Economic outlook sluggish

December 3, 2009

 

By Tim Moran
Business Journal Writer

California is different.

From the state’s ever-changing geography to its huge and growing population to its perceived “Left Coast” politics to its cultural diversity; no other state is like California.

Perhaps the biggest characteristic separating the Golden State from the other 49 is the sheer size of its economy. California boasts the eighth largest economy in the world, ahead of countries such as Spain and Canada.

It is an amazingly diverse economy, ranging from technology to agriculture, world trade to entertainment and tourism.

California was one of the first states to enter into the current recession, as hyper-inflated housing prices fueled by overly risky lending practices collapsed. It also has been a harder hit with unemployment; the state’s jobless rate is higher than the national average.

There are signs of the national economy beginning to recover, though national unemployment appears to be continuing to rise.

So, given California’s diversity and early entry into the recession, what are the prospects for the state’s recovery?

It’s hard to know the future,” said Edward Erickson, chairman of the department of economics at California State University, Stanislaus. “If we did, we wouldn’t be in the mess we are in.”

With that caveat, economics professors at area universities shared their thoughts on good and bad omens for California, and what signs area business owners and operators can watch for that will indicate recovery is at hand.

“Some things are working for us, and some are working against us,” said Jeffrey Michael, director of the Business Forecasting Center at University of the Pacific in Stockton.

“For instance, we can look at industries we have and industries we don’t have. One advantage is that there is no real auto industry in California. That’s an advantage because of the steep decline in the auto industry; that saw Chrysler and General Motors fall into reorganization bankruptcies and receive billions of dollars in government bailout money.”

But for Northern California, Michael continued, that’s not such good news. The state’s only remaining auto manufacturing plant, NUMMI in Fremont, is closing, taking thousands of jobs with it. That affects not only the NUMMI plant itself, but many manufacturing plants and jobs that supported the Fremont facility with parts and supplies.

While cars mostly are made somewhere else, they certainly are sold in California, and dealerships across the state have been hit hard. Several in San Joaquin and Stanislaus counties have closed their doors, taking jobs and sales tax with them.

The construction industry will continue to struggle in the short term, Erickson said, as California works through the huge number of foreclosed homes. Prices for existing homes on the market have fallen below the cost to build new homes.

“Until that market is taken care of,” he said, “it’s going to be hard to turn around (the new home market).”

Commercial properties also are suffering, Erickson said, and may cause a wave of foreclosures in apartment buildings, office and retail space.

Michael sees some positive signs a little farther out, in two to five years.

“California doesn’t have the excess housing stock seen in other areas,” he said. “If we ever get to the other side of the foreclosure mess, we will see that sector rebound.”

California’s early entry into the recession means the state has had more time to recover, said Alex Whalley, an assistant professor of economics at the University of California at Merced.

Another advantage for the state, according to Whalley, is that it exports a lot of goods, particularly agricultural products. The weak U.S. dollar makes those exports more attractive in world markets.

California’s agriculture industry is strength in itself, Erickson added. While different crops and commodities have their ups and downs, farming never completely plunges off a cliff as have housing and automobiles.

“Agriculture keeps going… you may have people transferring from one crop to another, but they harvest whether they do well that year or not,” Erickson said. Only in extreme cases, he added, do farmers plow a crop under rather than harvest it.

California’s trading partners also are a strength, Michael said, saying the state is the most Asia-oriented in the nation, with greater linkages to Asian economies. Those Asian economies are faring better in the global recession than European economies, said Michael, which is another plus.

Time Magazine recently ran an optimistic story on California’s future, noting that the state is a center for innovation and venture capital. That view has validity, Michael said. “A lot of new industries are born here.”

But California’s history coming into and out of previous recessions, and the current state budget mess don’t bode so well, said Thad Kousser, a visiting professor of political science at Stanford University.

“California seems to lag both coming into and out of recessions,” said Kousser. “That was the case in the 1990s. This one is deeper and has lasted longer, and it appears that California will trail (in recovering) again.”

One of the barriers to recovery is California’s ongoing budget crisis and the state’s tax structure, Kousser said. Even after deep cuts this year, the state is looking at another $7 billion deficit in the coming year. Only three other states have larger budget deficits relative to their size, said Kousser, New York, Nevada and New Jersey.

Any solution to the state budget problem, Kousser said, whether it’s further cuts or higher taxes and fees, is going to be unpopular.

The problem, he said, is the state’s tax structure.

California relies on high income and corporate gains taxes for a large portion of the state’s revenue. That revenue stream disappears more quickly in a recession than sales and property taxes relied upon for revenue in many other states.

The upside is that revenue also can rise rapidly when the economy rebounds, Kousser said, as the state has seen with the dot.com booms.

So, what should business people look for as signs the recession is fading?

Their own customers, said Whalley. “In a lot of ways, business people have a better sense of what’s happening in the economy than we do. They see their customers every day.”

What those customers are saying and how they are shopping is the best indicator of where the economy is heading. And, said Whalley, it gives businesses clues on how to respond to the recession.

“They should keep an eye on their customers, and what their needs are,” he said. “People have been trading down to a lower quality product and the businesses that made that adjustment are doing better.”

While employment numbers are a lagging indicator, Whalley said, unemployment and the fear of it have been a big drag on the economy.

Orders for goods is a leading indicator, he said, and one of the first signs of a recovery.

Sales at stores such as Home Depot and Lowes also can be an indicator, Erickson said, as can the arrival of goods from Asia at ports in San Francisco and Southern California.

The indicators really depend on what business someone is in, Michael said. Look for the ones that make sense for your sector of the economy.

Michael tracks employment more closely than other indicators, and he is not seeing positive signs yet. One of the first positive signs, he said, typically is a pickup in activity at temporary employment agencies.

Because of the state’s diverse economy, he added, the recovery – when it does arrive — won’t perform evenly across the different regions.

“It’s easy to find the bad news,” Michael said. “We’ve been hit a little bit harder than most places. But we do have things in place that will help when we do turn that corner.”

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