The California Economy : Sputtering Ahead : Houses Sit. Bases Close. Storms Rage. But Movie Making and Tourism, Crop Exports and Technology are Driving The State Forward.
Think of California’s economy these days as a car with a powerful eight-cylinder engine--except not all the spark plugs are firing. The car is chugging ahead, but sputtering badly.
That the economy is moving forward at all, of course, is a major improvement from two years ago when the state was stopped cold in a severe recession. Jobs are again being created and consumer spending is ahead of last year.
But hopes were high early in 1995 that the economy was on its way to a full recovery. Instead, continuing problems in some key areas--notably the moribund real estate industry, including construction--are preventing the state’s $850-billion economy from kicking into high gear.
UCLA forecasters cited the sluggish national economy recently when they revised downward their estimate of California’s non-farm job growth this year to only 223,000 net new jobs--a gain of just 1.8%. Last year, they had expected a 3.5% gain for 1995. The forecasters see even weaker job growth of 1.7% in 1996.
California’s unemployment rate--7.6% in June--remains two percentage points above the national rate, though it is down from its 8%-plus levels of a year ago. Just under 13 million Californians held jobs last month, state Employment Development Department figures show.
Yet, even for those working, annual raises in California next year will shrink to 3.7% on average--down from 3.8% last year and the lowest increase in a quarter of a century, according to a survey released last week by the compensation consulting firm William M. Mercer Inc.
Still, some segments of the state economy--notably Hollywood’s motion picture and television industries, certain high-technology businesses and the bustling ports in Long Beach and Los Angeles--are humming along nicely, contributing steadily to job growth.
What else is working well? What else isn’t? Consider this a midyear check under the hood of the entire statewide economy and a look ahead at how the major parts are likely to perform in the coming months.
Real Estate
Real estate is nearly synonymous with California and its fortunes. So it is no surprise that the protracted slump in home building, home sales and commercial construction is keeping a lid on economic growth. In their June quarterly report, UCLA forecasters called real estate “the most depressed sector of California’s economy.”
Resales of single-family houses in May were off 23% from a year earlier, to an annual rate of 380,380, the California Assn. of Realtors reported.
Housing construction isn’t doing much better. Permits for building single-family housing and condominiums this year are expected to be unchanged from 1994’s depressed level of 97,000 units, before climbing to 133,000 next year, the Construction Industry Research Board forecasts.
The problem? It’s not just affordability, many analysts maintain.
Mortgage costs and other lending rates have again fallen to relatively low levels; a conventional 30-year mortgage in Southern California now carries an average fixed rate of about 7.5%. And home prices keep sliding. The median price of single-family houses sold this year is expected to be $180,420, down 3% from 1994, the realtors group said.
Severe winter storms got the market off to a bad start this year. And since then, consumers’ waning confidence in California’s economy and worry about their own jobs has kept them from signing escrow papers--particularly homeowners thinking about trading up to more expensive houses.
“People have some hesitancy about encumbering huge amounts of debt when their job outlook is still uncertain,” said Cliff Allenby, vice president of the California Building Industry Assn.
Nonetheless, the Federal Reserve Board’s interest rate cut July 6--its first reduction in nearly three years--is expected to give the real estate market some help.
“There’s no question that the first half of this year was a disappointment,” but the lower rates should spur “slow, steady and gradual” gains in housing sales, said Leslie Appleton-Young, the realty group’s vice president of research and economics.
Consumer Spending
Consumer confidence is mostly reflected in how much we spend. And we’re a lot more hesitant to spend than we were a year ago.
In each of the four quarters of 1994, taxable sales posted by the state Board of Equalization--a measure of statewide retail spending--rose at least 4% from the same period a year earlier, as Californians stepped up their spending after the 1990-93 recession.
But in this year’s first quarter, preliminary reports say the increase was a more tepid 2.7%, to $67 billion--a gain that’s practically flat after inflation is subtracted--and economists see little reason for the pace to pick up later this year.
The spending slowdown has resulted from the winter storms, a slowing national economy and, sure enough, deteriorating consumer confidence. Plus, the 1994 figures no doubt reflect extensive spending on earthquake recovery.
Recent spending growth has been “disappointing” and “surprising,” given that roughly 65,000 net jobs were created in the first four months of 1995 and personal incomes are higher, Wells Fargo & Co. economists said in a report earlier this month.
“We’ve had the military base closures, the weather, the run-up in interest rates at the start of the year, the slowdown in the U.S. economy and all of that against the backdrop of ongoing defense cuts,” said Gary Schlossberg, a Wells Fargo senior economist.
Movies / TV
Hollywood specializes in fantasy, but the reality is that the movie and television industries are currently among the pillars of the state economy. UCLA forecasters last month labeled movie making one of the fastest-growing businesses in California.
A big reason Hollywood is prospering: Movie and TV producers--and the scores of specialty shops, skilled tradespeople and post-production firms that support them--have a rapidly growing number of places to distribute their “software.”
Video games, interactive computers with CD-ROMs and 150-channel satellite broadcast systems are just some of the burgeoning distribution channels for Hollywood. The outlets are expected to multiply even more in the years ahead as Hollywood, high-technology and telecommunications firms collaborate further to bring more forms of entertainment to consumers.
Figures on Hollywood’s impact on the economy aren’t easy to come by, but two studies released last year indicate how important this industry has become. The studies said that, as of 1992, the business generated 534,000 direct and indirect jobs in California and that the industry spent $16.3 billion on payroll, goods and services.
The studies also found that although the big studios garner the headlines, 85% of the industry is composed of small firms that employ 10 people or less.
The industry today “is even more robust,” said David Friedman, an economist and lawyer who authored one of the studies.
One piece of evidence? The expansion plans under way at several studios, Friedman said.
Warner Bros. wants to expand its lots in Burbank and Sony Corp. has made a $100-million investment in its lot in Culver City. Earlier this year, MCA announced a $3-billion addition to its Universal City development over the next 25 years.
Travel/Tourism
The tourism business, which supports an estimated 691,000 direct and indirect jobs in California, is enjoying its best performance in years.
Thanks in part to the recent absence of the earthquakes, fires, civil unrest and other maladies that have scared away visitors in recent years, tourism spending in California is expected to climb 5% in 1995--its best gain since 1991--after rising 3.8% last year to $55.7 billion, the state Office of Tourism estimated.
Los Angeles and San Francisco returned to the list of the nation’s top five vacation spots for travelers this summer, according to the American Society of Travel Agents. Anaheim ranked eighth.
Another bullish factor: the dollar’s slide against several other major currencies, which gives foreigners more purchasing power here and thus prompts them to visit.
All of this is helping job growth. Employment in California’s amusement and recreation industries has risen steadily in recent months; in June, it was a solid 4.7% higher than a year earlier.
Other Services
More Californians (about 6.5 million) work in the service and trade industries than any other segment of the economy. This category includes not only the movie and tourism fields, but everything from supermarkets to restaurants to legal services to auto repairs.
In general, the service sector is stable these days, neither growing nor shrinking significantly. That no doubt reflects the fact that even if consumers’ confidence in the economy is waning, they still have to eat and get their cars fixed.
Total service employment in June was up 2.7% from a year earlier, the Employment Development Department said, while employment in its trade category--stores, auto dealers and restaurants--showed only a 0.3% increase from June, 1994.
Professional services--notably engineering and computer services--are powering a good part of California’s job growth, UCLA forecasters and other economists said. Firms such as Computer Sciences Corp. in El Segundo and the engineering specialists Parsons Corp. and Jacobs Engineering in Pasadena together have won several billion dollars’ worth of new contracts during the past year.
A rebound in the airline business is also helping. United Airlines, the biggest carrier operating out of the Los Angeles and San Francisco airports, is hiring more than 1,000 reservation agents in California this year to handle the surge in passengers’ calls.
Technology
Perhaps no sector is working harder to fuel California’s economic growth than technology. Sales of personal computers and semiconductors have been sizzling for the past two years.
But even this sector’s job creation has been uneven. Some firms, notably in the semiconductor arena, are hiring aggressively to keep up with the spurt in demand for their goods.
Direct employment in the production of semiconductors and other electronic components in California totaled 124,000 in June, up 5% from its average level in 1993, according to EDD figures.
The semiconductor industry’s widely watched book-to-bill ratio stood at a sizzling 1.20 in May--meaning its firms were getting $120 of new orders for every $100 in shipments. In early 1991, the ratio stood at 0.99.
Yet the computer industry, which was pounded during the recession, is largely trying to accommodate the upturn in its fortunes with the employees it already has. Direct employment in the computer and office-equipment manufacturing sector, at 83,300 in June, is still down 9% from its average level in 1993 and down 17% from 1990.
Still, all those computers have helped another California industry: the networking companies. These firms make the gear that links computers into networks, and several--such as Ascend Communications--have gone public in the past two years, giving them added capital for expansion.
Aerospace / Defense
Already battered from several years of post-Cold War cutbacks, the aerospace industry continues to shrink in lock-step with Pentagon and civil space budgets. Yet it remains a key component of the state’s economy.
Employment at aerospace and defense contractors--where more than 300,000 jobs have already been lost--continues to drop. Analysts see more layoffs in the months ahead, even if they’re not as severe as in recent years.
In June, jobs involved in making aircraft and parts were down another 11.8% from a year earlier, the EDD reported. Missiles and spacecraft jobs were down 13.6% and defense electronics jobs were down 9.2%.
It’s no less dark an outlook at California’s military bases. A federal commission, having already shuttered 22 bases in the state since 1988, plans to close McClellan Air Force Base in Sacramento (14,000 workers) and the Long Beach Naval Shipyard (3,000), although President Clinton unveiled a plan he hopes will save many of the McClellan jobs for at least five years.
The closures have exacerbated the steady decline in Defense Department employment in California, which in June stood at 97,400, down nearly 8% from a year ago.
There are a few positive signs. Lockheed Martin Corp. recently elected to keep its 600-acre Sunnyvale missile plant open while closing two others in the East. The Pentagon will probably order additional C-17 transport jets built by Douglas Aircraft Co. in Long Beach. Hughes Electronics Corp.’s satellite business, based in El Segundo, is thriving.
But in many cases, the contractors say these trends will serve only to stabilize their current employment--not create new jobs.
Other Manufacturing
The rest of California’s production force--which builds everything from industrial machinery to furniture to electronic components--is still struggling to fully emerge from the recession.
Like much of the economy, prospects brightened considerably for manufacturing in 1994 as the recession began to ebb. But then sales flattened again this year.
Now “people are unsure what’s going to happen” with the economy, said Wayne Torrey, president of the California Furniture Manufacturers Assn. “I don’t think anyone is comfortable with any of the predictions.”
On the bright side, total manufacturing employment in the state is about even with a year ago, at 1.77 million people, the EDD estimates. That’s actually an improvement, if the beleaguered aerospace business is excluded.
Even outside of aerospace, though, Torrey’s furniture industry is a good example of why manufacturing in California still faces rough sledding. There are more than 500 furniture makers in the Los Angeles area alone, which ranks second only to the North Carolina-Virginia border as the largest furniture-production region in the nation.
Yet, with consumers worried about their jobs and the economy, new furniture has become what’s known as an “expendable” need--one can do without it for a while. Throw in California’s lackluster housing sales and new housing construction, and it’s easy to see why furniture manufacturing has stalled.
Agriculture
This huge California industry ($20 billion in annual sales, 250 commodities) prides itself on being resilient in lousy weather and tough economic times. This year, it’s getting some of both--and, true to form, ag is holding up rather well.
The storms in January and March--not to mention a freak hailstorm in Fresno County last month--ravaged a number of this year’s crops, causing more than $800 million in damages. Almond production plunged 57%, winter wheat fell 21% and lettuce acreage dropped 15%, the state Department of Food and Agriculture estimates.
The upshot, of course, has been higher retail prices for those items. But the price hikes will abate over time--lettuce and strawberry prices have already fallen back--so it’s unclear how much revenue will be lost this year by California’s 76,000 farms.
“It’s going to be interesting to see if the higher dollar amounts make up for the lack of volume,” said Jim Zion, export manager at Food and Agriculture.
On the plus side, foreign customers are demanding more and more of the state’s crops. “California farm exports keep going up,” particularly now that foreign buyers’ purchasing power is increased due to the falling dollar, Zion said.
That will help maintain farm employment in the coming months. Farming supports 1.4 million direct and indirect jobs in the state, or 10% of total statewide employment, the University of California estimates.
Elsewhere
For all its problems, California’s economy is still one of the nation’s top spawning grounds for new enterprises.
The number of businesses incorporating in California last year rose 7% to 42,871. That was the fourth-highest total in the country, and the increase was well above the 5% growth rate nationwide for 1994.
It also marked the third straight year that incorporation numbers rose in California. But Dun & Bradstreet Corp., which compiled the figures, noted that the 1994 figure was well below the peak 59,697 incorporations the state recorded in 1987.
Government, meanwhile, is a question mark in California’s economic future. Total federal, state and local government employment in June, at 2.14 million people, was up 0.5% from a year earlier. But looming on the horizon are massive job cuts proposed in Los Angeles and Orange counties as part of budget reforms in those regions.
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What’s Up, What’s Not
Sectors of California’s economy that are improving or holding steady:
Filmmaking: Robust. Major studios plan lot expansions.
Professional services: Engineering, computer services are powering state’s job growth.
Retail Sales: Up 4% every quarter in 1994, but slowed early this year.
Tourism: Los Angeles and San Francisco among top five U.S. vacation spots.
Agriculture: Holding its own--with boost from exports--despite destructive storms.
Sectors that remain anemic:
Real estate sales: Waning consumer confidence makes this the economy’s most depressed segment.
Construction: Permits for single-family housing are below 1994’s weak level.
Defense: Layoffs continue to strike Pentagon, NASA contractors; base closings spread.
General manufacturing: Sales flatten after a strong 1994.
Source: Times reports
Still in Low Gear
Though many indicators are improving as California’s economy struggles to break free of the woes that strangled it in the early 1990s, others continue to lag. A look at the state during the decade:
Median sales prices for single-family homes, in thousands of dollars:
1995*: $180
Home construction, in thousands of units:
1996*: 133
Total employment, in millions
1995**: 12.7
Defense employment, in hundreds of thousands:
1995**: .974
Taxable retail sales, in billions of dollars:
1997*: $338
Tourism spending, in billions of dollars:
1994: $55.7
* Forecast
** As of June, 1995
Sources: California Assn. of Realtors, California Employment Development Department, California Trade and Commerce Agency, Construction Industry Research Board, UCLA-BFP Forecast
Researched by JENNIFER OLDHAM / Los Angeles Times
