2002 economic outlook is dim

By SIMON AVERY AP Business Writer
Wednesday January 02, 2002

LOS ANGELES — A power crisis that cost the state billions. A dot-com bust that was far worse than expected. Finally, the devastating economic impact of a terrorist attack no one could have anticipated. 

“This year there have been a succession of challenges and blows that have not been expected and that have taken their toll on the economy,” said Sunne Wright McPeak, president and chief executive of the Bay Area Council, which represents business interests in the San Francisco Bay area. 

Looking ahead to 2002, experts warn Californians not to expect things to get better anytime soon. 

At the start of the new year, California’s unemployment rate has reached its highest level in five years. The state government, having spent $9 billion just to keep the lights on, finds itself burdened with a budget deficit expected to swell to $12.4 billion. 

Economists, meanwhile, predict that personal incomes will shrink in 2002 while unemployment continues to rise and the state budget deficit continues to grow. 

The problems began in 2001 when the tech boom that had raised Silicon Valley home prices to record levels finally ended. 

State employment peaked in June, and since then California has shed 101,600 jobs. In November, the state’s jobless figure reached 6 percent, topping 1 million for the first time in five years. 

Northern California’s Silicon Valley, which had fueled much of the state’s economic expansion through the 1990s, was particularly hard hit. In Santa Clara County, the heart of the technology haven, the unemployment rate rose to 6.6 percent in November from just 1.5 percent a year earlier. 

“We’ve been through a searing experience,” said Jim Cunneen, president and chief executive of the San Jose Chamber of Commerce. 

Parts of Southern California did manage to avoid last year’s downturn, however, and economists believe some areas will continue to thrive, thanks to their diversified economies. In Orange County, for example, unemployment actually dropped a fraction in November to 3.4 percent. 

But even in the South there is pain. The manufacturing, services and airline industries are scrambling to contain costs in light of falling revenue. 

Small businesses are also feeling the pain. 

“It’s been up and down, up and down,” said William Ho, general manager of Top Hat Cleaners in West Hollywood. 

The energy crisis doubled his monthly electricity to bill to $1,200, forcing him to consider raising prices just as he saw business slowing. The Sept. 11 attacks on New York also added uncertainty. But then a sudden drop in gasoline prices, along with electricity conservation, helped Ho control costs. 

“Things are starting to come back. The whole picture is looking a bit better since the Thanksgiving holiday,” he said. 

But optimism is flowing in dribs and drabs. Across the state, retailers added only sparingly to their part-time ranks for the holiday shopping season. In the movie production business, employment is at its lowest level since the summer of 1997. 

Falling corporate profits and the weakening employment picture mean Californians won’t see wages, salaries and bonuses jump as they have in recent years. In fact, economists predict there will be an overall net decrease in personal income next year. 

An expected gain of 1.3 percent will amount to a net loss of 1.4 percent after inflation is factored in, said Tom Leiser, senior economist of the UCLA Anderson Forecast. 

The figure represents a dramatic falloff from 2000, when personal income across the state increased by an average of nearly 10 percent before inflation. 

“There are more job seekers now. The pressure has gone out of wages,” Leiser said. 

Before the economy bounces back, experts say the effects of California’s energy crisis, the tech bust and the terrorist attacks must play out. 

Although the energy shortage caused less damage than anticipated, due mostly to mild summer weather and widespread energy conservation, aftereffects remain. The state government, for example, is still trying to find a way to finance billions of dollars in payments made to secure long-term power contracts. 

That liability, on top of a massive decrease in tax dollars that occurred when stock market gains flattened out and general merchandise sales fell off, is turning what was an anticipated $2.6 billion reserve for fiscal 2001-2002 into a state budget deficit of $4.5 billion. For the 2002-2003 budget year, that shortfall is expected to swell to at least $12.4 billion, according to the California Legislative Analyst’s Office. 

The net result: expect big cuts in the state budget and the amount of money the government injects into the economy. California’s budget has already become a drag on the economy and will slow the recovery that is expected to begin by the middle of next year, Leiser said. 

The travel industry, meanwhile, continues to exhibit aftershocks from the terrorist attacks. The transportation and utilities industry dumped 9,800 more jobs in November, mostly in the state’s airline industry. 

In the technology sector, companies have been positioning themselves to ride the eventual recovery wave by streamlining their payrolls, products and services, and maintaining research and development. 

Although there’s still no firm sign that the tech sector has hit bottom, a survey by the Bay Area Council reported that 38 percent of residents and businesses in the region expect the economy to improve through 2002. Just under one-third thought it would get worse in the next six months. 

“There is cautious optimism. There is resilience here,” said McPeak.