Forecasts for State Economy Growing Bleaker
The outlook for the California economy is getting much bleaker, hurt by the weakening national economy, the continuing slump in real estate and persistent losses in defense-related employment, top economists say.
If current trends continue, they say, the state’s recession could last until late 1992 and perhaps into 1993, making the economic downturn the most severe in California since the Depression in the 1930s.
The latest gloomy assessment was delivered Tuesday by the UCLA Business Forecasting Project, which predicted that the state’s employment would fall 3.2% this year, the sharpest drop since World War II.
“And should the downturn (in employment) spill into 1992, which seems all but certain, it will have lasted longer than any since the Great Depression,” said the report, which was prepared by David Hensley, the project director.
The report, which cited eroding employment numbers at the state and national level, was much more pessimistic than other recent quarterly economic forecasts issued by UCLA. In June, Hensley predicted that growth in California would resume by year’s end, although by September he had pushed back the beginning of the state’s recovery into early 1992.
“In hindsight, even this gloomy (September) forecast was obviously too optimistic,” he said. “The mood will be very sour in the state over the next 12 months” as layoffs continue in the construction, financial and government sectors.
“We look at 1993 as the year of legitimate recovery,” Hensley said. “We could turn up sooner--I’m not saying that that’s implausible--but my heart wasn’t in arguing it.”
On the national level, UCLA is predicting that the economy is poised to take a second dive into recession after a period of anemic growth. The fourth quarter is expected to bring negative growth in the inflation-adjusted Gross National Product of 0.2% followed by a 1% decline in the first quarter of next year, the study said.
UCLA’s national forecast is much gloomier than most. For example, a survey of 50 economists by Blue Chip Economic Indicators of Sedona, Ariz., found that the consensus is for 1.3% real GNP growth in the current quarter.
While Hensley is among the most pessimistic economists on the financial condition of California, he is not alone in his predictions.
Jack Kyser, chief economist of the Economic Development Corp. of Los Angeles County, which tries to promote local business activity, said he agrees that the California economy is in for a prolonged hard time.
“Our forecast for California in 1992 literally calls for employment to be about flat after a 2% decline this year,” Kyser said, noting that a restructuring in the construction, real estate, financial services and aerospace industries is exacerbating the effects of recession.
“There are a lot of forces at work and you don’t see anything that’s going to provide the spark of recovery. I think it’s going to be a tough, hard road for us over the next couple of years.”
As for the national economy: “It’s worse than Humpty Dumpty and all the President’s men can’t put it back together again.”
Some East Coast analysts have been predicting a Texas- or New England-style economic collapse in California for several months, but their forecasts have often been largely dismissed in the state as being alarmist and misinformed.
For instance, Prudential Securities bank analyst George Salem, known for his bearish outlook on California banks, predicted in a Nov. 13 report that California was headed for a recession that would be worse and last longer than the nation’s.
“In 1991, we are concluding that California’s longer-term growth will slow materially, causing the state to lag the U.S. economy in 1991, 1992, and most likely beyond,” Salem said. “Most importantly, we view the changes as structural in nature.
“We believe that 1991 will be looked back upon as the end of the old, positive California and the beginning of a much more difficult economy.”
The signs of the recession seem to be everywhere in California. The state’s unemployment rate was 7.4% in November compared to a 6.8% national rate, sales of existing homes have dropped for seven consecutive months, the office vacancy rate is rising in many areas and the state’s budget deficit is more than $2 billion and is likely to grow wider.
Hensley described the number of jobs lost in California as “shocking.” The California Department of Finance recently said that employment fell by 446,000 from June, 1990, through March, 1991. Statewide employment fell by 25,000 in November.
Next year, 38,000 more construction jobs could be lost as building continues to slow, Hensley said. Bank consolidations, particularly the merger of BankAmerica Corp. and Security Pacific Corp., could eliminate 30,000 jobs. The aerospace industry will continue to shrink as defense cutbacks are imposed, with 24,000 jobs dropped next year and 20,000 in 1993, he said. Sharper reductions could result if Congress kills a major program such as Northrop Corp.’s B-2 bomber.
“The vigor of the recovery will be limited by continuing layoffs in the state’s aerospace sector, the weak commercial real estate market, and lingering fiscal problems,” he said in the report.
The continuing drought and last year’s freeze are also negative forces, Hensley said. In addition, financial pressure on the state banks has limited credit availability, consumer spending is lackluster and retail sales are stagnant. To be sure, there are other economists who are more upbeat. But even many of them have toned down their optimistic summer forecasts, which were influenced by a wave of postwar spending.
California in 1991 “will clearly come in below the nation”--the only year in recent memory since 1971, said Jerry Jordan, chief economist at First Interstate. “What we need in California is perestroika. In a sense, (Russian President Boris) Yeltsin’s problem and (California Governor Pete) Wilson’s problem are similar--restructuring and getting markets working again.”
Still, Jordan is looking for a pickup in California by the spring. “I think by spring we will be improving,” he said.
Bank of America senior economist Fred Cannon acknowledged that recent employment numbers for the nation and California have been “a little depressing. . . . Until we get job growth it’s hard to see that we’re going to see a turnaround in the United States or California.”
However, Cannon doesn’t expect California’s recovery to significantly lag behind the nation’s when it occurs, perhaps by the middle of next year.
“When the United States begins to rebound, California will too,” he said. “Traditionally, we tend to underestimate the length and depth of recessions and we’ve certainly done that. But we also tend to underestimate the strength of recoveries and let’s hope that’s the case too.”
A Dismal Picture
Here is a look at total employment in California according to the UCLA Business Forecasting Project. UCLA researchers predict that the job picture will get bleaker before it starts to improve in late 1992 or early 1993.
