UCLA Sees Recession in California

UCLA business analysts predicted Thursday that the state will sink into recession this year, a downturn triggered by the national economic slump, plummeting technology spending and, above all, California’s electricity crisis.

It was the first time any of California’s major forecasters has predicted the state’s growing problems would soon lead to a recession--an episode of shrinking economic output. If the forecast is accurate, it would mean Californians face rising unemployment and reduced spending power.

The outlook from the widely followed UCLA Anderson Business Forecast also reflected the wallop being absorbed by Silicon Valley, the result of the collapse of many dot-com firms and the severe cuts in spending on computers and software by many American companies.

UCLA’s forecasters said the state’s recession would be concentrated in the Bay Area, beginning this summer or fall and probably lasting six months to a year. They said Southern California might suffer no more than a slowing rate of business growth because, among other reasons, it is less dependent on technology businesses and has a more balanced local economy.

Still, UCLA analysts said every major region of the state is being hurt significantly by the uncertainty and rising prices stemming from California’s power crisis.

One of the package of reports released at the UCLA Anderson Forecast Conference on Thursday, produced jointly by a team of researchers from UCLA and Cambridge Energy Research Associates, characterized the energy crisis as the key factor pushing the state into recession.

“Every business in California is trying to make guesses about electricity availability and reliability over the next five years,” said Edward E. Leamer, director of the UCLA Anderson Business Forecast.

“It’s that kind of instability that can cause businesses to halt their investment plans and wait until the uncertainty is resolved, and it’s that waiting that causes the big problem for the economy,” he said.

None of California’s leading economic prognosticators foresaw the early 1990s recession, but UCLA’s analysts eventually were recognized as coming closest to calling the situation accurately. Over the last three years, UCLA’s forecast group consistently ranked among the top three in accuracy among the rotating group of roughly 10 California forecasters tracked by the Western Blue Chip Economic Forecast of Arizona State University.

But not all of the state’s leading business forecasters are persuaded that an energy crisis-related recession looms.

Brad Williams, senior economist for the California Legislative Analyst’s office, said that wholesale electricity prices have declined lately and added that Californians already appear to be cutting back on their use of power, a trend that probably will limit the number of rolling blackouts this summer.

“The state has been fairly resilient so far, and some of our worst fears about energy may not come to pass,” Williams said. “The Bay Area may be in a recession right now, but the rest of the state has so far managed to continue to expand, albeit at a slower pace. We don’t see the rest of the state slipping into recession.”

The UCLA forecasters, however, base their outlook on more than electricity woes. The forecast group, which in December became one of the first to predict a U.S. recession this year, is sticking with that gloomy outlook for the national economy. That national slump will mean fewer orders for businesses in California, the UCLA analysts said.

In addition, the UCLA forecasters said the state will be hurt by the declining fortunes of some of its key foreign trading partners, including Mexico and South Korea. Los Angeles’ entertainment industry also could slump, even if contract talks with screen actors succeed in heading off a costly strike, they said.

The concern among analysts is that Hollywood studios worked on so many movies late last year and early this year--in an effort to complete projects before possible strikes by writers (since averted) and actors--that the resulting backlog of films will bring an inevitable production slowdown in coming months.

If the Bay Area falls into a sustained recession while Southern California merely slips into slower growth, it would mark a turnabout from the early 1990s. In the ‘90s, the devastation of Southern California’s aerospace and defense industry dragged the state into a severe recession, while the Bay Area went through a milder, shorter downturn.

UCLA analysts emphasized, however, that the damage to the overall state economy a decade ago would not be duplicated in the relatively mild recession foreseen for late this year and early 2002.

In their forecast, UCLA analysts predict that the unemployment rate will rise this year and continue climbing until hitting a peak in 2003. Depending on how the electricity crisis is resolved, the university’s analysts anticipate an average unemployment rate of 7.1% to 7.5% in 2003.

Business analysts normally consider the national economy to be in a recession when the economy’s gross domestic product--its output of goods and services--declines for two consecutive quarters. For state economies, there is no formal definition of a recession, but it generally is considered as about half a year of a shrinking economy characterized by declining personal income levels and a reduction in jobs. Until Thursday, forecasters at UCLA and elsewhere simply expected California’s growth this year to slow down from last year’s torrid pace.

The energy segment of the forecast predicted up to 36 hours of rolling blackouts and 112 hours of cutoffs for “interruptible” business customers this summer. That was up from the Cambridge, Mass.-based consulting firm’s prediction earlier this year of 20 hours of rolling blackouts, but still far below some of the most worrisome power predictions from other prognosticators.

The Cambridge Energy report also made a thinly veiled plea for a more free market-based solution to California’s energy crisis than state officials have pursued. The report predicted the outcomes for the state economy under two basic scenarios.

Cambridge Energy, whose clients include electricity generators and utility companies, co-sponsored Thursday’s conference at UCLA. But Michael Zenker, who heads the firm’s West Coast operations, said the firm’s outlook is an “independent view” and was not slanted to suit the needs of the firm’s energy clients.

Even under the most optimistic energy outlook provided by Cambridge Energy and UCLA researchers, the state’s economic outlook is cloudy.

For instance, they forecast that California’s job total will shrink by 0.4% next year. At worst, the forecast says, the job total could shrink 0.8%.

Likewise, California’s output of goods and services, which UCLA estimates grew by 7.8% in 2000, is predicted to fall to between 1.6% and 2% this year. Next year, it is projected to fall to somewhere between minus 0.2%, and minus 1.1%.