China's Almond Hunger Signals California Recovery as Schwarzenegger Leaves

The next governor of the most populous U.S. state may be handed a gift that’s hard to see from the capitol in Sacramento: the economy.

California’s political dysfunction, epitomized by a record 100-day budget-writing impasse, is overshadowing signs that some business sectors may be rebounding. Tax revenue came in 15 percent above Governor Arnold Schwarzenegger’s forecast in September, and whoever is elected to replace him, Democrat Jerry Brown or Republican Meg Whitman, could be surprised too.

“The economy is going to recover on its own despite the politics,” said John Husing, founder of Economics & Politics Inc., a consulting firm in Redlands, California. “All the political sector is doing is scaring the hell out of people.”

Among the signals -- obscured by a 12.4 percent unemployment rate -- are rising cargo levels at the Los Angeles and Long Beach ports complex and construction fueled by investors from China and Taiwan. There’s a surge in almond and olive exports from the San Joaquin Valley, which Newsweek last year characterized as “economic ground zero” in the U.S. because of foreclosures and an extended drought.

Personal income growth in California -- the world’s eighth- largest economy -- may almost double next year to 3.7 percent, according to the UCLA Anderson Forecast. Second-quarter wholesale and retail sales were up 5 percent from the same period last year, according to the Department of Finance. And new car registrations rose 15 percent in the first nine months, California New Car Dealers Association data show.

‘Love Real Estate’

In the San Gabriel Valley, home to eight of the 10 U.S. cities with the largest proportion of Chinese Americans, Ronnie Lam just completed a $200 million, 600,000-square-foot development in the city of Monterey Park.

Lam, an immigrant from Hong Kong who attended York University in Toronto, said he saw a market for his project’s 210 condo units from Chinese families who like to buy a pied-à- terre, or second home, for aging parents. The valley, east of Los Angeles, was the place to build: The median price of a home in Monterey Park jumped 11.2 percent in September, according to the California Association of Realtors.

“Asian people love real estate,” Lam, 54, said during a tour of his Atlantic Times Square, which features a 14-screen AMC movie theater, a Chinese-language bookstore and a Curry House.

Asians are also helping lift distressed areas. Shenzhen New World Group Co. of China paid $63 million last March for a bankrupt 469-room Marriott hotel in downtown Los Angeles, with plans for as much as $13 million in renovations.

‘Lots of Jobs’

In San Francisco, Zynga Game Network Inc., the biggest developer of Facebook applications, signed a seven-year lease last month for a new headquarters. At 270,000 square feet, it was the largest commercial deal in the city in almost five years, said Kelly Pretzer, a project manager for the Office of Economic and Workforce Development.

From Central California, almond shipments to China and Hong Kong grew 91 percent in September and August from a year earlier, according to the U.S. Department of Agriculture. Its forecast says annual state olive output may triple to 140,000 tons. The value of all California imports and exports is expected to climb this year, after imports plunged 21.7 percent and exports fell 19.4 percent in 2009, according to the Los Angeles County Economic Development Corp.’s Kyser Center for Economic Research.

“No one sector is going to turn everything around, but we’re bringing lots and lots of jobs into the economy,” said Art Wong, a spokesman for the Port of Long Beach, which is next to the Port of Los Angeles.

Housing Bust Hangover

The number of 20-foot containers arriving at the two busiest U.S. seaports hit 662,154 last month, approaching peak levels of 2007. Because a rise in traffic generally creates a like increase in positions, “this could be extra work for close to 100,000 people,” Wong said.

For all the bright spots, one hangover from the housing boom’s bust isn’t going away. The number of home-mortgage default notices grew to 83,261 in the third quarter from 70,051 in the second quarter, MDA DataQuick figures show.

“The reason you don’t see a much better, stronger recovery is because we’re still working off a huge overhang of unsold homes and future foreclosures, and local governments are going to be laying off people for at least the next year,” said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. “It’s a tale of two economies in California.”

Sheer Size

About 400,000 to 500,000 jobs would have to be created every year for five years to return to a pre-recession jobless rate of around 5 percent, Levy said, and “that seems very optimistic.”

The biggest U.S. issuer of municipal debt, California is rated A- by Standard & Poor’s -- four grades above junk status. That could change on Nov. 2. Success for a ballot measure ending the requirement for a supermajority to pass a budget may reduce “uncertainty about the state’s financial outlook,” Standard & Poor’s said in an Oct. 25 report. A University of Southern California/Los Angeles Times poll released the same day found 58 percent of likely voters supported the proposition.

Any tax increase would still require a two-thirds majority, and the next governor faces other challenges, including government worker pension liabilities that are underfunded by $42 billion. What’s more, the state just borrowed $6.7 billion from JPMorgan Chase & Co. and five other banks to pay delinquent bills that piled up during the record-length budget deadlock.

‘Long, Slow Recovery’

California faces annual deficits of as much as $20 billion through at least the fiscal 2014-15 year, according the Legislative Analyst’s Office, a branch of the Legislature. As much as 60 percent of every additional dollar of revenue from increased business activity and other sources is mandated to go to school funding obligations, according to the office.

The UCLA Anderson Forecast released in September doesn’t see much improvement in the economy until 2011, with the jobless rate averaging 12.2 percent this year.

“It won’t be a vigorous recovery at the beginning because the hole is so deep and the damage was so bad,” said Husing, who specializes in studying the Inland Empire east of Los Angeles. It has a 14.8 percent unemployment rate, the highest of any major metropolitan area in the country. “It’s going to be a long, slow recovery,” he said. “But I see all these positive little signals all over the place.”

Confidence about California is based in part on its sheer size: 163,707 square miles, almost 37 million residents and gross domestic product of some $1.8 trillion. It’s an economy larger than Brazil, India or Russia, and Los Angeles and four adjoining counties are responsible for more economic output than the Netherlands or Turkey.

53 in Escrow

Some manufacturers are expanding. Skechers USA Inc., a shoemaker, is building a new 1.8 million-square-foot distribution center in Riverside County. A unit of Kyocera Corp. of Japan is enlarging a plant in San Diego that makes solar panels.

Kyocera didn’t ask for subsidies or tax breaks because the company didn’t need them. “The state was like, ‘How come you didn’t take anything?’” said Cecilia Aguillon, Kyocera Solar Inc.’s director of market development and government relations.

Statewide, residential construction permits probably will grow by 27 percent this year, after a 45 percent decline last year, according to the Anderson Forecast. In the San Francisco Bay Area, home prices rose for 13 straight months through September, according to MDA Dataquick.

At Atlantic Times Square, developer Lam said 90 percent of retail space is leased and 53 of the 210 condos are in escrow. About 6,000 people walked through models for units priced from $460,000 to $972,000 over two weekends in August and September, with lines to take the elevator snaking around the corner. Lam said he gets about 200 visitors every weekend now.

“During construction, we were pretty worried,” he said, showing off condos featuring heavy use of red paint and fabric, considered a good-luck color among Chinese. “We asked ourselves whether we should have started in 2007. Now, instead of tenants picking us, we can pick the tenants.”

To contact the reporters on this story: Seth Lubove in Los Angeles at slubove@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo in Los Angeles at apalazzo@bloomberg.net; Christopher Wellisz in Washington at cwellisz@bloomberg.net.

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