research Center and the Jet Propulsion Laboratory. The state’s share of this industry’s establishments has increased from about 22.0% in 2012.