Gloomy Portrait of Economy Ignores the State’s Strengths

To hear Arnold Schwarzenegger and other gubernatorial hopefuls tell it, the California job market is totally in the tank.

Last week, Schwarzenegger advisor George P. Shultz branded jobs the campaign’s “new four-letter word.” Fellow Republicans Sen. Tom McClintock of Thousand Oaks and Bill Simon Jr., who dropped out of the race Saturday, have spotlighted California’s recent steep employment losses as a reason to sack Gov. Gray Davis and bring in new leadership.

Even Gallagher, the comedian candidate and a self-proclaimed member of the “Party party,” is calling for business “obituaries” to be published whenever companies go belly up, underscoring the continuing pain in the state’s labor market.

Yet the picture being painted by those in the recall race -- that California is suffering disproportionately on the employment front -- is in many respects misleading. As a percentage of its job base, California’s statewide employment losses aren’t any more severe than those of the nation overall.

Since employment peaked in March 2001 at the height of the technology boom, California has shed 293,600 jobs, or 2% of its nonfarm payroll positions -- the same percentage loss as the United States as a whole.

In July, California’s unemployment rate stood at 6.6%, up a hefty 1.9 percentage points from the state’s pre-recession low of 4.7%. But the national increase in the jobless rate has been even greater -- up 2.3 percentage points to 6.2% last month from its December 2000 trough.

And although California is a laggard compared with Nevada, which boasted a July unemployment rate of just 5.4%, it looks like Seabiscuit compared with plodding Oregon. There, unemployment reached 8.1% last month, the highest percentage in the country.

In the eyes of some experts, the candidates’ lamentations over the job market are misdirected: What they should focus on instead is coming up with concrete ways to close the state’s projected $8-billion budget gap for next year. That is a subject few candidates have been willing to take on with much specificity.

“It’s very hard for people to distinguish the state’s budget from the economy,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. “And the candidates aren’t helping matters any.”

Not that the state’s fiscal problems are completely unconnected with the employment situation.

Much of California’s pain stems from the types of jobs that have disappeared -- tens of thousands of lucrative high-tech positions. The San Jose area, in the heart of Silicon Valley, has lost more than 200,000 jobs, or a stunning 19%, of its nonfarm payroll positions since December 2000. The fat bonuses, stock options and capital gains from stock sales that went along with such slots also have evaporated.

Adjusted for inflation, personal income in California plunged 3.4% from January 2001 through July 2003, compared with a decline of 0.1% nationwide, according to estimates from the state Department of Finance. By its count, no other state did worse.

In turn, the Golden State’s coffers have been clobbered. In fiscal 2002, personal income tax revenue in California plunged 26% to $33 billion, down from $44.6 billion the year before.

“We lost proportionately more high-paying jobs” than other states, said Howard Roth, chief economist with the state Department of Finance. “That’s why we’re in the fix we’re in.”

The challenge in California, and across the nation, is to get companies to expand their payrolls. While a recent spate of positive economic reports has been encouraging, economists say U.S. employers may not feel confident enough about a turnaround to commit to significant hiring until well into 2004.

On that score, Levy said, California is much like everyplace else -- waiting for a pickup in the national and world economies to kick-start the job engine.

“There is nothing fundamentally wrong with the California economy.... We have a good set of industries,” said Levy, noting that other states would love to have California’s technology, bioscience and entertainment clusters. “We wouldn’t even be having this discussion if we had a healthy national economy.”

Not everyone is quite so sure about that.

The state’s technology companies have shifted a significant amount of production to Asia to cut costs, leading some to believe that California’s high-tech employment numbers won’t rebound, even when business spending does. By some estimates, it could be a decade before Silicon Valley recoups all the jobs that have vanished in the last two years.

The shift to Asia may also put a damper on export growth. Shipments of computers and electronic products, California’s No. 1 export, have contracted for 10 straight quarters. When global demand for technology goods picks up, many U.S. companies will be supplying their foreign customers from plants in China rather than California.

“I’m not sure we should be so confident that, when the orders start materializing, the California factories that once filled those orders will still be operating,” said Jock O’Connell, a Sacramento-based trade analyst.

California’s cash-strapped government sector, which employs more than 1 in 6 workers, also won’t be doing much hiring over the next few years given the state’s fiscal troubles.

Beyond that, job creation is suffering because of the state’s badly broken workers’ compensation system -- a popular target for denunciation on the campaign trail. With medical costs spiraling, employers have seen their insurance premiums soar. And because prices for the mandatory coverage are based on the size of a company’s payroll, many employers have frozen their hiring or cut their staffs to reduce costs.

Turner Moving & Storage in Napa, for instance, laid off 11 of its 14 employees last year after its premiums tripled, even though there was plenty of work for the second-generation family firm, operations manager Pam Turner said. The company now uses subcontractors who provide their own insurance.

Although that has solved one set of problems, it has created another. Lacking the flexibility of its own workforce, and unwilling to hire just any contractor, the company hasn’t been able to take on as many jobs. Turner says revenue has fallen by one-third and family members have taken big pay cuts.

“We can’t afford the people to grow the business,” Turner said. “I’ve never seen it this bad.”

Other states have moved aggressively to capitalize on the situation. The Nevada Development Authority just launched a marketing campaign aimed at California firms. It urges them to “look hard at doing business in Nevada, or face the possibility of not doing business at all.”

Still, the entrepreneurial spirit appears to be alive and well in California, giving analysts hope that California’s job market will eventually turn around, regardless of who occupies the governor’s office.

Although venture capital spending nationwide has plummeted in the last few years, Golden State firms continue to grab at least 40% of the pie, about the same share as they had at the height of the tech boom.

New business incorporations have remained surprisingly strong as well, and this year they have even surpassed records set in 2000, according to data compiled by Wells Fargo & Co.

So much for California’s being an economic pariah.

“California has the brains and the people and infrastructure to create new businesses,” said Sung Won Sohn, chief economist for Wells Fargo, who is bullish on California’s prospects over the long run. “It has an innovative business culture that is tough to replicate elsewhere.”

In addition, California’s residential real estate market continues to sizzle. Last month, Bay Area home sales hit a four-year high, while the median sales price hit a record $444,000, according to DataQuick Information Systems. Not to be outdone, Southern California home sales soared to their highest level in 15 years, with the median price jumping to a record $328,000.

Although rising housing prices only add to concerns about the state’s cost competitiveness, they also show that California remains a place where people want to be, despite its current turmoil -- both economic and political.

“It may take several years before the economy is strong enough to keep the budget in balance and generate jobs at the rate that we have come to expect in California,” said Tom Lieser, senior economist with the UCLA Anderson Forecast. “We may end up throwing the bums out and replacing them with other bums.

“But eventually our focus will turn back to business,” he said. “And business will improve.”

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Contributions race

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These contributions were reported by major candidates on the recall ballot who have received sums of at least $100,000 to finance their gubernatorial campaigns. Totals are for contributions larger than $1,000, the smallest that must be reported at this time. Donations must be reported within 24 hours of receipt.

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Cruz Bustamante

Total reported: $264,100 from 30 contributions

Amount reported for 24 hours ending Friday: $59,400 from 13 contributions

* The day after she donated $1,000 to candidate Arianna Huffington, entertainer Barbra Streisand gave $1,000 to Bustamante. The information consulting firm Cordoba Corp. contributed $21,200.*

Arianna Huffington

Total reported: $167,500 from 43 contributions

Amount reported for 24 hours ending Friday: $7,000 from three contributions

* Aaron Sorkin, a writer and creator of NBC’s “The West Wing,” gave $5,000. Actress Sally Kirkland added $1,000.

Tom McClintock

Total reported: $312,000 from 69 contributions

Amount reported for 24 hours ending Friday: $6,000 from four contributions

Arnold Schwarzenegger

Total reported: $2,397,800 from 27 contributions

Amount reported for 24 hours ending Friday: $108,500 from seven contributions

* Schwarzenegger’s economic advisor, Warren E. Buffett, chipped in $21,200. Irvine Co. chief Donald Bren contributed $21,200. Bren gave the same amount to Peter V. Ueberroth on Thursday.

Bill Simon Jr.

Total reported: $399,949 from 37 contributions

Amount reported for 24 hours ending Friday: none

* Simon reported no new contributions for the second straight day.

Peter V. Ueberroth

Total reported: $2,042,800 from 74 contributions

Amount reported for 24 hours ending Friday: $160,500 from 14 contributions

* David and Virginia Hanna, executives at Hanna Capital Management, contributed a combined $42,400. Lindsey Ueberroth, a niece, added $2,500.

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Two anti-recall committees, which are not subject to the same contribution limits as individual candidates, have raised more than $4.5 million to help Gov. Gray Davis. Taxpayers Against the Governor’s Recall, established in early June, has reported receiving more than $2.5 million. Californians Against the Costly Recall of the Governor, formed in late July, has reported raising more than $2 million.

* Robinson, Calcagnie & Robinson, a law firm specializing in wrongful-death litigation, contributed $25,000 to Californians Against the Costly Recall of the Governor.

Reported by Times Staff Writer Joel Rubin

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Source: Campaign reports filed with the California secretary of state

Los Angeles Times

*Contributions to candidates from each outside source are limited to $21,200. There is no cap on the amount candidates can give their own campaigns.