Few Predict a Rebound for State : Most Analysts Warn That California’s Recession May Continue Through 1993

The latest forecast for a California recovery: Don’t hold your breath.

Continuing layoffs, slumping real estate, shrinking defense budgets, a state budget deficit, earthquakes and riots all combined in 1992 to keep the state’s economy on the ropes. Economists are now wary about predicting a rebound any time soon.

“The recession will consume much if not all of 1993,” says David Hensley, director of the UCLA Business Forecasting Project. He bases his prediction on the prospect of more job losses in aerospace, the continuing glut of non-residential buildings, the state’s fiscal crisis and overpriced real estate.

And, he says, things could get worse: “I’m rather worried about whether the bad real estate market will spill over into 1993 and possibly delay the recovery until after 1993.”

Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County, says the real estate industry “had a little mantra: ‘Stay alive till ’95.’ Now it’s: ‘Make it through to 2002.’ ”

Since May, 1990, California has lost about 820,000 jobs, the state Department of Finance reports. The worst losses have come in construction and manufacturing, especially aerospace and defense. California unemployment reached 10.1% in November, its highest level since 1983.

In its December forecast, UCLA predicted that unemployment will exceed 11% in 1993 and remain above 10% through late 1995.

How bad was 1992?

* Retail sales for the first nine months of the year were up ameasly 0.8% over the comparable period in 1991, dragged down by Southern California, where such sales were down 2.8%, according to the U.S. Census Bureau. Figures for all of 1992 will be helped by a bump in sales from a good Christmas season and surprisingly strong after-Christmas selling.

* Housing starts in Los Angeles County were down 30% in the first 10 months of the year, one of the worst performances ever, according to the Construction Industry Research Board.

* California business failures were up sharply. Through September, 14,529 businesses folded, versus 10,846 in the comparable period of 1991, according to the Economic Development Corp. and Dun & Bradstreet Corp.

As the California recession has dragged on, some economists have been forced to reconsider their diagnosis of just what ails the state’s economy.

Hensley, for example, had been comparing the current downturn to the 1970s, when a national recession combined with a post-Vietnam defense downsizing to drag the state below the rest of the country. That has changed.

“This time, there are many more factors besides defense,” he says. As an example, “If you were to catalogue all the natural disasters that have occurred in this recession as one big factor, they would have a cumulative effect: the earthquakes, fires, floods, disastrous freezes and the seventh year of drought.”

Add to that the Los Angeles riots in the spring. Then there is the state’s never-ending budget crisis, which will result in the layoff of thousands of government employees. And there’s the merger of Security Pacific National Bank and Bank of America, which will result in more layoffs.

“It seems as if the state is in the worst recession since the ‘30s and is way beyond what anyone thought it would be,” he says.

California’s woes continue despite signs that the national economy has already begun to recover and amid suggestions that President-elect Bill Clinton will act aggressively to boost the national economy through infrastructure spending and tax credits.

But it’s uncertain how much a national recovery would aid the battered state.

Stephen Levy and Robert K. Arnold, economists at the Center for Continuing Study of the California Economy, in Palo Alto, concluded in their study that a 2% to 3% national growth rate in 1993 and 1994 would not be sufficient to bring the state economy back to its growth potential and to recover recession losses.

“Only a vigorous short-term national economic recovery will lead to an improvement in the California economy in 1993,” the economists concluded.

That’s because the usual factors that would pull the state and region out of the doldrums are nowhere to be seen.

Among other things, the state needs a boost from residential real estate and from trade and tourism. The latter requires strong recovery of the national and global economy. And things won’t turn up until consumers loosen their purse strings and begin once again buying big-ticket items such as refrigerators.

Of course, not all economists share the gloomy outlook. John O. Wilson, senior vice president and chief economist at Bank of America in San Francisco, believes that Clinton’s economic programs--if adopted--will make the U.S. economy grow at a rate of 3.5% in the second half of 1993, and that will boost the state.

About half the state’s job losses have been because of cyclical downturns in certain industries, and half because of restructuring and downsizing. A strong recovery in the national economy would be expected to produce a surge in cyclical California employment, which should more than offset continuing losses caused by restructuring.

“I expect we will add 800,000 to 1 million jobs to the cyclically sensitive and growth sectors of the economy over the next three years,” he says, adding: “And we’ll probably see continuing losses in the downsizing industries of another 400,000, for a net gain of 400,000 to 600,000 jobs in California” in that period.

Since many of the jobs lost to restructuring are in Southern California, he said, the region will under-perform the rest of the state. “The key to what happens there is the strength of the political and business leadership,” he says.

Adrian Sanchez, regional economist for First Interstate Bancorp. in Los Angeles, forecasts modest growth in 1993. “We see a turnaround occurring sometime in the first half,” he says.

But he shares the general assessment that Southern California will lag the state, with recovery here coming in late 1993 or early 1994.

“We still expect construction and manufacturing to continue its downsizing in ‘93, though there will be a bounce-back in services, trade and transportation,” he says. “And I think Northern California and the Central Valley will do much better than the south.

“There is a preponderance in the south of businesses related to defense and commercial real estate, and since the south represents well over half of the state, that’s why growth in the state will be so weak,” he says.

He agrees with economists who say that robust recovery won’t happen in Southern California until the market works out the oversupply of commercial real estate capacity and aerospace and defense manufacturing capacity--probably not until the mid-1990s, if then.

U.S. and California Economies

Both the U.S. and California economies slumped badly in 1992. This year things should improve for most Americans, but not much for Californians. These projections--from the UCLA Business Forecasting Project, Wells Fargo Bank and First Interstate Bank--tell the story.

Wells First 1992 UCLA Fargo Interstate Real GDP growth* 2.0% 2.8% 2.5% 3.3% Inflation* 3.5% 2.8% 3.3% 3.5% Interest rates** 30-year T-bond 7.7% 7.6% 7.75% 7.65% 90-day T-bill 3.5% 3.5% 3.40% 3.80% Jobless rate** U.S. 7.4% 7.1% 7.4% 7.0% Calif. 9.2% 11.0% 10.6% 9.9% Personal income (in billions) U.S. $5,049.3 $5,326.5 $5,342 $5,332 Calif. $639.8 $660.3 $667 $682

* Compounded quarterly

** Yearlong average