California’s Revenge: A Recovering Economy
The early 1990s were years most Californians would rather forget. But in the second half of the decade, as the national economy begins to slow, the Golden State is poised for a “reversal of fortune” that could surprise not only the nation but also those Californians who believe the economic future has shifted to its Western neighbors.
Salomon Brothers’ David G. Hensley, the first economist to articulate the reversal-of-fortune scenario, sees California’s comeback tied to new economic realities that will benefit the state far more than its neighbors. According to Hensley, California’s economy, over the past year, has experienced a strong uptick in existing-home and retail sales, job creation and per-capita income growth. By contrast, growth rates in surrounding states, such as Idaho, Nevada and Utah, have been declining since 1993.
But in a state weary of layoffs, the spurt in new-job growth is most impres- sive. Fully 17% of the Labor Depart- ment’s 1994 newly revised job numbers--representing more than 230,000 jobs--are in California, including 50,000 more in supposedly moribund Los Angeles County, the largest such revision of any region.
Furthermore, between 1993-94, North Carolina, Colorado and Arizona--all top performers in the early ‘90s--suffered large drops in their pace of job creation, while the rate of employment growth in California outranked most states.
With such positive momentum, California may be well-positioned to withstand the “soft landing” that the Federal Reserve Board has been orchestrating. “The cyclical fundamentals in California vis-a-vis the other Western states have changed,” Hensley says. “Now, it’s California that’s really coming on.”
A California comeback defies conventional economic wisdom. U.S. News & World Report, for example, recently ranked California at the bottom of the 50 states in terms of economic prospects. Colorado, Utah and Texas routinely top most business-magazine surveys.
Now this pattern is reversing. Higher interest rates have slowed economic growth in the industrial Midwest, the mid-South and the Intermountain West, regions that are dependent on domestic demand for housing, appliances, autos and other items bought on credit.
At the same time, the weak dollar, Europe’s nascent recovery and continuing growth on the Pacific Rim have shifted the focus of new growth to markets outside the United States. This plays to the strengths of export-oriented California. Trade from the Los Angeles customs district last year grew 13.5%, helping the state to surpass New York.
Mexico’s economic tailspin is the major negative on the export front. But California’s hit from Mexico’s troubles is likely to be far less severe than what is felt in Texas, where Mexican trade accounts for 3.5% of total employment, or in Arizona, which is more than twice as dependent as California on southbound commerce.
California’s export strength results from its plethora of smaller, globally oriented firms, many of which are dominant in key service and technology niches. According to World Trade magazine, more than half of the hundred fastest-growing exporters are in the Golden State, twice as many as Florida, Texas and the rest of the West combined.
“California is turning around because it is a very entrepreneurial state,” contends David L. Birch, president of Cognetics, an economic analysis firm in Cambridge, Mass. This asset is the basis of Birch’s projection that more new white-collar office jobs will be created in Los Angeles and the Bay Area by 2004 than in Phoenix, Orlando, Seattle and Denver combined. Much of this growth will involve companies in creative services linked to international trade, tourism, multimedia and entertainment. At the same time, California is still the undisputed leader in virtually all science-based industries. During the past decade, it has actually increased its share of the computer industry, to 27%, while taking about 30% of the nation’s biotech sector.
Of course, such advantages could be squandered by government policies and a continuing declinist mentality. Yet, Sacramento has significantly reformed the regulatory and workers’ compensation systems that were helping to drive companies and entrepreneurs out of state.
These changes have already produced results. Over the past two years, for example, the number of companies leaving California has dropped from an estimated 140, in 1992, to a mere 40 last year.
California’s competitive position vis-a-vis its aggressive neighbors has been further enhanced by declines in real-estate prices. After rising at more than a 20% annual clip in the late 1980s, prices for building and renting space in the state have dropped by as much as 50%. It is now often cheaper to rent first-class office space in Downtown Los Angeles than in Phoenix or Seattle; state-of-the-art facilities deserted by aerospace giants in the South Bay are far less expensive than building new ones in the hinterland.
Equally important, the once huge differentials in housing costs between California and its neighbors have narrowed. Five years ago, Californians moving to Seattle reaped huge windfalls; today, the prices of homes in suburban Bellevue, home of Microsoft, are roughly equivalent to those in Mission Viejo.
These shifts in relative housing costs, as well as a strengthening recovery, have reversed the state’s net out-migration. From July, 1994, to January, 1995, in-bound migration grew by 12%, while the outbound traffic dropped by 19%, compared with a year earlier, according to California DMV statistics. A 60,000 loss in population has turned into a 11,000 gain.
Net migration to Washington State, the destination of choice for many California exiles, is now a small outflow.
With the state creating more high-tech, high-skilled jobs at a higher volume than any other, California’s appeal to younger, educated people seems likely to increase. By contrast, the large new populations inherited by our neighbors are disproportionately composed of retirees and aging, white, middle-class workers in search of “what America was.”
Still, all these emerging advantages do not assure that California will reap the fruits of reversal of fortune. The state’s comeback still depends on restoring its sense of confidence in the future, which all but evaporated in the early ‘90s.
