Recession Hits State With Surprising Force : Economy: California’s image as a haven from hard times is tarnished. War is not a boon to defense sector.
An employer advertises 28 job openings and the result is pandemonium: Anxious applicants race to the plant at dawn the next day, jamming traffic on nearby streets. Within a week, almost 14,000 people--some with advanced college degrees--have asked for a job.
A tale from the Great Depression? Hardly. The employer was Los Angeles-based Arco, and the scene took place recently at its Carson oil refinery.
“I couldn’t get in the front gate,” Doug Elmets, an Arco spokesman, recalled of the mob scene. “Security people were directing traffic. It was quite a sight to see.”
The national recession has hit California with surprising force, eroding the state’s mystique as a haven from hard times, a place somehow exempt from the grinding turns of the business cycle. Last week’s move by the Broadway department stores’ parent company to seek bankruptcy protection is just the latest sign of malaise.
In recent months, the Golden State’s unemployment rate has soared to 7%, third-highest among major industrial states. Weakness persists in construction, aerospace and retailing. A large deficit in the state budget threatens future problems. Consumer worries about the length of the Persian Gulf War and growing concerns over the state’s drought round out the joyless picture.
Despite an unexpected gain in jobs last month, “the problems are growing, and it’s hard to find a way out of this thing by the second half of the year,” says David Hensley, a UCLA specialist in the California economy.
There once was a widely held assumption that California--endowed with diverse industries and enriched by Pacific trade--would fare better than the nation overall in a recession.
But now, with key industries such as building and aerospace in a decided slump, the confident assumption has turned into a humble question: Will California maneuver today’s perilous economic currents as well as the rest of the nation?
Until recently, it appeared that California might escape much of the anguish of a national downturn.
When sluggishness filtered through the U.S. economy in 1989, California remained buoyant. Big retail stores counted on the region for robust sales, even as their markets in New England and other areas slowed down. Home builders kept breaking ground on new projects, even as their counterparts in much of the nation griped of mounting woes.
Then, in the first half of 1990, troubles crossed the California border. The hard-charging construction industry crashed into a wall, large aerospace employers announced thousands of layoffs, consumer spending slowed--and the state economy began to weaken. Since then, California’s slump appears to have caught up with the nation’s, economists say.
The Gulf War, moreover, has brought no large benefits to the state’s defense industry, which faces long-term cutbacks.
“The U.S. was slowly sliding in this downturn over an 18- to 24-month period,” said Ted Gibson, principal economist with the California Department of Finance. “In California, we were kind of flying high and went into it suddenly.”
Common explanations for why hard times galloped into California mirror the woes faced in other regions: an excess of commercial real estate development, the troubled thrift industry, expensive homes and a sharp pullback in available credit, as worried lenders sought to meet tougher regulatory standards.
“Even for projects that make a lot of sense, there simply has not been money to proceed,” said Leslie Appleton-Young, vice president of research and economics for the California Assn. of Realtors.
California, which set the nation’s pace in home building in the recent past, has been increasingly barren ground for builders. The total number of new housing units last year fell by 31%, “the largest drop since 1966,” said Ben Bartolotto, research director of the Construction Industry Research Board in Burbank. The 36% plunge in single-family units is the steepest to be found in the research board’s records, which go back to 1954.
The construction slump has sent a shock wave through much of the state economy, hurting builders, investors, workers and vendors of building materials. For those who own homes, the weak market may have led to a sense of diminishing wealth--and decisions to reduce spending.
This factor, while affecting homeowners in much of the nation, may be especially corrosive to public confidence in California, where many cheerfully assumed that real estate values could only move upward.
“It’s the swing from boom to bust (in construction) that’s going to cause turbulence in California in 1991,” said UCLA’s Hensley.
In a little-noticed announcement late last year, state officials disclosed another hint of trouble: an unusual slowdown in taxable sales between April and June, suggesting that worried consumers started to pull back earlier than recognized.
Sales of products subject to the California sales tax--groceries and medicine are not included--grew just 1.7% after inflation in the second quarter of 1990 over the same period a year ago, according to the State Board of Equalization.
The figures, which are the most recent available, show gains for apparel and some products, but losses in such key areas as autos, lumber and building materials.
“If inflation were included, the Los Angeles and Orange County (sales) figures would be negative,” said Jack Kyser, chief economist at the Los Angeles Area Chamber of Commerce.
The weak tax collections have exacerbated a state budget deficit that could hit $7 billion, prompting Gov. Pete Wilson to propose a series of spending cuts and tax increases in his new budget. Continued weakness in the economy could lead to layoffs for government workers, further slowing the economy.
“At some point, that deficit is going to hit really hard,” Hensley said. “It might be when the fiscal year starts in July.”
By all accounts, the move by Carter Hawley Hale, owner of the Broadway stores, to seek bankruptcy protection from its creditors also was prompted in part by the sluggish business conditions. Anxieties about the Middle East have depressed consumer spending in California for months, as they have throughout the country.
Yet retailers say the California market had lost some of its glitter even before war-related fears became an added drag on the economy.
Executives at Dayton-Hudson, the giant Minneapolis-based retailer that owns Target and Mervyn’s stores, note that the sales level in California started tapering off about six months ago and has not kept up with gains in some other areas, such as the Midwest.
One of Dayton-Hudson’s “biggest falloffs” in Christmas sales came in California, where it owns 206 stores, a major shift from the brisk growth of the past, said Kenneth A. Macke, chairman of Dayton-Hudson.
As retail sales have weakened, unemployment has risen. California’s 7% unemployment rate now is higher than that of all major industrial states except Massachusetts and Michigan. While all agree that the jobless rate is troubling, there is some confusion about what the number really means.
Based on a government survey of employers, California’s economy looked surprisingly strong in January, gaining more than 50,000 jobs. The finding was so contrary to other economic gauges, however, that experts wonder if it is a statistical aberration.
The bankruptcy filing by Carter Hawley Hale would seem “intuitively” to reveal more about California’s economic landscape than the January job statistics, said David Shulman, a managing director of the Salomon Bros. investment firm in New York and former California economic forecaster at UCLA. But the jobs gain “is still a puzzle,” he added, possibly signaling a swifter recovery than expected.
Another unknown for the state is the toll the drought ultimately will take on economic growth. In the long run, restrictions on water use--and publicity about them--would cut into construction, tourism and other industries, Hensley said. The one-two punch of the freeze and the drought already may cost Californians $6 billion, as problems in agriculture filter through the rest of the economy, he estimates. Sound depressing? The recession shouldn’t obscure some of California’s long-term assets, some say, including its growing consumer base, the wide assortment of employers and vital ties across the Pacific.
In light of such advantages, Los Angeles, Orange, San Diego and other counties should prosper in the coming decade, predicts Appleton-Young of the realty association. “Over the next 10 years, California will have very strong job creation relative to the rest of the country,” she said.
For now, however, economic realities make for an austere picture, one in which workers stampede toward opportunities that used to be plentiful.
In the past, Arco’s job openings for welders, equipment operators and other refinery workers--with starting pay between $11.42 and $17.45 an hour--might have attracted several hundred applicants, Elmets said.
This time, more than 1,000 job seekers had marched through the refinery door by 9 a.m. the day after the ad appeared in the Los Angeles Times and Orange County Register. Harried office workers quickly ran out of applications, yet would-be employees continued to flood the refinery.
Within a week, the number asking for work had soared to nearly 14,000, and that “doesn’t include the basket of resumes that were mailed in,” Elmets said.
