Signs of Recovery Are Budding

CALIFORNIA went into recession later than the rest of the nation, fell harder, faster, and is coming out more slowly. But by the end of this year, recovery should be in full swing, and by mid-1992, the state should be leading the country in many key indicators: employment, housing starts, retail sales, manufacturing.

"We were like a car going 90 m.p.h. while everyone else was going 50," says Joel Kotkin, senior fellow for Denver's Center for the New West. "When everything slowed to 40, it took us more time to adjust and hit the brakes. But all the fuel that kept us at that speed - population, diversity, youth - is still here for the 1990s."

The inter-mountain West, hard hit by the resource depression of the 1980s which dropped oil, coal, and commodity prices, is in the best shape in a decade.

Inland California - Sacramento, Stockton, Fresno, Bakersfield, San Bernardino - is in far better straits than coastal cities, hard hit by aerospace/defense layoffs, manufacturing flight, and housing stalls.

State economic forecasters say predictions are murkier than in past recessions for lack of clear impacts on the continuing drought, long-term effects of a winter freeze, and the nation's worst budget deficit ($14.3 billion until June 1992) that has yet to be tackled by the Legislature in Sacramento.

The state Senate approved a fiscal package that would cut welfare grants by 4.4 percent and would repeal automatic cost-of-living adjustments to welfare recipients. The $55 billion budget, which is now being considered by the state Assembly, also calls for about $7 billion in new sales and luxury taxes.

The state Legislature will also be considering employee furloughs, wage freezes, and pension-plan changes to cut costs.

"Balancing [the deficit] will come through a combination of fewer services, sales or income taxes, and furloughs or layoffs of in state and local government employees," says Joseph Wahed, senior economist at Wells Fargo Bank. "All of these will slow recovery."

Mr. Wahed sees an agricultural economy adapting so well to both drought and freeze that farm income will increase significantly over last year, despite dire, earlier predictions.

"California farmers are showing themselves to be extremely adaptable in shifting out of troubled crops to new ones," he says.

David Hensley, who heads the Business Forecasting Project at the University of California at Los Angeles, says May figures for housing starts and sales, industrial production, and retail sales are up slightly over April, the first widely based, positive indicators in months.

"None is significant by itself, but in aggregate they weigh in as important," Mr. Hensley says.

The variable is water. The image of drought projected elsewhere may significantly hurt California tourism, Hensley says. And the housing recovery is being slowed by delays or moratoriums in building permits over restricted use of water. "That could be the big issue of next year," he says.

The other hurdle is purse strings on construction. While some banks have gotten out of real estate altogether to deal with problem loans in other sectors, the national bond market has prematurely decided the nation is in recovery.

"That is very dangerous," says Wahed. "If bond rates continue to go up, we can kiss the housing recovery here goodbye."

Long term, the growth of Pacific Rim economies and the prospect of the North America Free Trade Zone highlight fundamental differences between the recessions in California and the West and New England.

New England "has been losing population during these same downturns, while California has been gaining," says Mr. Kotkin. "Down the line, this loss makes each recovery a little slower, a little flatter. The long-term strength still favors the West."