State Not on the Recovery Wave, Fed Says : Economy: Other parts of the country are showing signs of a rebound, according to the agency’s ‘beige book’ report. But California continues to lag.

California’s economy remains bogged down despite growing evidence of a modest recovery in most other parts of the country, the Federal Reserve reported Wednesday.

The Fed found that its San Francisco-based 12th District, which is dominated by California, is missing out on a national rebound in retail sales and is one of the weakest regions in manufacturing.

California “is somewhat disengaged from the rest of the country now, and we’ll watch this (national upturn) from the sidelines,” predicted David Hensley, director of the UCLA Business Forecasting Project.

The Fed’s “beige book” report on regional trends was the central bank’s most upbeat economic assessment since the middle of last year, but its low-key tone may have dampened the enthusiasm of investors hoping for a robust recovery. The report said business sentiment is “modestly more optimistic in many parts of the country, but it remains cautious.”

Stocks, which rallied Tuesday after a batch of encouraging economic reports, were mixed Wednesday.

Joseph A. Wahed, chief economist for Wells Fargo Bank in San Francisco, said the Fed’s report and other economic data show that “the country is climbing out of the deep hole it got into late last year. How strong is it coming out? That is the question.”

“It’s time to get the champagne out of the wine cellar, but don’t uncork it yet,” Wahed added.

Economists differed on whether the U.S. economy has already pulled out of recession, but there was widespread agreement that California, particularly Southern California, is far from seeing a recovery.

Hensley, for instance, said the state economy won’t bounce back until late this year or early 1993. The national economy, he said, has already begun its recovery.

Hensley predicted that statewide employment will continue to decline in the construction, real estate, financial services and defense industries, and will be flat in state and local government. “We have to absorb these blows before we turn up,” he said.

Both in the state and nationally, “there’s not going to be a meaningful economic recovery without a significant increase in hiring activity,” said John Lonski, senior economist with Moody’s Investors Service in New York.

Still, even in California--where the Fed survey cited “persistent weakness”--business sentiment was found to be improving. “Throughout the state, people think the economic climate may be turning around,” said Jack H. Beebe, research director of the Federal Reserve Bank of San Francisco.

The Fed’s beige book reports--delivered eight times a year and used to help guide the central bank in its monetary policy decisions--are based on questionnaires sent to business leaders across the country. In the 12th District, which covers California and eight other states, 12% of about 60 people surveyed in late February and early March said they expected output to decline in at least two of the next four quarters.

That figure was an improvement from 32% in January, when the last Fed survey was taken, and 25% in November. Also, 70% of those responding in the most recent survey said they expect the economy to expand over the four quarters, albeit at a rate below 2.5%.

According to the survey, lower interest rates are spurring sales of homes and autos, and recent rains have improved prospects for agriculture.

Nationally, the report cited a pickup in home construction and home sales, along with gains in auto sales and other retail sales. In another positive sign, inflation at the wholesale and retail level appears to be in check.

On the other hand, the Fed said, commercial construction remains “moribund,” and bank loan demand is flat. Mortgage refinancing, which has been a bright spot, appears to be tapering off.

Also, manufacturing remains “generally flat, with layoffs and rising unemployment often noted. Yet several districts report glimmerings of recovery in manufacturing, with improving expectations for future activity.”