CALIFORNIA ECONOMY: MORE WEAKNESS : OVERALL : Fed Says State Still Lags; U.S. Picture Is Mixed
Economic conditions in California remain weak, as the confidence of business leaders and consumers has deteriorated, the Federal Reserve said Wednesday in its survey of regional business activity.
The gloomy report on California came as the Fed said the economy has been growing unevenly across the country, with weak loan demand and flat real estate sales despite cuts in interest rates.
In its periodic economic survey, known as the Beige Book, the nation’s central bank sounded a more pessimistic note about business and consumer activity than in a June 17 report in which it said the economy was improving throughout the country.
California was the weakest of the Western states as it continued to face aerospace and defense-related layoffs, problems from the state’s budget crisis, slow retail sales, sub-par housing activity, soft loan demand and a glutted commercial real estate market.
“Some deterioration in consumer confidence is noted . . . particularly in California, where the state budget crisis and defense reductions threaten further employment losses,” the Fed said.
Whereas the Fed’s June report on the economy had found manufacturing strength throughout the country, the new report said that growth in factory output varied widely from region to region and industry to industry.
Retail sales also varied by region but showed modest improvement overall, it said.
“Consumer and business loan demand strengthened in only a few regions while remaining weak in most of the country,” it added.
Fed Chairman Alan Greenspan said separately in testimony before the Senate Banking Committee that inflation was largely in check but that long-term interest rates must fall before growth can take off. He also said that the economy, which expanded at a 2% annual growth rate in the second quarter, was growing--but at an inadequate rate.
“It is nonetheless moving forward at a degree and rate that I have said numerous times before is less than desirable,” Greenspan said.
The economic survey was done by the Federal Reserve Bank of Richmond, Va., based on information collected by the 12 Fed district banks before July 28. It is one of the reports considered by the policy-making Federal Open Market Committee, which meets Aug. 18.
The Fed’s report came as President Bush complained that the media gave a distorted picture of how bad things are in the economy.
In an interview with USA Today, Bush, defending his record on the economy, said, “There’s a distortion out there about how good things are or how bad things are.”
The Fed report paints a picture of an economy that slowed significantly after a spurt of growth during the first three months of the year, when the gross national product grew by an annual rate of 2.9%.
“We just literally stalled out,” said David Jones, chief economist at Aubrey G. Langston & Co.
California Economic Report
The Federal Reserve released its “beige book” report Wednesday on regional business and economic conditions as of July 28. Here are highlights from the report about California, where the Fed said “economic conditions remain weak:”
* Business sentiment: Executives are “less optimistic” than in June.
* Wages and prices: State budget crisis is likely to result in a 5% cut in higher education salaries, while fees at state universities are expected to climb 40%. Wage negotiations settled in construction arena without labor cost increases, but forest products industry grants 3.5% annual increases over two years.
* Retail trade and services: Retailers report that sluggish conditions continue in Southern California; auto sales are up slightly. Insurance industry reports layoffs. Budget crisis and defense cutbacks lead to drop in consumer confidence. Government being hurt by budget problems.
* Manufacturing: Production slowdowns and consolidations lead to more layoffs in Southern California’s aerospace and defense industries.
* Real estate: Housing market is sluggish. New home construction is weak, with permits down 12% in first five months of the year. Home sales below those of a year ago. Commercial real estate remains depressed in Southern California, with some properties being sold at a loss.
* Finance: Downsizing continues due to mergers, cost containment, slow loan demand and increased loan problems. More bank cutbacks predicted. Large banks report declines in commercial, consumer and real estate lending. Real estate sector is dominated by refinancings. With loan demand soft, banks are increasing their securities holdings.
Source: Federal Reserve
