Southland Expected to Stay Strong in Recession
Despite emerging problems that are likely to slow California businesses, the state’s expansion will chug ahead next year whether or not the nation stumbles into recession, according to a variety of economic forecasts.
Even UCLA forecasters, who Monday delivered the most downbeat of a recent cluster of economic reports on the outlook for California and the Los Angeles area, predicted that the state will shift into no worse than a moderate rate of growth.
The downshift could be much more pronounced in the San Francisco Bay Area, where a “dot-com” boom over the last few years has driven down unemployment to extraordinary lows, boosted home prices to unprecedented highs and created a severe shortage in office space. Southern California, particularly Los Angeles, never revved up that much and, consequently, isn’t likely to slip that much, analysts say.
Statewide, UCLA’s forecast calls for the unemployment rate to rise from an average of 4.9% in 2000--the lowest level since 1969--to 5.4% next year and 5.9% in 2002. A jobless rate of 5.4% would be the state’s third best in the last dozen years.
UCLA analysts based their California forecast on their related prediction that the national economy will fall into a brief, mild recession during mid-2001, a somewhat more bearish outlook than that of most leading prognosticators.
One reason that California’s economy next year could prove more durable than the nation’s is linked, analysts say, to the relatively late arrival of the expansion in the state. California--hit harder, later and longer by the recession of the early 1990s than other states--lost hundreds of thousands of jobs in a severe aerospace and defense industry downturn.
As a result, in areas such as Los Angeles County, which has endured unemployment above the national average for a decade, the labor market isn’t as tight. “Consequently, we have a pool of workers available to sustain employment growth,” said Anil K. Puri, co-director of the Institute for Economic and Environmental Studies at Cal State Fullerton.
Analysts say California’s economy also will be supported by its extensive international trade, particularly with Mexico and East Asia. Even as many of California’s dot-com companies are collapsing, overall the state is expected to continue selling lots of high-tech services and products overseas and across the country.
Still, forecasters point out that the state and Southern California economies are vulnerable to numerous threats. The tight credit that has made financing scarce for all U.S. businesses, a result of six Federal Reserve interest-rate hikes since mid-1999, is hampering capital-hungry companies in California too. Analysts say that has been particularly evident in the dot-com upheaval in the Bay Area.
California faces skyrocketing costs for natural gas and electricity, along with the likelihood of periodic blackouts stemming from the current severe strains on the state’s power grid. In many cases, analysts have based their upbeat predictions on the assumption that state officials will take action to ease the worsening energy crunch.
That squeeze “could have a sizable impact, but it won’t mean a change in the trend of the economy,” Puri said.
Still, Puri conceded that California economists are unclear on whether the energy crunch “is a short-term problem of management or a long-term problem of generation of electricity.”
A further problem is the prevalence of working-poor and low-income families despite years of economic recovery. In addition, communities in the San Joaquin Valley continue to be riddled by double-digit unemployment rates that show no sign of abating.
For the next year or two, however, most California forecasters aren’t very worried about the overall health of the state economy. Tom Lieser, the UCLA economist who was in charge of the university’s new state forecast, contrasted the outlook for next year with the devastating recession that California suffered in the early 1990s.
“This is not another aerospace meltdown,” Lieser said, referring to the outlook for next year. “It’s not a meltdown at all.”
Other leading forecasters, including Ted Gibson, chief economist for the California Department of Finance, see an even milder slowdown for California. He predicts that the number of jobs in the state will climb nearly 3% in 2001, down modestly from the brisk pace of about 3.5% or 3.6% this year. Most economists consider growth of more than 2% a healthy pace.
Gibson is counting on the national economy to slow next year but to continue growing, by historical standards, at a strong pace. But even if the nation falls into recession, he said, California “would escape with a slowdown rather than a full-fledged decline.”
The reason, he said, “is our industry mix. We are not heavily invested in the smokestack industries that would take the brunt of it.”
According to the UCLA forecast, Californians’ personal income--reflecting exercised stock options and other realized stock-market gains, along with regular pay increases and new jobs--is expected to rise 11.3% this year. That would mark the strongest year since 1984 or, taking inflation into account, it would be the best since 1969. Next year, UCLA projects, the gain will be a far more ordinary 6.7%, the weakest figure since 1997 or, after inflation, the weakest performance since 1995.
The economic outlook varies greatly from one part of the state to another. In the Bay Area, Lieser said, the Internet-related slowdown might push up unemployment from extraordinarily low rates of about 2% now to perhaps 4% in 2001 or 2002, a level that normally is a reflection of an economic boom. “They’d still be close to full employment,” Lieser said.
In Southern California, analysts say, unemployment and other economic indicators will weaken only slightly next year.
The Los Angeles County Economic Development Corp., for example, projects unemployment rising from 5.3% in L.A. County this year to 5.5% next year, while in Orange County the level would inch up from 2.5% to 2.6%. In Riverside and San Bernardino counties, which have enjoyed the fastest job gains in Southern California but where employment often is low-wage, the combined unemployment rate was predicted to climb from 5% this year to 5.2% in 2001.
Still, the California economy faces additional dangers. Gibson said that stock-market gains, including stock options, accounted for nearly one-fifth of the tax revenue flowing into the state’s general-fund coffers this year. If technology stocks remain in the doldrums, it could pinch the state’s still-flush treasury.
Likewise, the California economy could suffer if an international crisis crimps exports to key overseas markets, such as Mexico and East Asia.
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Slowing Down
Many of the state’s business forecasters say the California economy will slow next year but avoid falling into a recession. A new forecast from UCLA, one of the most bearish predictions for 2001, reflects that general outlook.
Unemployment is expected to remain low ...
2002 (estimated): 5.9%
... but income won’t keep rising as quickly.
2002 estimated): 5.4%
Source: UCLA Anderson Forecast
