CALIFORNIA COMMENTARY : Recession Is Another State of Mind : California’s challenge won’t be fending off stagnation, but managing problems of phenomenal growth.

The rolling recession hit first in Texas, where real-estate values plunged and financial institutions faced bankruptcy. It was a recession caused by inflated housing prices, overbuilding in commercial and industrial real estate and a collapse in energy prices. This recession rolled across Texas into Arizona, Colorado, Oklahoma and Louisiana.

It then leapfrogged from the Southwest to the Northeast, where the “Massachusetts Miracle” turned into an economic disaster. Again, real-estate values in Boston and surrounding environs collapsed, financial institutions went into bankruptcy and high-tech unemployment became a fact of life. The recession quickly rolled down the East Coast and inundated New York. Thousands of investment bankers, financial analysts, stock brokers and other assorted Wall Street workers were suddenly without jobs. And now the recession has rolled into the nation’s capital. The Washington region is confronting something that no one in that area thought possible: Housing values are declining, jobs are becoming scarce and defense cutbacks loom.

Now, we Californians are being told that our time has come. Housing is overpriced. Both commercial and industrial real estate are overbuilt. High-tech industries cannot compete with the Japanese. And, we are told, as the largest defense-spending state in the nation--$50 billion out of a total defense budget of $300 billion--we are especially vulnerable to defense cutbacks.

How does a Californian respond? Are we vulnerable to the rolling recession? We begin by noting the conditions that must prevail for a recession to occur in a regional economy such as California: The economy must be narrowly based, such as energy in Texas, finance in New York or government employment and contracts in Washington; the population growth of the region must stagnate so that the potential demand for housing evaporates, and employment and income growth must slow so that the economy goes into a recession.

The California economy is the largest in the United States, and diverse. Furthermore, it is diverse in just those areas that are expected to grow. According to the latest government projections on employment for the next decade, the industries expected to show the strongest growth are services, retail trade and agribusiness. The industries expected to grow more slowly include construction, manufacturing (especially automobiles), transportation, public utilities, wholesale trade and government. California is far more concentrated in the higher growth than in the slower growth industries, with two notable exceptions--construction and defense. The growth in population in California over the past decade has been nothing less than phenomenal. A total of 5.4 million people have moved into the state since 1980, an increase of 22.8%. New York, by comparison, added only 392,000 to its population, a 2.2% increase. To a large extent, it has been this increase in population in California that has created our current housing problems. We simply could not build housing fast enough to satisfy the demand, and so housing prices rose dramatically.

What about the future? Again, the latest government projections indicate that we will add 4.2 million people by the end of the 1990s. This means that the housing demand will continue to grow. The labor force will continue to expand. The pressures on our transportation and utility systems, schools, water supplies and land use will continue to mount.

California is expected to be one of the strongest states in terms of employment and personal income growth over the next decade. The growth in nonfarm employment is projected to average 1.7% each year, well above the 1.2% average growth expected for the nation as a whole. The same is true for personal income, which is expected to grow an average of 2.4% each year compared to the national average of 2%.

Whether we realize this potential or not will depend upon two major factors. First, will the California economy be overwhelmed in the near term by a collapse in housing prices and defense cutbacks? Second, will California have the political will over the longer term to deal with the mounting problems associated with our rapid population growth?

The median price of a home in California is $196,000. It is also a fact that median prices in the Sacramento area ($129,000), the Central Valley ($108,000) and Riverside-San Bernardino ($130,000) are far lower. Homes in these areas are very affordable by California standards. Therefore, it is no surprise that some of the strongest housing markets in the country are in California.

There is no doubt that California is going through another housing cycle. We have been through these in the past, the most notable being the period from 1979 through 1982. It is a period in which the areas of highest-priced housing (Los Angeles, Orange County, San Francisco), can expect no significant appreciation in housing values for several years. Areas of lower-priced housing can anticipate continued in-migration and housing pressures. The important point is that growth is continuing in both population and employment, and this will prevent a collapse in housing prices similar to what has been experienced in other parts of the nation.

Given the current defense outlook, we can anticipate a loss of about 40,000 defense-related jobs each year from now until around 1995. But California will also be adding an average of 300,000 new jobs each year. Admittedly, many of these new jobs will be in lower-paying service areas. But the important point is that the California economy will not be devastated by defense cutbacks.

It is not the rolling recession that we need fear. California’s situation is far different from that of Texas, Boston, New York or Washington. What we must be concerned about is how we are going to respond to the needs of our rapidly growing population. Our future will be told in our willingness to make the necessary investments in our basic infrastructure: education, highways, public transportation, water and land use. Our problems are those associated with growth, not those of a stagnant economy on the verge of a recession.