NEWS ANALYSIS : Outlook for State Economy Grows Dimmer

The California economy, whose recovery looked so promising only a few months ago, has lately turned as cheerless as this spring’s cloud-covered skies.

The real estate market has gone into a ditch, with statewide home prices still falling and sales activity at a 10-year low, while unemployment remains stubbornly two percentage points higher than the national level.

Although many economists--like the meteorologists--insist that the clouds soon will lift, they acknowledge that the hopeful signs of last winter have faded.

“Obviously, California is at a pivotal point, and some unequivocal evidence of sharper growth is needed very soon,” said economist Chris Taylor of Wells Fargo Bank.

The state’s recovery, which began last year after a long and punishing recession, is still at an early enough stage that demand for housing and consumer goods would normally be expected to fuel the rebound. But if some positive signals do not start flashing soon, she said, businesses may decide to pare back their production and hiring plans.

Consumer confidence in the Pacific region--already far below that of the country as a whole--has fallen for three straight months, even as national numbers have climbed.

Robert W. Miller, president of Big 5 Sporting Goods in El Segundo, sees it in lackluster sales this spring. “When you’re feeling good, you’re out buying something,” he said. “Right now, for whatever reason, people here are not feeling good.”

Barry Pascal, owner of Northridge Pharmacy, said the recovery never reached his store in the first place. Even before the Northridge earthquake 16 months ago, Pascal’s sales were “flat and drifting down.” And now? “Still flat and drifting down,” he said.

Overhanging the regional picture is a national economy that has swerved so sharply downward that Rep. Fortney H. (Pete) Stark (D-Hayward) warned Friday that “the warning signs of an economic crash are everywhere.”

Stark, the ranking Democrat on the Joint Economic Committee, called on Federal Reserve Chairman Alan Greenspan to start cutting interest rates.

“I do not want to see high interest rates drive the economy back into a recession again, particularly since California has not yet recovered from the last one,” he said in a letter to the Fed chief.

The rest of the country managed a strong recovery without California’s help, but can California rebound in the face of a national downturn?

“If the U.S. economy slips into a significant recession, no, California can’t go it alone,” said Charlotte A. Chamberlain, economist and analyst for Wedbush Morgan Securities in Los Angeles.

However, Chamberlain and some others believe that the local recovery has only hit a temporary plateau on its way back up. “I prefer to think of it as the pause that refreshes rather than a stall,” she said of the current hiatus.

But there is no doubt that things have slowed.

California continues to create jobs, but at a slower clip now than in November and December and with some sectors--notably finance, insurance and real estate--losing employment. The rate of payroll job growth was less than 1% in the first four months of 1995.

After falling sharply through most of last year, the state’s unemployment rate has been wobbling around 7.75% since New Year’s--two percentage points above the national jobless average.

Likewise, California retail sales are growing, but the pace has slipped. March retail sales were 3.1% higher than in the same month last year--not a bad showing, but down from the 4.2% increase in January.

A clear negative is the crash of the Mexican peso, which may cut California exports to Mexico by more than $1 billion in 1995. With December’s peso devaluation, U.S. products became too expensive for many Mexican consumers, and sales have tailed off sharply.

On the plus side, the weakness of the dollar relative to the Japanese yen has helped California exporters compete against Japanese rivals for business across the Pacific Rim, noted economist Joe Mattey of the Federal Reserve Bank of San Francisco.

Another positive sign is that commercial lending by California banks has been strong, indicating that banks have confidence in their customers’ prospects and that businesses are expanding. Commercial and industrial loans by large California banks reached $29.1 billion in the first quarter, up 10% from a year earlier.

The commercial real estate market in Southern California has rebounded from the Depression-like days of the early 1990s. Southern California ranked as one of the top five areas in the country for real estate investment, according to a survey of national real estate investors released this week by CB Commercial Real Estate.

With rental and occupancy rates rising statewide, commercial property values are rising, unlike in the single-family housing market, where prices have been falling since 1991.

Economists who believe the California recovery will get back on track nearly all point to two things: interest rates and the weather.

They place much of the blame for slowing retail sales growth on the furious rains and flooding that hit the state in late winter and early spring. “Who wants to risk life and limb going out to the mall?” Chamberlain joked.

Poor weather is also mentioned in connection with the miserable housing market, as is the fact that the latest sales and price figures reflect home-buying decisions made several months ago, before interest rates started coming down.

With 30-year fixed-rate mortgages now coming back under 8%, the optimists say, the housing market inevitably will shake off its doldrums and restore consumer confidence in the bargain.

The Conference Board’s Consumer Confidence Survey for April showed a third straight decline in the Pacific region, while the much more robust national figure logged a third straight monthly increase. There are no separate numbers for California, but the state dominates the survey’s Pacific region.

“Confidence is going to be somewhat fragile [in California],” said analyst Lynn Franco of the Conference Board. “The Orange County bankruptcy, the weak housing market--all those things that make people tentative are going to affect confidence,” she said.

If lower rates are going to spark home sales, it hasn’t happened yet.

At Great Western Bank, May has been slower than April in terms of loan volume growth, and April had been slower than March, said Senior Vice President Ian Campbell.

Times staff writer Jill Leovy in the San Fernando Valley contributed to this story.