If California were a country, it would immediately be a global force to be reckoned with. It is no secret that California is the largest and most productive state in the United States. Between Silicon Valley, Hollywood, agriculture, and tourism, there is plenty to be excited about in the Golden State.
California’s GDP in 2022 was $3.6T, representing 14.3% of the total U.S. economy. If California were a country, it would be the 5th largest economy in the world, and more productive than India and the United Kingdom.
In terms of military power, California has the most active-duty service members out of any state in the U.S., plus one of the largest nuclear weapons research and manufacturing facilities in the world. Plus, some of the world’s most influential companies reside in California: Disney, Apple, Google, Facebook, Oracle, and Wells Fargo to name a few. For portfolio investors, California shareholders have performed exceptionally well. If California were an independent nation, there is little doubt that it would do quite well on a global stage.
If we were to list the 50 states by economic output, it’s easy to see how dominant California really is.
California’s Economic Secret
So, what is California’s secret? Is it the weather? Silicon Valley? Hollywood? The higher wage rates? No, it is none of these, though these are certainly impacting the state’s economic output. The single biggest factor driving California’s economic success is the size of its 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 647K people reside in the state whereas California has 39M people. Note that this is the second year in a row that California has realized a net loss in its population. We go into California’s population decline and how to change California residency here.
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 biggest driving force of the U.S. state’s economic output levels: population.
If we were to adjust each states’ GDP by its population (per capita), California is no longer on top. New York now has the honors. California finishes in second with an $92K economic output per person. Note that Alaska is third on this list with only a population of 733K.
While not on top of a per capita basis, no one would argue the economic importance of the state. California’s economy is diverse. It 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 state’s GDP. However, according to the California Department of Food and Agriculture, “California agriculture is a $49B 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.Source: Bureau of Economic Analysis 2022 data in billion chained 2012 U.S. dollars
While the state has recently seen its population decline as California residents have changed their residency and moved to other states, its overall GDP has continued to grow with its heavy reliance on finance, real estate, and professional services. While California has a diverse economy, it is not so diverse that it can continue to rely on its historically large GDP while its population continues to decline.