California’s Outlook Still Gloomy, Two Surveys Show : Economy: Uncertainty about federal taxes and health care reform is holding back the national recovery as well.
Economic activity in California continues to lag behind the rest of the country, while uncertainty about federal taxes and health care reform appears to be restraining the national recovery, the Federal Reserve Board reported Wednesday.
California’s gloomy outlook was echoed in a separate forecast by UCLA’s Business Forecasting Project, which reiterated its earlier prediction that the state’s economy will not begin expanding again until next spring at the earliest.
In a survey of economic conditions around the nation, the Fed said it found that businesses are hiring fewer workers and delaying potential investments in response to predictions of higher taxes and health care changes.
In addition, it said the unsettled political outlook may be inhibiting consumer spending, while potential changes in U.S. trade policy are producing anxiety among importers.
The “beige book” report, based on anecdotal evidence compiled by the 12 regional Federal Reserve Banks, said the economy is growing at a “slow to moderate pace” in most areas of the country and should continue to do so.
California, however, continues to lag. Sales remain flat, manufacturing is “in a serious slump” and activity in high-tech electronics is down, the report says.
“The majority of our respondents expect the economy to expand,” it says. “Most contacts in California and Washington, however, expect their regions to under-perform the national average.”
The report by UCLA, sponsored by its Business School, said in its latest quarterly survey that the three trends needed for California’s rebound still have not occurred: higher housing starts, a healthier national economy and stronger demand within the state for California’s goods and services.
The housing industry, for instance, remains “flat on its back,” the report says. “The window of opportunity for California to emerge from the recession this year has probably closed,” said study director David G. Hensley.
In the meantime, UCLA again predicted major layoffs among state and local government workers later this year because of the state’s fiscal problems. But its forecast of 21,000 layoffs was revised down from the 31,000 seen in its study from the previous quarter.
An economist at the Federal Reserve Bank in San Francisco attributed California’s sluggishness to declining defense spending, an overbuilt commercial real estate market and the restructuring of financial institutions.
The Fed’s observations were supported by private analysts.
“What we’re seeing is that the Southern California economy is still declining but at a slower rate than it has been declining,” said Michael Penzer, senior economist at Bank of America in San Francisco. “We don’t know if it’s hit bottom yet.”
The report is the latest of several recent indications that the U.S. economy, though expanding moderately, is growing more slowly than previously expected.
The Commerce Department reported Wednesday that gross domestic product--the basic measure of the country’s total output of goods and services--grew at a revised annual rate of just 0.7% from January through March, far slower than the 4.7% growth rate of the previous three months.
In a separate report, the Commerce Department said orders to U.S. factories for autos, appliances and other expensive durable goods fell 1.6% in May, the third consecutive monthly decline and an indication of continuing problems in the manufacturing sector.
The Fed’s “beige book” report is prepared eight times a year for the Federal Open Market Committee, which determines short-term interest rate policy. The Fed, which controls the interest rates at which banks may borrow money, usually lowers rates to spur investment and economic growth and raises them to stem inflation.
Despite the slow growth, recent signs of rising prices have created concern that the Fed might raise interest rates soon to keep inflationary pressures in check. Asked about that possibility Wednesday, President Clinton said he sees no need for a rate increase.
“There’s no inflation in this economy,” the President said. “I think long-term interest rates will stay down. That’s the key to the economy.”
The Fed report echoes the claims of some business groups that the Administration’s deficit-reduction and health care initiatives have had a chilling effect on private-sector activity.
“The concerns about fiscal and health care policy are already damaging the economy and offsetting some of the positive impacts of lower interest rates,” said Lynn Reaser, chief economist for First Interstate Bancorp in Los Angeles.
Reaser said the lack of confidence has had its greatest impact on employment practices. “We’re seeing companies using record amounts of overtime and relying on temporary help,” she said.
GDP
Gross domestic product measures all the goods and services produced in the United States. In percentage change from previous quarter:
1st quarter of 1993: +0.7% (final)
Durable Goods
New orders, seasonally adjusted, in billions of dollars:
May, 1993: 128.3
April, 1993: 130.3
May, 1992: 120.5
Source: Department of Commerce
