California Still Reeling From Recession Blow

California, dazed and bloodied from its longest and deepest downturn since World War II, is acting like a punch-drunk boxer in a grueling bout with no end in sight.

Accustomed to helping power the nation out of economic slumps, the Golden State--weighed down by its beleaguered southern half--now finds itself the laggard, on its knees and still jabbing at thin air as much of the rest of the country slowly gets back on its feet.

Considering the state’s massive job loss during the two-year recession, the slowdown in key Asian markets, the stagnation in construction and the anxiety created by April’s riots in Los Angeles, “you start to say this economy’s in great trouble,” said Charles J. Cicchetti, managing director of Arthur Andersen Economic Consulting in Los Angeles.

Economists and executives generally agree that the key to a full-fledged California rebound is a strong recovery in the rest of the nation. Unfortunately, the halting improvement under way outside California and the Northeast is weak-kneed at best.

Given that, many economists predict that California could continue to bump along the bottom through year-end, and some contend that the state is in for at least another full year of anemic activity. A return to the days of robust growth that characterized much of the 1980s is years away at best, most observers agree.

“We will recover when the U.S. recovers,” said Robert K. Arnold, senior economist with the Center for Continuing Study of the California Economy in Palo Alto. “If it’s a weak recovery, it will take California longer.” And so far, he added, the U.S. recovery is “very weak.”

Meanwhile, having run out of cash, California faces a mounting fiscal crisis as legislators and Gov. Pete Wilson conduct a partisan tug-of-war over the state budget’s $10.7-billion deficit. The budget deadlock could force the state to start paying its bills with IOUs once the fiscal year ends Tuesday.

Estimates vary, but California appears to have lost between 500,000 and 700,000 non-farm jobs in the downturn, which started in mid-1990. As much as 85% of that decline was in Southern California, according to Pauline Sweezey, chief economist for the state Department of Finance in Sacramento. Los Angeles County alone accounted for 63% of the state’s job loss, with layoffs coming primarily in defense and aerospace, construction and financial services.

California’s unemployment has been running higher than the nation’s during much of the recession. In May, the rate for California was 8.7%, compared to 7.5% for the country as a whole.

Recouping the lost jobs will take at least until 1994, said Kevin Scott, executive director of the bipartisan Commission on State Finance in Sacramento. The prolonged weakness will mean less money coming in to the state to pay for education and services, raising the likelihood of further economic stagnation.

As a result, Scott said, “even with a recovery, it won’t feel like a return to the strong economic environment we’ve known in the recent past.”

Given the pervasive gloom that has settled over the state, some Californians might not recognize a rebound even if it plowed over them in a Mack truck. A great deal of anxiety about job security still afflicts white-collar and blue-collar employees alike, who have watched friends and neighbors suffer from layoffs even if they themselves were not directly affected.

The mood is brighter in the Bay Area and the Central Valley, which suffered far less in the recession than Southern California and where the prognosis for recovery is better. In Northern California, construction and defense make up a small share of the economy, so the slumps in those sectors were less damaging. Moreover, the Silicon Valley region’s defense industry managed to escape the hefty layoffs that hit the Los Angeles area.

“People are just very gloomy right now,” said Carolyn Sherwood-Call, an economist with the Federal Reserve Bank of San Francisco. “It goes beyond the specifics of their situations.” Until down-and-out consumers start feeling more upbeat, it is unlikely that they will do much to get the economy rolling. In the year’s first quarter, taxable sales--a measure of consumer spending--fell at a 7% annual rate from weak levels a year ago.

One key to that pessimism is the slump in commercial and residential real estate. The recession brought to a halt years of dependable gains in housing values that had helped give California a reputation for no-holds-barred economic growth.

The recent riots in Los Angeles have exacerbated concerns about jobs and real estate values. “People were feeling wealthy and could take chances,” said Cicchetti, the Arthur Andersen economist. “That has dried up, and the confidence has been squeezed away. That lack of confidence translates into a complete depression in real estate.”

According to the San Francisco Fed, California lost 27% of its construction jobs between March, 1990, and February, 1992. Last year, the value of new non-residential construction awards was less than half the 1986 peak, and the number of permits to build housing was the lowest since 1982.

In a study issued last week, the UCLA Business Forecasting Project said California’s best hope for recovery lies in its dormant housing market. David G. Hensley, project director, noted that, thanks in part to “relatively low mortgage rates (and) an improved inventory situation,” the stage is set for a strong rebound in housing starts next year. (The outlook for commercial real estate, meanwhile, remains “very depressed” because of a glut of office space.)

But after a promising March and April, home sales tapered off in May, said John Karevoll, editor and publisher of the Southern California Real Estate Observer newsletter in Running Springs.

“Home sales are definitely not doing what everybody hoped they would,” he said. “It never promised to be spectacular, but in March and April it seemed to be on an upward trend.”

At least one builder said he cannot yet drum up much enthusiasm that a recovery is imminent because banks are still being cautious about lending.

“I have never seen financing as tough as it is at the same time the market has been so bad,” said Keith A. Johnson, president of Fieldstone Co., a Newport Beach company that builds $200,000 “move-up” homes in San Diego, Orange County and the Inland Empire. “There is an upturn that is looking to happen, and it needs a stimulus.”

Johnson blames regulators for toughening up on banks’ capital requirements at a time when looser lending could help ease the recession by boosting a key industry--construction. At the 21 projects that Fieldstone has under way, sales are off 25%, an “acceptable” level, Johnson said. “Much more than that, the economics of the project start to suffer more,” he said.

The best Johnson can say of his mood is that he is “cautiously optimistic.”

“It’s kind of like the national economy,” he said. “Things are improving, but only slightly.”

Signs of recovery in retail sales are evident at Mervyn’s, a department store with 109 outlets in the state. Mervyn’s core customers--families seeking moderately priced clothing--are spending more.

“People are tending to buy basic products, things that are versatile,” said Joseph C. Vesce, president and chief executive of the Hayward-based division of Dayton Hudson Corp. “They are being thoughtful and frugal.”

Given a choice among three differently priced T-shirts, Vesce said, customers are picking the lowest-priced variety.

As if to prove the economists wrong, Mervyn’s has noted that its recovery in California is starting from the “bottom of the state up,” with big improvements in San Diego, greater Los Angeles and Orange County. Whereas last year the chain was showing sales declines at stores open at least a year, lately the rule has been percentage increases in the single digits. Moreover, because customers have paid down much of their debt, Vesce said, they will be in a better position to spend as they “start to become more positive in their prospects.”

Despite the bleak outlook for Southern California, economists are reluctant to say that the state is down for the count.

“It’s important to recognize that L.A. still has a lot going for it,” said Frederick Cannon, senior economist at Bank of America in San Francisco. “You can’t say it’s not the land of opportunity, but it continues to be a very difficult recession.”

Jobs on the Wane Non-farm employment in California has been on the decline since the second quarter of 1990, primarily because of layoffs in aerospace and defense, construction, durable-goods manufacturing and financial services. The biggest drop occurred in the first quarter of 1991.