What is the forecast for the California economy post COVID-19?
COVID-19 has hit the global economy hard and hurting many business owners. For those of us in California, the economy has also been hit hard. In addition, we continuously hear negative news about the California economy regardless of the media we watch or listen or read.
March 16, 2020, was the date the six counties in the San Francisco Bay area came together and mandated the closing of non-essential businesses. This is also called the start of “The Great Lockdown recession.”
That is now over 6 months ago.
We currently have wildfires tearing up the US West Coast, COVID-19, and a US Presidential election just around the corner.
If we look ahead, what does the rest of 2020 and then the next three to four years look like for those of us that own and operate a business and live in California and are thinking of selling or buying?
At a recent conference for the California Association of Business Brokers, I was able to attend via Zoom a presentation from Dr. Robert Eyler. Dr. Eyler is the President of Economic Forensics and Analytics (EFA) as well as a Professor of Economics at Sonoma State University.
Dr. Eyler gave about a 90-minute presentation. I have condensed what I consider some of the highlights into this article with a specific focus to help a business owner in California decide if they should sell their business in the next 6 months or so. Perhaps it may be better to hang onto the business for a while with the expectation that the California economy may get better.
What does it take for an economy to recover?
Dr. Eyler explains that the most important item in an economic recovery is jobs.
For jobs to return, businesses need to be stable, so they are then willing to take the risk to hire back workers and indeed take on new hires.
The following slide presents a simple but effective graphic of how recovery works.
US and California Unemployment claims
From January 2020 to the end of August 2020, the US and California unemployment claims tended to track each other.
This is interesting as the Great Lockdown in California first went into effect on March 16, 2020, which immediately created a spike in unemployment claims, but the US unemployment claims began to rise at almost the exact same time.
The peak unemployment claims for the US and California were not far apart; about April 25, 2020, for California and May 09, 2020, for the US economy.
Not all industries in the California economy were affected
The influence of the loss of jobs has not been across all industries equally.
In fact, and it makes perfect sense, due to COVID-19 and shelter in place, some industries have been devastated while some industries have thrived due to the effects of the CARES Act and the stimulus to the economy.
As the graphic below shows, the California industries affected severely are:
- Food Services and Drinking places as restaurants and bars were closed.
- Accommodation as the travel industry came to a screaming halt from the collapse of both domestic and international tourism.
- ‘Other Services’ as this includes places like hair salons were brought to an immediate halt.
- Mining and Logging have been affected but I am guessing this is more to do with mining (and drilling for oil due its drop in demand due to “Work From Home) while the logging industry is adjusting as the housing and commercial construction industries adapt due a slowdown and normalization.
Where does the US economy go from here?
If you have been following the business and political media, Congress has been doing its level best to pass a second round of the CARES Act or fiscal stimulus.
The Democrats want to pass legislation that includes trillions of dollars and the Republicans want it to be much smaller.
If any legislation passes it will provide job security for many businesses and their employees and stimulate the economy.
Additionally, the Federal Reserve has said its policy going forward after their September 2020 meeting is to keep interest rates near zero. This will be for at least the next 12 months if not further into 2022 or indeed 2023.
Hurricane Sally has dumped huge amounts of rain on the southeast corner of the United States. This has brought a large amount of damage which will also see re-building and stimulation to the economy.
What is happening to the California economy?
The California economy is under a challenge from different pressures. Something we are not talking about in too much detail at the moment, but the west coast wildfires hitting California, Oregon, and Washington have been devasting. I was told by one fire manager there is an ‘open checkbook’ to fight the fires. After the fires are brought under control, there will be re-building which will stimulate the west coast economies.
The four major areas to watch for the California economy are, according to Professor Robert Eyler:
- Jobs
- Housing
- Business closures and incomes, and
- Consumption behavior – what, how and when are consumers spending
In southern California, Los Angeles County is hurting as tourism and the movie industry have been shut down. Orange County, due to its tech sector, is not doing as badly.
The rural counties in California are doing well as there is a drain of residents from the more expensive southern California and Bay area counties plus they are more reliant on agriculture which continues to be stable.
What is happening to the California job market?
As the graphic below shows, about March 16, 2020, was the date the California Governor and local state California counties went into shutdown mode.
As the graphic below shows, from about March 16, San Francisco County and Los Angeles county that has been in place to the end of June 2020. In July 2020, the numbers are starting to decline with San Francisco, Los Angeles, San Diego, and Sacramento counties about the state of California average while Fresno shows much greater stability.
Watch the CA housing market
Just as jobs are important, so too is the housing sector. If housing prices decline and decline quickly this is very much a negative as this affects consumer confidence and what flows from it.
As the graphic below shows, the median listing price for a house in 5 different counties in California from July 2016 to July 2020 is within the normal range with Los Angeles County, Sacramento County, and Fresno County, in fact, seeing increases.
What is happening to Small Businesses in the California Economy?
As the graphic below shows from www.tracktherecovery.org, as of August 09, 2020, and compared to January 2020 the State of California saw a statewide decrease of small businesses open by 24.7% or the dark green line.
Two industry sectors have been hit by a decrease in the number of small businesses being open. These are the Retail and Transportation sector which saw a 29.6% decrease as of August 09, 2020, when compared to January 2020 or the light green line. The other industry sector was leisure and hospitality and it saw a 34.7 decline as of August 09, 2020, when compared to January 2020 or the red line.
CARES Act and supporting California businesses with PPP Loans less than $150,000
There can be no doubt that the Federal government passing of the CARES Act and the support it gave to businesses via the SBA PPP Loan program and SBA Economic Injury Disaster Loan program was real and helped many industries.
For those businesses that received a loan of less than $150,000, the average loan size was $35,961.
Below is a pie chart of the PPP lending in California by industry sector. This is at June 30, 2020, for loans up to $150,000.
CARES Act and supporting California businesses with PPP Loans greater than $150,000
For those businesses in California that received a loan greater than $150,000, there were 80,554 loans approved. Of those loans, there were 603 loans approved for an amount greater than $5 million. Additionally, there were over 80,000 loans approved between $150,000 and $1 million.
Below is a pie chart of the PPP lending in California by industry sector. This is at June 30, 2020 and for loans from $150,000 and up.
Is it the right time to sell my California business?
Despite what is happening in the economy, and there is more than plenty happening, the decision to value and then sell your business remains an incredibly personal decision.
- The labor marketing is recovering as we can see with unemployment claims. This is great news as it represents stability as we move into the ‘new normal.’
- Interest rates are at historically incredibly low levels. This is also great news as it helps businesses not only with their borrowing costs but also homeowners who are refinancing to provide them with additional discretionary spending.
- The upcoming Federal elections are moving to a conclusion and the removal of uncertainty that will affect investment decisions.
- COVID-19 is waiting for a vaccine and that appears to be closer and closer.
- Housing prices are stable and so providing an orderly market for those that want to buy or sell.
- For those of us in California, one of the few negatives is that we can probably expect an increase in taxes.
- One of the biggest factors to consider is the industry sector your business is in. More stable industry sectors in California seem to be manufacturing, construction, warehousing, and logistics.
If you are thinking of selling your business and want the process to be as clean and successful as possible, the first place to start is with a business valuation.
An accurate business valuation is not only important to the seller but it’s important as a buyer may require finance such as an SBA loan to buy a business and an SBA lender will want the details of the business being sold to be presented clearly and cleanly.
Once the business valuation is clear, there are many steps to successfully sell a business. Here is a summary of the Twenty Four steps it typically requires. If you would like more detail, here is a more comprehensive explanation about selling a business.
If you have questions about valuing or selling your California business, you are welcome to schedule a 30-minute conversation with me. Simply click this link to see my calendar and schedule a call with me by choosing a date and time that works for you. The rest happens automatically. I want to be your business broker and help you sell your business to the right buyer at the right time.
