Economists Predict Strong Growth for State Next Year : UCLA, B of A Forecast Healthy Service Sector

Californians can look forward in 1987 to a year of solid economic performance, featuring gains in personal income and vitality in key industries, according to two surveys released Wednesday.

The UCLA Business Forecasting Project predicted that job growth in the state would exceed the national average and would be propelled by gains in service employment, trade, finance, insurance and real estate. Non-agricultural employment will grow at an average annual rate of 3% through 1989, the UCLA forecasters said.

Bank of America analysts said Wednesday that “California will benefit from lower interest rates, reduced energy costs and the decline in the value of the U.S. dollar, which will boost foreign trade. Much of the the state’s increased prosperity will come from expansion in the trade and service sectors, growth in aerospace and high-tech manufacturing and an increase in the population.”

Uncertain Outlook for U.S.

But forecasters found a more uncertain outlook for the overall U.S. economy, which may be boosted by a decline in the trade deficit but will also have to adjust to the changes in the income tax code. Larry J. Kimbell, director of the UCLA study, predicted in a statement that “1987 will be a year of transition. The economy will have to adjust to tax reform, immigration reform and significantly lower rates of defense spending than we have witnessed so far this decade.”

Kimbell added: “We will need lower interest rates to offset the near-term negative effects of these programs, and the Federal Reserve Board will deliver them.” Growth in the gross national product will rise from about 2.7% this year to 3.4% in 1987 and 3.8% in 1988, he said.

Not all economists are as optimistic, however. Earlier this week, Henry Kaufman, chief economist of the Salomon Bros. investment firm, predicted that the GNP will rise by a lackluster 2% next year.

Predictions for California

Turning to the California economy, the forecasters Wednesday predicted:

- Gains in personal income. UCLA said personal income would increase 5.9% in 1987, 6.4% in 1988 and 6.9% in 1989, while Bank of America, which limited its forecast to one year, said income would rise by 7% in 1987.

- A slow drop in the unemployment rate. UCLA said the rate, currently 6.7%, would stay the same next year but will decrease to 6.1% by 1989. Bank of America foresees a 6.6% unemployment rate for 1987.

- Modest price increases. Inflation in the state, currently about 3.2%, will gradually rise to 5.1% over the next few years, according to UCLA. Bank of America said next year’s rate will be 4.5%.

Despite the favorable outlook, B of A analysts cited several limitations on California’s economic potential. These include persistent international competition in manufacturing and agriculture and a glut of office buildings that will suppress new construction.