Forecast: State economy to rebound in second quarter

By Simon Avery AP Business Writer
Wednesday December 05, 2001

LOS ANGELES – California will climb out of the recession with the rest of the country next spring but the pain caused by the current downturn will linger well into the year, according to a new economic forecast. 

Even as the economy begins to grow again and incomes start to rise in the second quarter of 2002, state economists predict the job market will tighten further and there could be some large-scale corporate bankruptcies during the year. 

The projections are detailed in the UCLA Anderson Forecast, a widely watched look-a-head on the economy to be released Wednesday. 

The report says the state’s 5.7 percent unemployment rate will continue rising gradually and peak at 6.4 percent in early 2003. But the overall impact of this recession will be milder than its predecessor in the early 1990s, when the state unemployment rate hit nearly 10 percent. 

For Californians like Edwin Gomes, a 29-year-old resident of South Central Los Angeles looking for an apprentice plumber job, the forecast offers some hope that he’ll eventually land a stable job but not enough to spur his spending. 

“You still have to take care of your money because you don’t really know what’s going to happen,” he said. “You’re not able to spend money on that fancy new coat or other luxury things.” 

Meanwhile, the forecast calls for personal income in California to increase only slightly this year, by 2.1 percent, dramatically off last year’s 9.8 percent growth rate. 

Next year that figure could decline even further to 1.1 percent. But by 2003, when economists expect technology, tourism and international trade to be doing well again, personal income should grow by 5.6 percent. 

The September terrorist attacks have caused the most direct damage to the state’s economy so far, mostly in the hotel industry. 

Continuing cancellations and postponements of tourists’ visits from affluent countries, especially Japan, threaten further harm in the short-term, said Tom Lieser, senior economist and author of the Anderson Forecast for California. 

Long-term, however, the impact of terrorism should ease and tourism — worth $75 billion a year to the California economy — should rebound. 

“People get kind of hardened to it after a while,” Lieser said. 

Regionally, San Francisco and Silicon Valley will continue to bear the lion’s share of this recession, which officially began last March. The San Francisco Bay area has been stung by over-inflated real estate prices and the near collapse of spending in the high-tech sector, where orders and shipments remain depressed and jobs are still disappearing. 

“It’s premature to assume that Silicon Valley has hit bottom, but it might not be too far away,” said Lieser. 

An improvement in tech prospects is key to any lasting recovery throughout the West, said Rob Valletta, senior economist at the Federal Reserve Bank of San Francisco. 

While the tech sector is showing some signs of stabilizing — including news from the Semiconductor Industry Association Monday that worldwide semiconductor sales rose 2.5 percent in October — strong growth of between 10 and 20 percent will be necessary before the sector becomes the economic driver it once was, Valletta said. 

That probably won’t occur until at least 2003, he said. 

Parts of Southern California, meanwhile, will likely escape the recession altogether due to their economic diversity. But as a whole, Southern California can expect things to get worse before they get better, economists warn. 

“It is not immune to the national slowdown anymore,” Valletta said. 

Although the recession is expected to be mild by previous standards, the return to economic health will be slower and less dramatic than usual. 

“There are a lot of things out there that are going to limit the strength of this recovery,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corporation. 

Prominent among them are inflated residential and commercial real estate markets in San Francisco and San Jose, which are only just starting to deflate, and companies’ bloated inventories and excess investment in assets such as factories, he said. 

Over-investment and supply will likely cause several large-scale bankruptcies across the country in the next year, most likely in the retail and airline sectors, Kyser said. 

The state government’s worsening financial situation could also slow the rebound, as legislators are forced to make cuts to balance the budget. 

The failure of electricity deregulation is costing the government billions of dollars at a time when tax revenue has plummeted due to investors’ losses in the stock market and declining sales tax receipts. 

California is expected to end fiscal 2001-02 with a deficit of $4.5 billion, according to the California Legislative Analysts Office.