Sharp Rise in State Personal Incomes Seen

Citing spectacular new wealth creation in California, leading economic forecasters say the state is on pace this year to experience the sharpest increase in personal income in nearly a decade.

UCLA forecasters say the booming stock market and sustained robust job growth should boost California’s personal income by a whopping 7.4% this year, gains that will enhance housing sales, business investments and consumer spending. That compares with a 7% increase the previous year and a projected 6.2% increase in personal income for the nation this year.

The forecast, which is to be released today, dovetails with a new report from the state showing broad and substantial increases in Californians’ adjusted gross incomes for 1997, the latest tax year available, especially for residents of the Bay Area.

In Santa Clara County, home to Silicon Valley and the epicenter of the stock market wealth buildup, about 91,200 couples--or one-third of all joint tax filers there--reported adjusted gross incomes of $100,000 or more in 1997.

That’s 16,000 more couples than in the previous year and more than double the number of joint filers in that income bracket compared with the 1991 tax year.

Overall, the median incomes for joint filers statewide surged by 6.4% in 1997 from the previous year, to $49,210, according to the state Franchise Tax Board. And analysts say 1998 was an even stronger year for income gains.

“This would be a nice expansion even without the new wealth which has been created here,” UCLA’s Tom Lieser said in his new forecast report. “That wealth, however, may be the edge which is carrying this economy to exceptional new heights.”

But Lieser and other analysts injected a strong cautionary note about the state’s increased reliance on the stock market, which is juicing up the economy in many ways but also puts the state at greater risk and is contributing to a widening disparity in incomes, even within regions of the state.

By far the largest component of personal incomes is wages, but workers in California, more than those elsewhere, have widely benefited from bonuses and options tied to the performance of stock. Moreover, other recent studies have shown that the stock market has become a driving force in California’s home sales. UCLA estimates that total consumer spending in California is at least $10 billion more because of stock gains.

The UCLA personal income figures, which come from payroll reports and include income related to stock options, actually understate the picture because they do not reflect capital gains from the sale of personally held stock. And those gains have surged by 50% or more in 1996 and 1997, providing a notable windfall to state tax revenue. Analysts believe that when 1998 figures are compiled, they will show another robust year of growth in capital gains.

But as Ted Gibson, chief economist at California’s Finance Department, put it: “Capital gains are not a one-way street. And we could have the unhappy experience of it going negative.”

In 1990, Californians’ personal incomes grew by about 8%, but after inflation the real gains amounted to about 3.5%. This year, after inflation, the income gain is likely to be about 5%.

The specter looms larger as the Federal Reserve appears certain to nudge up interest rates next week to cool the robust economy. UCLA forecasters are predicting two additional rate hikes of a quarter of a percentage point each by early next year.

Just how the stock market will react is the $64,000 question.

“Investors may react more negatively than we know,” Lieser said. “There has been a tremendous equity buildup, and this time it’s not all Bill Gates or a handful of them. There is always a risk with these boom conditions that they may bear some of the seeds of their own downturn.”

Said Mark Zandi, chief economist at Regional Financial Associates, a Philadelphia-area forecasting firm: “In that scenario, the economy will have a tougher year next year, and California will suffer disproportionately more.”

Federal reports show that the Bay Area in 1997 led the nation in average personal income and growth. And the new Franchise Tax Board breakdowns indicate a widening income gap between the major Bay Area counties and Southern California.

Based on joint filings, five counties in Northern California reported the highest median incomes in California for 1997: Marin ($80,253); Santa Clara ($69,893); Contra Costa ($67,041); Alameda ($60,896); and San Mateo ($56,904).

Marin also had the biggest increase from 1996, at 10%.

By comparison, Los Angeles County’s median income for joint filers was $42,629, slightly below the statewide average. That was up 4.9% from 1996.

Orange County, the Southland’s highest-ranking region, was No. 7 among 58 counties, with joint filers reporting median income of $55,846, up 6% from 1996.

Incomes for San Bernardino and Riverside counties came in close to Los Angeles, also lagging the rest of the state.

Economists, however, say 1998 and 1999 income figures should show Southern California making up some ground, because since last year job growth has been stronger in the southern half.

The relatively lower housing and other costs in Southern California also should favor this region in terms of business location and job growth.

“It’s not as important whether they catch up to the Bay Area,” said Stephen Levy, director of the Center for the Continuing Study of the California Economy. More important, he said, is whether workers in Southern California, especially lower-wage workers, will be able to make solid income gains and progress up the economic ladder.

Based on 1997 filings, the percentage of couples in L.A. County reporting incomes of $100,000 or more rose from 7% in 1991 to 10% in 1997. But those reporting incomes of less than $20,000 held steady at 22% of the filers.