California nearing recession

The Associated Press
Saturday June 30, 2001

LOS ANGELES — California’s power crisis and the struggling technology market will keep the state’s economy teetering on the edge of recession for at least the rest of the year, economic forecasters say. 

Even without factoring in the continuing costs of keeping the state’s cash-strapped utilities in operation, California’s economy – the fifth largest in the world – is rapidly slowing and will struggle to keep from shrinking, according to the Anderson Forecast released Thursday. 

Californians are jittery over the reliability of the state’s power system, worried about their jobs and have lost much of their confidence in the economy, said Tom Lieser, senior economist with the quarterly report, based at the University of California at Los Angeles. 

The UCLA economists estimated consumer spending in the first quarter, adjusted for inflation, declined 3.3 percent in the state as paper riches based on vanishing stock options, known as the “wealth effect,” disappeared. “The recent weakness of taxable sales ... likely means that the wealth effect on consumer spending, which was an important determinant of the 1999-2000 gains, is now dead in California,” Lieser said. 

He estimated the state’s unemployment rate – 4.9 percent in May – would reach 6.3 percent by 2003 before turning around. 

One bright spot in the forecast was state exports, which remained high with 13.2 percent year-to-year growth from the first quarter last year, Lieser said. 

But the power crisis, fueled in part by increasing demand from the high-tech industry and limited hydroelectric capacity due to drought in the Northwest, is an increasing drain on the state. 

California has spent billions of dollars buying electricity for its largest utilities, which have been losing money for the past year due to high wholesale power prices and deregulation rules that prevented them from passing the high costs on to consumers. 

A report prepared by Cambridge Energy Research Associates, an energy research group that co-sponsored Thursday’s Anderson Forecast forum, concluded that by bailing out the utilities and shielding consumers, the state would end up with huge debt and more rolling blackouts this summer. 

The report suggests the power crisis would end sooner if consumers bore the brunt of rising electricity costs because that would force conservation. 

That drew sharp criticism from Steve Maviglio, spokesman for Gov. Gray Davis. 

“Already without a rate increase we’ve had an 11 percent reduction in energy use from last May to this May,” Maviglio said. “And there’ll be a rate increase hitting June bills that should cause even further reductions.” 

On the national front, Anderson Forecast Director Edward Leamer said the risk of recession had dropped slightly from an earlier report, from 90 percent to 80 percent. 


On the Net: 

Anderson Forecast: http://www.uclaforecast.com