It is no secret that California is the largest and most productive state in the U.S.. California’s GDP last year was $2.7T, representing 14.3% of the total U.S. economy. California’s economy is so big that if it were a country, it would be the 5th largest economy in the world, more productive than the United Kingdom.
If we were to list the 50 states by economic output, it is easy to see how dominant California really is. In contrast, it is also east to see how small the economic output of the northern central region states are.
So, what is California’s secret? Is it the weather? The higher wage rates? No, it is not due to either of these. If we look at this from a mathematical viewpoint, the single biggest factor driving a state’s economic success is the size of it’s population. The correlation between these two factors is a staggering 98.2%. Yes, Vermont has the smallest economic output, but that can be explained by the fact that only 623K people reside in the state whereas California has 39.5MM people. Of course, there are other factors that drive economic growth, such as education levels, entrepreneurial business environment, availability of capital, etc. But these are topics for another day. I simply want to highlight the real driving force of the U.S. states economic output levels: population.
If we were to adjust each states’ GDP by its population, California is no longer on top. New York has the honors to this right. California finishes in 8th place with a $69K economic output per person. Note that North Dakota, Alaska, and Wyoming, all states that performed poorly on the nominal GDP chart, perform well here.
While not on top on a per capita basis, no one would argue the economic importance of the state. California’s economy is diverse one that is dominated by technology, trade, media, tourism, and agriculture.
The two strongest economic areas are those that surround Los Angeles and San Francisco with media, trade, and tourism driving the former and technology, trade, and tourism driving the latter. While California is the top agricultural producing state in the U.S., it only represents less than 2% of the states GDP. However, according to the California Department of Food and Agriculture, “California agriculture is a $42.6B industry that generates at least $100B in related economic activity.”
If we were to classify California’s economy by its different industries, here is how they contribute as a percentage of the total.
Finance, insurance, real estate, leasing21%
Educational services, health care, etc.7%
Arts, entertainment, recreation4%
Agriculture, forestry, fishing2%
Professional and business services13%
The state’s heavy reliance on finance, real estate, and professional services highlights its recent economic rise. The state fell as low as 10th place in a 2012 global economic ranking due to the impact of the 2008 financial recession before rallying to 5th place in 2017. While California has a diverse economy, it is not so diverse that the most recent recessions hurt the state more than others.
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