‘93/’94 Year-End Review and Outlook : State May Finally See a Recovery : But L.A. and Orange Counties Could Still Lag, Economists Say

California’s prolonged recession might actually end in 1994--not that most residents of the Golden State would notice.

Most economists predict that economic output and employment levels will bottom out midyear, with barely perceptible growth occurring in the second half.

So even if it comes, a recovery won’t do much to get the beleaguered state back on track.

“I think 1994 will be the transition year,” said Adrian Sanchez, regional economist with First Interstate Bancorp in Los Angeles. “But we’re laying most of our eggs in ‘95’s basket, where we will see the visible signs of recovery through most of the state.”

The most recent quarterly prediction by the widely watched UCLA Business Forecasting Project argued that the state will never regain the bulk of the high-paying defense, manufacturing and other jobs lost since 1990.

California is already 2 million jobs below previous trends, the UCLA forecasters said. And most new jobs will be added in the lower-paying service sector, especially retail trade.

UCLA forecasts a 0.2% dip in non-farm employment in 1994, then 1.3% growth in 1995. But it won’t be until 1998 that the state regains real strength, with 3% annual job growth, the forecasters say.

Leading the recovery will be the Inland Empire and central parts of the state, followed by the Bay Area and Northern California, with the rest of the Southland bringing up the rear.

What about Los Angeles County, home to most of the state’s defense industry? Most economists don’t expect a turnaround here until 1995 at the earliest.

Most economists say it is construction that will lead the state out of its long malaise. Once housing prices stabilize and potential buyers regain their confidence in the economy, there should be a spurt in home buying, leading to more construction and jobs.

So far, there are conflicting signs in the real estate market. New homes sales have been rising, but home prices continue to fall. And new housing starts declined on the West Coast in November.

Continuing low interest rates and home prices will draw more buyers into the market, said Pat Neal, president of the California Assn. of Realtors. “The worst is behind us,” she said.

Strong growth can be expected only in certain industries such as movies and television, business services, health care and tourism. None of those sectors is significant enough to fuel a robust recovery in California, economists said.

“The problem is you just don’t know what is going to be the new source of jobs,” said Ronald Schmidt, senior economist at the Federal Reserve Bank of San Francisco. “And you can’t anticipate these things. We didn’t anticipate the computer boom. Maybe you can look at biotech, or certainly, in California, at expanding trade opportunities. These are all things that might trigger a real surge of activity.”

Key to California’s recovery will be the resurgence of the U.S.--and then the European and Japanese--economies, which buy the state’s goods and services, said Stephen Levy, an economist and head of the Center for Continuing Study of the California Economy in Palo Alto.

Supporters of recent international trade pacts--the North American Free Trade Agreement and the latest accord under the General Agreement on Tariffs and Trade--argue that California stands to benefit greatly from the relaxation of tariffs and quotas the world round. But other analysts say the benefits of NAFTA will be modest and those from GATT will be long in coming.

“We should expect the California economy to lag the nation for one more year,” Levy said. “Even if we do turn around our growth, we’ll be less than the rest of the nation because of the drag of defense reductions.”

David G. Hensley, vice president of real estate research at Salomon Bros. in New York and former head of UCLA’s Business Forecasting Project, has an unusual take on the recent data--one that gives him more hope for the state’s immediate future.

Salomon Bros. recently compared state employment counts with federal ones and found important discrepancies in the totals, suggesting that employment growth in the states may have been undercounted last year, Hensley said.

In California’s case, 1993 employment growth may have been underestimated by as much as 120,000 jobs--meaning the state’s losses may already have started to level off. The official state estimate is that California lost about 170,000 non-farm jobs in 1993, Hensley said.

Another factor suggesting that things are already starting to look up, in Hensley’s view: Retail sales in key urban markets of Northern and Southern California showed strong year-to-year growth, on the order of 6% to 8% or better.

And the biggest indicator to watch: Announcements of defense layoffs dropped off in the last six months or so, suggesting that 1994 could see a breather in the rate of defense job losses, though such losses are sure to continue.

“That may be enough in itself to allow a technical turn in the economy to modest rates of growth, rather than a decline,” Hensley said.

There is one big risk to watch for in 1994. If tax revenues continue to fall, state and local governments may lay off large numbers of workers--layoffs that were largely avoided in 1993. Such layoffs could derail any nascent recovery.