California Has Lost Its Shield : Economy: State’s diversity unlikely to cushion the impact of recession and massive defense layoffs--it’s back to 1970.

In recent weeks, the economic outlook for California has markedly deteriorated. The sudden flurry of negative news on the U.S. economy indicates that the nation is falling into recession. Should it tumble, California will certainly not be spared. Worse, the situation in California increasingly resembles that of 1970, when the state was severely hurt by the one-two punch of national recession and massive defense layoffs.

After drifting for months, the national economy is gaining momentum--downward. The initial estimate of second-quarter gross national product, released July 27, was abysmal. For the first time since the 1981-82 recession, real final sales--led by declines in consumption, investment and net exports--fell. Only inventory accumulation and a surge in government spending prevented real GNP from declining. Then the government reported that employment declined by 220,000 in July--by 60,000 even after accounting for the loss of census workers.

These two reports signal that the United States is either already in or about to be in recession. Compounding the problem is Iraq’s invasion of Kuwait, which is driving oil prices sharply higher. Since more expensive oil means higher price inflation, long-term interest rates are moving up. As a result, the most promising method of avoiding recession--an attempt by the Federal Reserve to lower long-term interest rates--has been derailed for now.

Because of the high degree of interdependence between the U.S. and California economies, the outlook for the state is thus decidedly more negative. Much has been made of the California economy’s industrial diversity, which has enabled it to avoid the kind of slowdowns that have afflicted nearly every other region of the country. But this same diversity also virtually guarantees that the state will follow the nation into recession. The state’s economy is already showing signs of weakness.

--A precipitous decline in California home-building. As recently as last December, building permits for single-family units were being processed at annual rates of 160,000 units. Since then, they have fallen each month, reaching an annual rate of 98,000 in June. In Los Angeles County, new permits are off by 50% from last fall.

--Construction employment, flat since February, seems poised for a downturn.

--Statewide employment growth is running 25% behind 1989’s pace.

--Help-wanted advertising in Los Angeles, as reflected in the Los Angeles Times, is in the midst of the biggest percentage decline not associated with an outright recession in 30 years. On a seasonally adjusted basis, the number of help-wanted ads placed with The Times in July was down 13% from a year ago.

--Lackluster retail sales. Growth in California retail sales has been slow since last August, barely keeping pace with price inflation. Statewide sales of building materials declined in four of the past five months ending in April (the most recent month available), the first such declines since the 1981-82 recession.

--Myriad fiscal problems at all levels of California government.

Against this backdrop, McDonnell Douglas, Northrop, Lockheed and General Dynamics have scheduled layoffs of 15,000 to 20,000 workers for later this year. Large numbers of construction workers, meanwhile, will lose their jobs as the bottom falls out of the housing market. These two sectors have contributed 350,000 new jobs during the state’s current expansion. That number triples when multiplier effects are factored in. The sharp reversal in aerospace and construction employment already augured a much slower near-term economy, because no other sector is expected to accelerate to offset the losses.

Which brings us to 1970: Massive defense and space-related layoffs exacerbated economic damage caused by the national recession. Indeed, the damage was deeper and more widespread in California than elsewhere. Employment growth fell below that of the United States; the jobless rate soared to 8.8%, three percentage points about the national average. Net immigration plummeted, from 200,000 in 1968 to a record low of 96,000 by 1970. Ironically, a boom in home construction (the result of a housing recession in the mid-’60s) prevented the slowdown from being even worse.

Although it is too early to predict whether the harsh experience of 1970 will be repeated, it is unambiguously clear that California’s previous position of economic strength, relative to the United States, is fading and will not shield it against a future downturn.