CALIFORNIA ECONOMY: MORE WEAKNESS : Firms Are Going Under at a Record Clip in the State
Businesses are going under in California at a record pace, with failures increasing almost 43% in the first half of this year versus a nearly 17% rise nationwide, according to a survey released Wednesday by Dun & Bradstreet Corp.
The report suggests that instead of moving out of California, many troubled businesses are simply folding their tents. Much has been made in recent months of business flight from California caused by the state’s heavy regulatory burdens, high workers’ compensation costs and other factors that discourage businesses. But the number of business failures far exceeds the number of firms leaving California, economists said.
Further, preliminary evidence suggests that the number of business start-ups in California continues to decline, while beginning to increase nationally.
“The evidence is overwhelming that it’s all recession plus construction slump plus defense slowdown,” said Robert Arnold, senior economist with the Center for Continuing Study of the California Economy. “It doesn’t surprise me that we continue to have business failures.”
The business failure and start-up data provide more evidence to support projections that California’s recession may last well into next year.
“We’ve not seen the end of the bankruptcies,” said Lynn Reaser, chief economist at First Interstate Bank. She predicted that California won’t join the national recovery until early next year or even as late as the spring of 1993.
California was one of the states hit hardest by business bankruptcies in the first six months of this year, with 9,985 firms closing their doors versus 50,582 nationwide. Every major industry group except mining reported more bankruptcies than in the first half of 1991.
The state probably will continue its record-setting pace for the rest of the year, while the failures nationwide are expected to slow down as the national economic recovery builds, said Joseph W. Duncan, corporate economist and chief statistician for Dun & Bradstreet, a business information firm.
“It’s a bad situation,” Duncan said. “The sharp increases in services bankruptcies, particularly in New York and California, underscore the ongoing economic stress and recessionary pressures among smaller businesses that provide services to larger companies.”
Bankruptcies in the nation’s services sector rose 24.4%, second only to the 33.2% increase posted by the agriculture, forestry and fishing sector.
One bright note: Liabilities--debts and other obligations--of the failed firms fell slightly in California. That suggests that small businesses are going under, not big ones with huge numbers of employees. Those liabilities fell 3.8% to $5.6 billion in California. Liabilities rose only 2.5% to $65.8 billion nationally.
“What that means is the worst part of the failures is probably over in terms of economic impact,” Duncan said, adding that the liability numbers are still quite high.
“What really affects the economic system are the liabilities associated with the failure,” he said. “It’s the million-plus-dollar failures that have a big impact.”
The other side of the story is business start-ups, which Dun & Bradstreet currently is compiling for the first half of the year. Duncan said he expects start-ups to be up slightly nationwide but down in California.
“This is another sign of California’s economy lagging the nation’s,” economist Reaser said. “The effects on business have been widespread, cutting across the board from small retailers to construction firms to manufacturers to various services.”
Some of the failures can be attributed to lack of financial resources and too much debt left over from the leveraged buyout wave of the 1980s, Reaser said.
Getting bank loans has become a major problem for small- and medium-size businesses, according to a survey released Wednesday by the Arthur Andersen accounting firm and National Small Business United, a business group.
A total of 55% of small business owners surveyed nationwide by the Gallup Organization said they were having trouble getting bank loans. And the problem is worse in Los Angeles, where about 70% are having lending problems, said Anthony Radaich, Southern California partner in charge of Arthur Andersen’s Enterprise group, which specializes in small and closely held companies.
“Banks seem to be eliminating or cutting companies off from their lines of credit or reducing lines of credit,” Radaich said, attributing the crunch to regulatory pressure on lending institutions.
California Business Failures THE TOLL RISES
Total business failures in California:
1984: 10,434
1991: 14,466
Many new businesses opened their doors in California in the late 1980s and are closing themin the 1990s. In 1992, California businesses are failing at a record rate with 9,985 businesses closing their doors in the first six months of the year.
LOSS LEADERS States with the biggest increases in business failures for the first six months of 1992: Hawaii: 463.2% Iowa: 223.0 Vermont: 65.8 New York: 66.7 Wisconsin: 59.8 Arkansas: 45.1 California: 42.6 New Mexico: 34.5 Maryland: 34.1 Nevada: 33.1 Source: Dun & Bradstreet Corp.
