California Lags Overall U.S. Economic Recovery : Recession: Mixed signals in report are expected to cause the Fed to wait before deciding on changing interest rates.

The economy is improving modestly in most areas of the nation, but California continues to suffer from a combination of aerospace and defense cutbacks, anemic real estate markets and sluggish retail sales, the Federal Reserve Board reported Wednesday.

The central bank’s assessment of economic conditions in each of the 12 Federal Reserve districts across the country noted that business activity and consumer spending are either improving or holding steady in virtually every region except the West Coast.

Signs of recovery in some Western states are being offset by continuing weakness in California, the Fed said, citing Southern California as the most acute problem area.

The commercial real estate recession is allowing some Southland tenants to negotiate rent discounts of 25% to 40%, and foreclosures of major projects are expected to rise in 1993, the report said. And while retailers in most areas of the country are reporting improved sales, receipts actually are declining in Southern California, and consumer confidence remains poor.

Economists said the mixed picture portrayed by the Beige Book report, published two weeks before Fed officials meet in Washington to discuss monetary policy, makes it unlikely that the central bank will move interest rates either higher or lower.

“What (the report) is saying is, more of the same, maybe a little bit better, but more of the same,” said Donald Ratajczak, an economist at Georgia State University. Fed officials, he said, are likely to tell themselves “let’s wait until next month” before considering additional intervention in the economy.

The Southern California economy is heavily dependent on sectors that are not fully participating in the recovery, particularly defense contracting and real estate, analysts said. Aerospace firms smarting from defense cutbacks have announced wave after wave of layoffs, and high vacancy rates continue to bedevil commercial real estate.

Ratajczak said California also has been hurt by the withdrawal of Japanese banks that supplied credit and bought up real estate in years past, compounding the effect of the domestic credit crunch that has caused problems across the country.

The Beige Book noted that analysts are projecting a significant state budget shortfall over the next year, with official estimates ranging from $4.1 billion to $7.5 billion.

In other areas of the country, the outlook appears much brighter, the Fed reported. Besides a general increase in retail sales, the report said many retailers are optimistic about the critical holiday sales season.

The Commerce Department, meanwhile, reported that wholesale trade in October declined by 1%, and it revised its estimate of September wholesale growth to a mere 0.2%.