State Growth Expected to Slow to More Moderate Pace

Despite resilient, undeterred growth in recent months, California’s economy will slacken notably in the coming year as the state succumbs to pressures from the long-anticipated nationwide slowdown and slumping economies around the world, according to several newly released reports.

The more moderate pace of growth, after two years of strong expansion, means businesses in the state will generally reap smaller profits and more workers will feel the pain of layoffs, even as employment overall and personal incomes keep growing at a healthy rate. The heady home sales and price gains of this year also will moderate--indeed, that shift has already begun.

“The boom is over,” UCLA economist Tom Lieser said in his report, being released today.

“Life in California won’t be as pleasant in 1999 as in recent years, but it should remain good,” said Mark Zandi, economist at Regional Financial Associates, a national economic analysis and forecasting firm in West Chester, Pa.

By all accounts, job growth in California will continue to outstrip the national rate, reflecting the state’s younger expansion cycle and stronger construction market. Still, forecasters widely agree that California’s job growth will ease from the 3%-plus gains in 1997 and this year to a more moderate pace near 2%.

The difference is significant. In each of the last two years, the state has produced about 420,000 new nonfarm jobs. But that is likely to shrink to roughly 300,000 next year, if the latest forecasts are correct.

Job formation next year should keep pace with the projected growth in California’s labor force. So unemployment in the state, which has fallen to an average of 5.9% this year from 6.3% in 1997 and a high of 9.4% in 1993, is expected to rise only slightly next year. The nation’s jobless rate is projected to climb more measurably, to 5% from 4.5% this year.

The state’s housing industry, however, will probably fall short of meeting demand, even though new-home permits are projected to grow 15% next year, to about 150,000 units. That is in contrast to a decline in housing starts for the U.S.

Statewide, the California Assn. of Realtors is projecting that median home prices will climb 4% in 1999, to $213,350 for a single-family house, after jumping 10% this year. UCLA predicts a 5.7% increase in average home values in Los Angeles County for 1999, down from an 8.1% spurt this year.

For the first time this decade, Southern California’s economy figures to clearly outperform that of the state’s northern half, continuing a pattern that emerged in the second half of 1998 as Asia’s flagging orders for high-tech goods and other growth constraints led to a sharp slowdown in Silicon Valley.

Jack Kyser, economist at the Los Angeles Economic Development Corp., sees the five-county Southland region generating 51% of the state’s new nonfarm jobs in 1999, up from 48% this year, which is about the region’s share of the state population of 33.5 million.

Leading the way will be the sprawling Riverside and San Bernardino counties, followed closely by Orange and Ventura counties--all of which are expected to maintain job growth rates of 3% or higher. But Kyser is decidedly less optimistic about Los Angeles County.

His forecast calls for the county’s payroll growth to dip to a tepid 1.6% from 2.4% this year, driven by two trends: an incipient drop-off in aerospace and high-tech manufacturing and further erosion in the once-highflying apparel industry, which is being hurt by cheaper imports from Asia and an exodus of sewing work to Mexico.

Some mitigating factors, he predicted, include a rebounding motion picture industry and healthy gains in jobs that are largely missed by government data--the self-employed and independent contractors in entertainment, software and other growing businesses. “It’s a real volatile mixture out there,” Kyser said.

As with most forecasts, Kyser’s relies on emerging signs and economic models that draw on recent and historical trends. The state and regional projections also are based on certain assumptions about the national economy.

At this time last year, most economists predicted that the national economy would slow markedly in 1998, but that has not happened. Hence, last year’s projections for California’s job growth also turned out to be low.

But with mounting economic turmoil globally and cutbacks in business investments at home, there is near-universal agreement that the national economy will slow sharply next year.

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California: Downward Shift

Although varying in degree, forecasts clearly point to slower economic growth for California next year. A look at how several forecasters see the state performing in various economic measures:

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Nonfarm Personal Retail New housing job growth, income, sales, permits, % chg. % chg. % chg. in thousands 1998 Consensus 3.1% 6.8% 5.8% 129

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Nonfarm Personal Retail New housing job growth, income, sales, permits, 1999 California Assn. of Realtors 1.9 4.7 NA 150 L.A. Economic Development 2.1 5.6 5.3 124 Legislative Analyst Office 2.2 5.2 5.2 144 Regional Financial Associates 1.8 5.7 3.8 170 UCLA 2.4 5.3 6.2 150 Consensus 2.1 5.3 5.1 148

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Notes: 1998 figures are based on consensus of all projections. Regional Financial Associates’ definition of retail sales includes nontaxable items, such as groceries.

Sources: California Assn. of Realtors, Los Angeles Economic Development Corp., Legislative Analyst Office, Regional Financial Associates, UCLA-Anderson Forecasting Project

*NA=not available