California Economic Recovery Stalled for at Least a Year, Experts Predict

California’s economy is stuck in a rut and isn’t likely to get out of it for at least a year, UCLA business experts said in a forecast to be released today.

Hobbled by a battered technology sector, slumping exports, a weak job market and a staggering budget deficit, the state won’t see anything close to a normal growth until 2004 at the soonest, according to the quarterly UCLA Anderson Forecast.

In contrast to the nation’s economy, which appears to be inching forward in low gear, the Golden State appears to be stalled in a recession with no signs of strong acceleration.

“The good news in California is that we won’t have a double dip,” said Tom Lieser, senior economist with the UCLA Anderson Forecast. “The bad news is that we haven’t left the first one yet.”

Defining a recession for a state isn’t as straightforward as it is for the nation. For the country overall, the general rule of thumb is two straight quarters of contraction in the gross domestic product. Most economists believe the U.S. recession, which began in March 2001, was over by late 2001 or early 2002.

There is no comparable shorthand for state economies. Gross state product figures aren’t available on a timely basis, so economists typically look to other indicators such as employment and income. By most measures, what’s happening in California isn’t pretty, though the southern part of the state is markedly stronger than the north.

For starters, the state’s job market is stagnant, with job creation at a virtual standstill. The latest figures from the state Employment Development Department show that California’s unemployment rate rose to 6.4% in October, up from 5.9% in October 2001, while the state has 23,100 fewer nonfarm payroll jobs than it did a year ago.

On that score, California is actually outperforming the nation. From its pre-recession peak in the first quarter of 2001, California’s employment has declined 0.5%, compared with 1.1% for the U.S. as a whole, according to data compiled by UCLA. Most of California’s job losses have been concentrated in the Bay Area.

The problem is that a disproportionate share of those declines have come in high-paid sectors such as information technology, telecommunications and computer services, leaving the state much worse off in terms of income than the rest of the country.

Over the same period, personal income in California has fallen 0.5% while personal income in the U.S. rose 3.9%. Lieser calculates that earnings in California’s manufacturing sector alone have plummeted 17.5%, or $21.4 billion, from their peak in early 2001, reflecting the loss of options, bonuses and other income related to the production of high-tech goods.

Declining incomes have taken a toll on California consumers, who aren’t propping up the economy like shoppers in the rest of the nation. Taxable sales in California are projected to decline 3.3% in 2002 after a flat 2001.

The collapse of the technology sector has likewise hammered exports. Shipments of computers and electronic products, the state’s No. 1 export, plunged 18% in 2001 and are down another 23% through the first three quarters of this year.

For state government, the bottom line is huge budget deficits as revenue from income and sales taxes has tumbled.

And there is little relief in sight. The UCLA forecast predicts no strong turnaround in the tech sector next year, with overall employment projected to grow by an anemic 0.7% in 2003 and personal income and taxable sales improving modestly.

This is a big reason that California legislators, who used every financing gimmick available to close this year’s $24-billion deficit, are looking at tax hikes and service cuts to plug another $20-billion-plus hole heading into the next fiscal year. It also underscores why the entire state is going to feel the pain even though the Bay Area has borne the brunt of the downturn.

“The hole we are looking at in the technology industry in the Bay Area ... isn’t going to fill up anytime soon,” said Lieser, who added that “there isn’t really anything else driving us forward.”

UCLA business forecasters, the first in the nation to predict last year’s recession, have remained among the most pessimistic about the U.S. recovery.

So far, the economy has lived down to their expectations. They project real U.S. GDP growth to expand by a lackluster 2.5% in 2003 as the nation waits for businesses to grab the baton from consumers and start spending again.

“We can’t get back to normal until business investment recovers,” said Edward Leamer, director of the UCLA Anderson Forecast.