Outlook for State Remains Bleak, Analysts Say : Economy: California still lags the nation, the Federal Reserve Board tells the new Administration.

The Federal Reserve Board, in its first report to the new Clinton Administration, said Thursday that California’s economy continues to deteriorate even as conditions improve in the rest of the country.

Although holiday sales exceeded expectations in some regions, particularly the Midwest, California retailers reported disappointing seasonal revenues, the Fed said in its review of economic conditions across the nation.

The central bank’s assessment of conditions in California is bleak: Manufacturers continue to lay off workers as profit margins shrink. Housing prices are still softening across the state, and loan demand is weak. Hotel revenue is declining, while commercial rents and property values remain depressed.

“The state’s fiscal outlook remains troubled,” the central bank said in its “Beige Book” report, which is based on recent surveys of businesses and financial institutions by the 12 regional federal reserve banks.

Private sector economists said the regional recession is particularly severe in Southern California, which is weighted down by the twin burdens of a contracting defense industry and a real estate market suffering from a glut of vacant office buildings.

“The northern part of the state should begin to improve in the first half of 1993,” said Lynn Reaser, chief economist for First Interstate Bancorp in Los Angeles. “But the Southern California economy will probably not improve until late 1993 or early 1994.”

Analysts said the state eventually should benefit from the recovery that is underway in other parts of the country, although the aerospace and defense sector will continue to contract in response to declining defense spending.

“We’re looking for demand for California products to boost the (state’s) economy,” said Brian Cromwell, an economist with the Federal Reserve Bank in San Francisco.

Economists noted that California appears to be suffering in part from the continuing hemorrhage of businesses and residents to nearby states, where the cost of living is lower and regulations less stringent.

“The strong performance of other (western) states is at the expense of California,” said Sara Johnson, a regional economist with DRI/McGraw-Hill, an economic forecasting firm in Lexington, Mass.

But Reaser, the First Interstate economist, said she doubts whether the effect has been that great.

While some California businesses left during the recession, others refrained from expanding into other states because of a lack of funds, Reaser noted. Similarly, although some younger people have left the state to look for work elsewhere, many homeowners who once planned to move have deferred selling their homes because of the weak housing market.

Whatever the reason, neighboring states have seen some improvement in their economies this winter, the Fed reported. One national retailer said its holiday sales were up 7% to 8% in the Northwest, compared to only 3% to 5% in California. Electronics manufacturing is on the rebound in Oregon, the central bank said, and housing prices are rising in Utah.

The national recovery seems to be strongest in the Midwest, the Fed said. In the Great Lakes region, demand for passenger and truck tires has pushed tire production close to capacity for some manufacturers.

Even in once-troubled New England, economic activity increased “very modestly” at the end of 1992, the Fed said.