Big Fizzle In California?

You remember California--the Golden State, with 15% of the nation's population and a history unrivaled for its trend-setting peculiarities. Hot tubs, Governor Moonbeam, and pierced navels. The land of milk, honey, and nuts--and, for the last half-decade, of sheer economic misery. Gone are the state's hordes of conspicuous consumers, smitten with convertibles, electronic gadgets, and fancy threads. The new economic mantra: layoffs, bankruptcies, and foreclosures.

Earlier this year, economists sensed shades of the old California reemerging: Employers were slowly starting to add jobs, and houses were once more being built on empty lots alongside oil pumps and palm trees. Well, hold the tofu. California, still hamstrung by layoffs in the defense and aerospace industries, no longer looks so sunny. Of the 40,000 jobs the state created in the first quarter of 1994, all but a scant 6,800 have since melted away--a sad performance at a time when the rest of the country was creating some 2 million jobs. After sliding for several months, the state's unemployment rate shot to above 9% again in July (charts).

UNINSPIRING. All this has local economists, who a few months ago had predicted the beginning of a mild statewide recovery, quietly scaling back their forecasts. This month, in its survey of 11 California economists, Western Blue Chip Economic Forecast dropped its estimate of statewide personal income growth to an uninspiring 3.8% rate, including inflation--the worst among the 10 Western states. Next year's expected 5% growth ranks last as well. "California's economy is more or less bumping along the bottom," says Federal Reserve Bank of San Francisco President Robert Parry.

The Fed's Aug. 16 decision to raise short-term interest rates by half a percentage point won't help matters. Higher rates will make business loans less accessible and heighten pressure on real estate activity that was mnly recently showing some signs of stirring. Some economists believe the ultimate effect could be to prolong the state's anemic economic performance. "The last thing California needs is for the U.S. economy to be slowed down," says Larry J. Kimbell, director of the University of California at Los Angeles Business Forecasting Project.

Even before the Fed's action, the state's numbers were hardly robust. Although housing starts through June were up by 15.4% over last year, according to the Construction Industry Research Board, they still trailed activity in recession-plagued 1991. Real estate prices in most of the state's largest cities remain soft. "They're still a very worried group of buyers," says Wade Cable, president of Presley Cos., an Irvine homebuilder. After running 30% higher in the first quarter, Presley's home sales for the year in California should increase by just 5% over 1993.

What's wrong with California? The state's huge manufacturing base, for one thing, has continued to dwindle--faster than most economists expected. The impact is especially severe in Southern California, where the UCLA Business Forecasting Project predicts that 30,000 more defense workers will be pink-slipped this year. And anticipated job gains in other industries haven't materialized. In fact, there have been surprise layoffs this year by large employers in financial-services, oil, and high-tech industries.

DISASTERS. The layoffs have been devastating to once stable and prosperous California communities. In San Diego, General Dynamics Corp. is selling off a 242-acre industrial parcel, complete with an employee carousel, after closing its Convair fuselage division. Layoffs: 1,900. Not far away, Teledyne Inc.'s Ryan Aeronautical will soon shut down for two weeks, idling some 800 workers, in hopes of postponing permanent cuts.

But California's problems go deeper than layoffs. A rash of disasters--most notably the Jan. 17 Northridge earthquake--continues to prompt an exodus of both businesses and wealthy individuals. Even the expected rush of federal dollars following the Northridge quake, a potential stimulus to the economy, has been slow in coming. The federal Small Business Administration has lent an estimated $3 billion but so far has processed only about 40% of 212,000 applications, according to Administrator Erskine B. Bowles. That has been barely enough to increase the state's construction employment by 4,000 jobs in the year's first six months, estimates the Construction Industry Research Board. In the meantime, losses from the disaster have totaled $15 billion.

The state has its optimists who still see signs of eventual recovery. Jack Kyser, chief economist for the boosterish Economic Development Corp. of Los Angeles, points to falling commercial vacancy rates, an uptick in payroll taxes, and some stirring among major retailers who have moved into the state as proof that California is on the mend. Yet even Kyser admits the Golden State's situation is fragile. "There's recovery going on, but sometimes you have to check the mirror for signs of breathing."

California's unemployed can vouch for that. July's jump in the unemployment rate, 0.7 of a percentage point, was the largest of any major state. To Joan Lyon, an unemployed human-resources executive in San Francisco, that meant "terrific competition" for the three jobs she has been interviewed for since June. Sam Friedman, who closed his 12-person computer consultancy three years ago, has had no luck finding another business. "The banks just won't lend money to a startup in this state," he says.

LOOKING NORTH. The state does have its healthy pockets, such as a surprisingly robust Sacramento region. There, home construction is up by 23%, as Californians from more expensive and earthquake-prone regions flee to the area's relatively low cost of living. "I wouldn't call it a boom, but it's a lot stronger than a lot of other economies in the state," says Robert Gary Spohr, a onetime San Francisco equipment-leasing executive who recently bought a large copy shop in Sacramento. Computer maker Packard Bell Electronics Inc. is also looking northward: Prompted by legislation that will soon create a new enterprise zone in Sacramento, it has said it will likely move its 1,500-person workforce from Southern California.

Luring business to the state, though, is still a tough slog. Despite legislation to ease workers' compensation costs and boost tax credits for business investment, companies such as Apple Computer Inc. and Intel Corp. recently decided to expand in states that offered better benefits. And even with a new $13 million advertising campaign to sell the state, finding new employers may soon get even tougher. The state's $1 billion budget deficit could mean higher taxes. And new smog regulations, to be announced this fall for five Southern California cities, are expected by local governments to cost $5 billion annually and slow employment by 63,000 jobs by the end of the decade. "The EPA's plan is a bullet aimed at the economic security of our community," complains Ontario Mayor Gus James Skropos.

In time, experts say, the Golden State should regain its luster. The state's underlying economy remains vibrant, says the Center for Continuing Study of the California Economy in Palo Alto. New service jobs related to biotechnology, the Info Highway, and foreign trade, it says, will add 3.7 million new jobs in the state by 2005. Sounds nice--but very distant--for a recession-weary California, which these days is getting remembered for all the wrong reasons.

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