Forecasts See State’s Economy Slowing--a Bit

Forecasters are widely projecting California’s fast-moving economy to slow next year, but only slightly, from a gallop to a trot.

The state’s employers are expected to create a hefty 400,000 additional jobs next year--almost as many as this year, according to several newly released reports.

They add that growth in personal incomes, retail sales and home values--although all dipping from this year’s exceptional pace--will remain brisk and continue to outstrip the national average.

“Keep buying California and its dynamic economy,” says UCLA economist Tom Lieser in his latest forecast, released Wednesday.

The consensus from UCLA and several other leading forecasters, including the Legislative Analyst’s Office, calls for personal incomes to rise by a robust 6.4% next year and for inflation to hold at the decade-long average of 3%. The sharpest drop-off will come in retail sales, from this year’s torrid 9% growth to a still-vibrant 6% increase next year.

If forecasters are more optimistic at 1999’s year-end than in past Decembers, it might be because they have been grossly underestimating the strength of the national and California economies for the last three years.

Indeed, a year ago, Lieser and other forecasters predicted a significant deceleration in California’s economy. But that has not happened.

Although California exporters did feel the sting of Asia’s slump, the recovery there has now begun to boost the state’s export industries.

Motion picture revenues for the year are already at a record high, even before the Christmas movie releases.

And stock in high-technology companies and venture capital funding, both concentrated in California, continue to soar, lifting incomes and spending to levels that strain belief.

California’s payroll tax withholdings in November surged by a whopping 24% over a year ago. The difference: largely stock options and bonuses.

“It’s unbelievable,” said Ted Gibson, economist for the Finance Department, which has tracked the state’s sizable windfall from the extraordinary income and sales tax gains of the last couple of years.

To most California economists, a stock market correction remains the single biggest threat to the short-term growth of the state and nation. But even after factoring in the possibility that the Federal Reserve will raise interest rates again next year, UCLA now sees U.S. economic output advancing by a robust 3.2% rate, down from 3.8% in 1999.

The other factor that could constrain growth next year is labor. As California’s unemployment rate has fallen below 5%--a figure no forecaster came close to calling--economists agree that the state’s annual rate of job growth will dip below 3% next year, after four successive years of 3%-plus acceleration.

Compared with other states, however, California still has a considerably bigger supply of unemployed and other potential workers to tap. RFA, a regional forecasting firm in West Chester, Pa., expects California’s population to grow by about half a million next year. About half of that will come from immigrants. And the vast majority of the newcomers will be working-age adults.

Mirroring the labor-market trends, California’s leading job growth centers have rotated from the Bay Area to Southern California to, now, the central region. And next year, the focus could shift to Los Angeles County, which has lagged the state in the rate of job production but whose relatively higher unemployment gives it an advantage in labor.

Jack Kyser, economist at the Los Angeles Economic Development Corp., thinks L.A. County will hit two milestones next year. Sometime late in the year, he and others are projecting, the county will reclaim the rest of the jobs lost in the recession earlier this decade--a feat that all other major counties accomplished long ago. The county, he said, will also pass the 10-million mark in population.

“There’ll be more demand for housing. You’ll see more traffic and congestion,” he said, calling it “the curse of good economic times.”

Indeed, a recent slowdown in construction of new homes is a cautionary indicator amid all the bullish signs in the state’s economy. Home building was the one economic indicator that fell short of projections this year. The latest forecasts see only slightly stronger new-home construction next year.

The slower home building has helped push up California’s median home prices this year by 8%, to $218,500 currently. But the California Assn. of Realtors now projects home resales to shrink by 8% and median home prices to rise by 5% next year. The main reason: Only 36% of California households can now afford to buy a median-priced home, down from 42% just a year ago, said G.U. Krueger, an economist at the California Assn. of Realtors.

Statewide, growth in construction employment is expected to fall from more than 10% this year to half that next year. If forecasters are right, the state’s job-growth leader next year will be business services--which could account for as much as a third of all new payrolls created next year. Its two main categories: temporary-help firms on the low-pay end, where workers earn about $19,100 a year, and software on the high end, with the average annual salary at $99,400.

And in many ways, economists say, business services typify the increasingly uneven pattern of California’s growth. Business services now employ nearly 2 million people in California and will in a couple of years overtake manufacturing.