California Recovery Could Start in Summer
The San Francisco Bay Area and Los Angeles County will suffer the brunt of California’s economic downturn, but a statewide recovery should begin by next summer, according to a growing number of business forecasters.
These forecasters predict that many of the state’s business centers, including San Diego and all the counties bordering Los Angeles County, will avoid falling into recession. Instead, these areas simply are expected to expand at a slower pace.
Still, most of the analysts agree that recent layoffs, a standstill in business growth in Los Angeles County and a devastating decline in the Bay Area’s high-tech sector have tipped the overall state economy into recession.
It would mark California’s first recession--commonly defined at the state and local levels as two consecutive quarters of shrinking employment--since the state’s punishing 1990-93 downturn. Analysts say, however, that the current decline appears far less severe than its predecessor, which cost the state more than half a million jobs and was focused in Los Angeles County. This time around, the damage is heaviest in Northern California.
“Things could be a lot worse if the whole state had the same affliction as the Bay Area,” said Tom Lieser, an economist with the UCLA Anderson Forecast. The UCLA center is one of several research groups issuing California forecasts this week.
California Better Off Than Rest of Nation
The nation last week was officially declared to be in recession, with the starting point deemed to have been March. Economists portray California, or at least most of the state, as losing less momentum than the nation as a whole.
That’s largely because California is less dependent on the hard-hit, so-called smokestack manufacturing industries than are many other parts of the country.
In fact, the only part of California clearly in recession is Santa Clara County, home to Silicon Valley, according to forecasters at the Anderson Center for Economic Research at Chapman University in Orange.
The Chapman researchers, who are issuing their economic outlook Wednesday, said the worst may be nearly over even in Silicon Valley.
“Most of the information technology cutbacks and the cutbacks in spending by businesses are behind us,” said Esmael Adibi, director of the Chapman research center, which is among the most optimistic of the forecasters.
“We have more or less experienced the bottom, and we don’t have fundamental problems such as the ones we had in the 1990 to 1991 U.S. recession, so California should outperform the nation.”
At the same time, the California legislative analyst’s office, which already has released the details of its forecast for next year, predicts unemployment will jump. It said the jobless rate, which hit a 31-year low of 4.9% last year, will climb to 6.7% next year, the worst level since 1996.
Likewise, the legislative analyst’s office forecasts that personal income, after taking inflation into account, will have reversed course from a strong gain of 5.9% last year to a decline of 2.5% this year. It predicted that in 2002 personal income would rise a modest 1.6%, largely because of an improving economy in the second half of the year.
As recessions go, this one appears to be mild, said Brad Williams, senior economist for the legislative analyst’s office. “So far, the state has remained fairly resilient, with consumer spending and employment outside of manufacturing holding up better than one might have anticipated,” Williams said.
Ted Gibson, chief economist for the State Department of Finance, added: “The good news is that the recession is already half over.”
Fed, Congress Are Factors in Recovery
The widespread expectation that even California’s most troubled areas will begin recovering by mid-year--around the same time the national recovery is widely anticipated--is based on several factors. Forecasters, noting that the Sept.11 terrorist attacks disrupted travel and other sectors of the economy, are basing their outlooks on the hope that the United States will be spared further terrorism.
In addition, the forecasters assume the Federal Reserve Board will keep interest rates low and perhaps cut rates further. Some analysts also count on Congress to pass a stimulus package that will lift the U.S. economy and, in turn, California’s economy.
The Bay Area’s tech industries, in particular, are expected to be helped by a comeback in spending by firms on high-tech equipment. The rationale is that computer-related goods have a short life cycle, and, as a result, companies that spent heavily on high-tech products in 1998 through 2000 will be starting to replace their equipment again.
A twist to California’s slowdown is that one key measure of the state’s economic performance--personal income--is slumping much more than another barometer, nonfarm jobs.
One reason is that the state’s big rise in personal incomes in recent years largely came from stock options and stock profits in high-tech industries. Those stock-related gains have shriveled amid the sagging stock market.
Also, Lieser said, the jobs that the state has lost are high-paying positions at dot-com firms and other technology companies.
The loss of that income is, in turn, undercutting tax revenues and spurring a state budget crisis that analysts say could inflict further economic damage. Spending cuts likely to be imposed to plug the budget deficit are expected to undermine local government and public school hiring, which have been important sources of new jobs in Los Angeles and other areas.
“It’s going to feel like a recession for most local governments,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.
Kyser, who will offer a preview of his economic outlook for 2002 on Tuesday, said the state budget situation is one of many worrisome issues for Los Angeles. The coming year will bring labor contract talks, and at least the possibility of strikes, in the crucial motion picture and longshore industries.
He also is concerned about the lingering damage to the area’s business travel and tourism industries stemming from the events of Sept. 11, as well as the slump in the county’s manufacturing firms. On the other hand, Kyser predicts that motion picture production, if contract talks go smoothly with the Directors Guild of America, will rebound from its current lull. Increased spending on military technology also could start helping the area, he said.
Kyser expects the county’s job gains to slow from 2% last year to 1.1% this year and a negligible 0.1% next year. The unemployment rate, he said, should rise from 5.6% this year to 6.9% next year.
