Slow Upturn Is Seen for California

The state’s economic growth is likely to remain sluggish until 2005, when California is projected to begin a five-year spurt that will outpace the nation in job and income gains, according to a forecast being released today.

In their widely followed quarterly report, analysts at the UCLA Anderson Forecast say that despite a recent flurry of upbeat indicators, the economic quickening is coming too late to lift California’s performance any sooner than two years out. The UCLA economists, who downgraded their projections for the state’s weak economy in their midyear report, lower their estimates even more for 2003 and 2004.

They now expect the state will end this year with 42,000 fewer nonfarm payroll jobs than it had in 2002 -- a 0.3% decline contrasted with the 0.4% gain projected in June. In addition, they believe, employment, taxable sales and personal income, all key revenue sources for the state, will probably register smaller gains in 2004 than previously anticipated.

That’s bad news for California lawmakers, who have been counting on a healthier economy to help pull the state out of its deep fiscal hole. The budget that passed in August was based on economic assumptions very similar to those of UCLA’s June forecast -- assumptions that the Westwood economists, who have been among the nation’s most pessimistic, now admit were too rosy.

“It may take a little longer than many people had thought earlier,” said Tom Lieser, senior economist with the UCLA Anderson Forecast. “Economic growth has been disappointing.”

Still, Lieser said he was more optimistic than he had been just a few months ago that California’s economy had finally turned the corner. Major sectors, from trade to tourism, have stabilized; and even the battered technology industry is showing some improvement. Meanwhile, the transportation sector and businesses such as health services continue to grow.

Bottom line, according to the UCLA forecasters: The economy is stirring to life, but probably not quickly enough to help legislators avoid more hard choices in the next budget cycle.

Job seekers will have a tough time of it as well, at least in the near term. California’s job slide, like the nation’s, has lasted nearly 2 1/2 years and has come as a surprise to economists who had expected the labor market to improve by now.

UCLA analysts predict that continued weakness in Northern California will more than offset modest gains in the Southland, resulting in net payroll losses for the state this year and a much slower start to 2004 than previously thought. Employment growth next year is anticipated to be around 1%, down from the 1.8% rate forecast in June. The U.S. labor situation isn’t expected to grow any faster in 2004.

In 2005, though, the state’s labor market should start heating up as employers finally boost payrolls to meet the demands of a growing economy, according to UCLA economists. Their forecast calls for job growth averaging 2.2% to 2.6% annually through 2010. If that happens, it will put California once again out in front as a job generator. For much of the last half-century, the Golden State has outperformed the nation in job growth, in part because of its above-average population growth and dynamic mix of industries. And those factors will come into play in the years ahead.

A pickup in job formation would help California’s finances, which have been battered more than other states’ because a disproportionate number of the jobs lost in the state in recent years were in high-paying technology fields. When those jobs vanished, so did the accompanying bonuses, stock options and capital gains that were major funding sources for the state treasury.

Personal income taxes account for 60% of the state’s general fund. This year, UCLA forecasters say, personal income is expected to grow by a relatively weak 3.2%.

Consumer spending also is likely to remain sluggish. Nervous about the lousy job market and restrained by sluggish income growth, Californians have cut back on their shopping, which in turn is putting another huge dent in the state’s tax coffers. After soaring 12% in 2000, statewide taxable sales were flat in 2001 and declined by 1.3% last year. With shoppers continuing to sit on their wallets in the face of a shaky recovery, Lieser has lowered his taxable sales growth projection to 1.7% this year from 2.1% and trimmed the 2004 estimate to 4.1% from 5%.

All told, said Lieser, there’s little chance of a huge tax windfall on the horizon, so government will have to continue its belt-tightening.

“I think that we are in the process of seeing a leaner and meaner approach to state and local government,” he said.

At the same time, Lieser said he was confident the worst was over for California, which probably has exited recession. Pinpointing a recession for a state isn’t as straightforward as it is for the nation, where a general rule of thumb is two straight quarters of decline in real gross domestic product. Economists look at a host of factors in determining whether a state is in recession, including employment, personal income, taxable sales and building permits.

Though California continues to shed jobs, the pace of losses has slowed, with only 1,900 net nonfarm payroll jobs lost in August. Other indicators have been strengthening as well. The state’s trade sector is recovering, with six of California’s top 10 export products showing gains over the first half of the year. Industrial building permits are rising and housing starts are on a tear. California’s tourism sector, while slammed in areas such as San Francisco that are heavily dependent on international visitors, generally has held up better than that of other travel hot spots because of its large domestic market.

Even the state’s long-suffering manufacturing sector, which has lost more than 300,000 jobs during the economic downturn, is expected to see those declines slow to a trickle next year. Firms that have survived the shakeout say their prospects are looking a bit brighter, even if it has come at the expense of rivals.

Take Aluminum Precision Products Inc., which makes forgings for the aerospace, automotive and medical industries. The Santa Ana company snapped up another firm’s manufacturing facility last year for pennies on the dollar in anticipation of brighter times ahead, said Phil Keeler, founder and president of the privately held firm.

“So many of our customers and competitors are being forced out of business it’s pathetic,” Keeler said. “At the same time, that has created opportunities for us. Hopefully, we’re going to be a survivor.”

UCLA economists have been among the most pessimistic, and accurate, about the economy’s prospects after the dot-com crash and collapse in business spending. The national recession was technically one of the shortest and shallowest on record, beginning in March 2001 and ending in November of that year, according to the National Bureau of Economic Research. But there has been no solid recovery -- and won’t be, at least by traditional standards, according to Edward Leamer, director of the UCLA forecast.

Leamer has argued repeatedly that the 2001 recession was different from the nine other economic downturns that have occurred since World War II precisely because it was caused by a slowing in business investment rather than a collapse in consumer spending. Although that helped insulate the economy, Leamer said, it means that the nation shouldn’t expect the usual 4.5% to 5.5% growth that follows typical recessions because consumers, motivated by low interest rates, already splurged on houses and cars.

Though many economists were encouraged by revised figures released by the federal government last month showing 3.1% annualized growth in the second quarter, Leamer said those figures were pumped up by military spending and consumer durables, which he doesn’t expect to continue.

He is projecting 2.3% real GDP growth this year, followed by 3% growth in 2004 and 3.7% in 2005. Normal economic growth is considered to be in the 3%-to-3.5% range, which is sufficient enough to keep unemployment from rising but generally not enough to drive it down. Leamer expects U.S. unemployment to average 6.4% in 2004, up from its August level of 6.1%.

“I don’t see another [recessionary] dip, but I don’t see much good happening either,” Leamer said. “We’re looking at a relatively weak economy.”