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California Remains in Grip of Recession

UCLA analysts trim earlier projections on job growth and key revenue sources.

June 05, 2003|Marla Dickerson | Times Staff Writer

California is still mired in recession, according to UCLA analysts who downgraded their already low expectations for the state economy in a forecast to be released today.

Statewide job growth is anticipated to be a mere 0.4% in 2003, down from the anemic 0.7% predicted earlier this year, translating to roughly 45,000 fewer new jobs than had been projected, according to the quarterly UCLA Anderson Forecast. Taxable sales and personal income, critical revenue sources for the state, also are estimated to come in lower than had been expected this year as well as in 2004.

Though the downward revisions aren't radical, they underscore a nagging weakness in the economy that has surprised many analysts, including those at UCLA, whose recent state and national forecasts have been among the most pessimistic and accurate. The revisions also highlight the challenges facing state lawmakers, who are banking on a rebound to help close a huge budget gap.

The UCLA forecast says the recession probably will end in the third quarter of this year. The forecasters define recession as successive months of declines in nonfarm employment, which California has experienced so far in 2003.

"The economy is still really lackluster," said Tom Lieser, senior economist with the UCLA Anderson Forecast. "It's going to take more time to work out of this than we thought."

Southern California has held its own during the downturn, Lieser said, but the Bay Area's slumping technology sector continues to weigh heavily on the state economy. That region is still shedding jobs more than two years after the Internet bubble burst and business spending on computers and other high-tech equipment collapsed. Santa Clara County, the center of Silicon Valley, alone has lost 193,300 jobs, or 18.1% of its nonfarm payrolls, since employment peaked in December 2000. Many of the region's high-tech manufacturers have shifted some production offshore to cut costs, which will limit the Bay Area's job gains even when business spending recovers.

Employment is a lagging indicator, as companies typically wait to see a sustained uptick in new orders before committing to adding workers. Still, Lieser and other economists had expected California's job market to be showing some stirrings of life by now. Instead, Golden State employers have cut their payrolls in four of the last five months.

The UCLA forecast predicts that more job losses in Northern California, coupled with only modest employment growth in the rest of the state, will limit the statewide payroll gains to 0.4% this year and 1.8% in 2004. While that's slightly better than the growth projections for the nation, Lieser said, the gains won't be enough to drive down California's unemployment rate, which will remain "stubbornly high" near the current rate of 6.7%, well into next year.

The loss of thousands of well-paying technology jobs and the Wall Street winnings that accompanied them are a big reason that the state is facing the most severe budget crisis in the nation. At the height of the boom in 2000, one-quarter of the revenue flowing into California's general fund came from taxes on capital gains, stock options and bonus income. Total personal income in the state that year grew by a sizzling 10.5%. It rose by only 0.9% last year. Californians' incomes, on a per capita basis, surpass the national average, but the gap is narrowing.

UCLA forecasters project that personal income will increase by 2.5% in 2003, down from their previous estimate of 3%. They also reduced their 2004 estimate a full percentage point to 4.3%. That has big implications for a state that has come to rely on personal income taxes to fund 60% of its general fund.

Democratic lawmakers in Sacramento are relying on the Legislative Analyst's more optimistic economic and revenue forecast to build the next state budget. Ted Gibson, former California Finance Department chief economist, said UCLA's latest numbers imply that state tax revenue will be $1 billion to $1.5 billion less than the Legislative Analyst's "rosy scenario."

Weak income growth and job losses have rattled California consumers, who have reined in their spending, resulting in another big hit to government coffers. After soaring 12% in 2000, statewide taxable sales were flat in 2001 and declined by 1.3% last year. With shoppers continuing to show caution in the face of an uncertain recovery, Lieser has downgraded his taxable sales growth projection to 2.1% this year from 3.8%, and trimmed the 2004 estimate to 5% from 5.8%.

"There is no quick fix" for California's budget woes, said Lieser. "We're looking at several fiscal years of this."

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