Can 'recession-proof' California avoid nationwide slump?
Economists now say that the dynamic California economy -- once thought to be able to withstand the brunt of a national recession -- is also likely to get bogged down in 1980.Skip to next paragraph
Subscribe Today to the Monitor
They note these factors: inflation galloping at record speed; consumers showing their appetites are not insatiable, and the powerful housing industry displaying signs of frailty.
Although the aerospace and defense-oriented industries should buoy business activity in the state, a distinct slump is nonetheless likely, these economists predict. They say unemployment, particularly among construction workers and those in retail sales, will rise. Production will slide. Retail activity will flatten. Mortgage rates eventually will dip from their current 18 percent rate, but at a much slower clip than they climbed. And consumer credit, as a result of the recent moves by the Carter administration, will be less free-wheeling.
"The economy is going to show weakness very quickly," says Robert Parry, chief economist for Security Pacific National Bank in Los Angeles.
Most alarming, at this stage, is inflation. The US Department of Labor reported last week prices in February rose at a staggering 25 percent annual rate in Los Angeles. That rate, while considered by most as an aberration, was the biggest one-month increase since World War II, and seven points ahead of the national inflation rate for February.
The inflationary cycle in the Los Angeles area was boosted by rising costs for transportation, medical care, interest rates, gasoline, and housing. Food prices climbed only slightly.
But Mr. Parry says fuel prices are likely to level off and mortgage rates will begin to dip by the end of the year, bringing the inflation rate down in the process.
However, inflation will remain between 14 and 18 percent nationally and in California for the next three months and will drop to 10 to 12 percent by December. "Still high," says Dr. Raymond Jallow, chief economist for the United Bank of California.
Dr. Jallow says he believes that the sudden tightening of consumer credit will take its toll in the marketplace quickly.
"The average consumer will react even quicker than the Carter administration itself," Dr. Jallow says. "He will be more discriminating, do less impulsive buying, be cautious on investment, and save more." The result will be less retail activity.
One key purchase will be particularly less attractive for the next year or so: housing.
High mortgage rates for buyers and high interst rates and soaring costs for builders will bring the housing industry to a comparative halt. Housing starts averaged more than 200,000 units in California last year. This year, the rate could plunge to the 100,000 mark.
Builders blame the crunch on Washington's efforts to tighten credit. "They are trying to kill the golden goose," says George Galvin, executive vice-president of the Building Industry Association of Southern California. Builders, he says, are laying off workers, scaling down proposed developments, slowing new planning, and losing customers. Today, nearly half the housing deals that reach escrow are falling through because buyers cannot meet loan qualifications.
The future of California housing is complicated. But the long term looks good. Speculation should continue to keep prices high. A shortage of rental units and all-time low vacancy rates between 2 and 3 percent will keep general demand strong. Lowered production this year will yield pent-up demand next year.
"The framework is there for continued speculation," says Shirley Stephenson, vice-president at Security Pacific, who predicts a 24 percent drop in home building in 1980. She sees a continued shift to condominiums, town houses, higher densities, mobile homes, and manufactured housing as "viable" alternatives to cut costs for buyers.
"This is a transitional year," say Sanford Goodkin, chairman of the Sanford R. Goodkin Research Corporation. "It's an interesting kind of mucilage year binding the heat of the latter 1970s with the new pace of the 1980s. The heat could not have continued this year."