Golden State Looks Past Recession

DROUGHT, freeze, defense layoffs, and a housing slump have been kicking sand onto the once-sunny face of industrial California. But signs are appearing that - like a bulky, bronze beachcomber - the world's eighth-largest economy could be flexing its muscles again by 1992.

State unemployment (7.4 percent) soars above the national average (6.5) - fueled here by layoffs in aerospace, defense, and manufacturing.

Housing starts fell by one-third last year, leading to precipitous drops in commercial and industrial construction. The largest state budget deficit in United States history - $12.6 billion - has landed on the heads of legislators like a brick.

And despite several indications that post-Gulf-war public confidence is easing the national recession, several projections of gross state product - total ouput of goods and services - hover between minus .05 percent to minus 0.1 percent, after years of steady growth.

Myth laid to rest

``The myth of the Golden State is finally dead,'' says Sherry Bebitch Jeffe, a political scientist at the Claremont Graduate School. Citing the largest population surge in state history last year - 834,000 - Ms. Jeffe echoes a growing chorus of observers who say the nation's most economically-diverse state is beyond the pale of manageability.

But some observers spin the same population numbers from dross into gold. They say that although prodigious growth is a mixed blessing because of strain on public services, it nonetheless is the engine that will continue to propel California toward the year 2000 far ahead of a lagging nation.

``The current slowdown does not mean that the state has lost its competitive advantage,'' says Stephen Levy, director of the Center for the Continuing Study of California Economy. ``Business managers and investors should expect the state to add 3 million jobs and 6 million residents in the 1990s, far outpacing the national growth rate.''

The West Coast is the nation's fastest growing region, and every major national and international corporation must develop a presence in the area, Mr. Levy adds. Pacific Rim trade is the fastest-growing segment of international trade.

Demand for technology - both foreign and domestic - is the fastest-growing segment of manufacturing, a California hallmark.

`Staggering challenges'

So although continued population growth creates ``staggering challenges for our schools, highways, environment, and quality of life,'' Levy says, it ``creates huge business opportunities as well.''

James Pugash, housing analyst at Montgomery Securities in San Francisco, says sales of new and existing homes are up 14 percent statewide, compared to 8 percent for the rest of the US.

The housing figures are a key indicator of the status of the overall economy because they represent a large share of GNP, he says - 5 percent nationwide, but much higher - 5 to 10 percent - in California.

Evidence of a rise in the housing market ``is very significant because it has been depressed so long,'' says David Hensley, head of the Business Forecasting Project at the University of California at Los Angeles.

Falloffs in housing starts last year were more than twice the national average, and the lowest since 1982. The state may lose another 50,000 jobs before construction comes back strong, perhaps in early 1992, says Mr. Hensley.

Phil Vincent, chief economist for First Interstate Bank, sees California's population growth as the most significant single indicator of a housing turnaround. ``We've had booming population growth, so a boom in construction has to follow,'' he says.

State spending by California will be straitjacketed by budget cutting, says Hensley, and the massive state deficit is likely to hurt local and state government hiring, a relatively high 13 percent of total economic activity.

Employment figures, probably the greatest single indicator of the state's financial health, recently have been obscured by two widely divergent polls, both compiled by the US Bureau of Labor Statistics.

The first, the so-called ``establishment survey'' is taken at places of employment and shows 30,000 out of work statewide.

A second survey, conducted in homes, puts the figure at 300,000 which would be a whopping 18 percent of the national total.

Hensly, measuring such other indicators as help wanted ads, unemployment insurance filings, and retail sales, say he thinks the more negative figure is accurate. ``This means California will be well behind the nation in coming out of recession,'' he says.

Positive outlook

Though there is dispute about how long the state and country will stay in recession, there is less doubt about state prospects in recovery.

``For the 1990s, California and its regions remain the largest national market and possess the greatest potential,'' says Levy.

Annual demand for housing will reach 100,000 in the Los Angeles basin and 250,000 statewide - double current building levels, according to estimates by both Levy and Hensley.

Either way, California will fare better than other national regions. ``New England is still in a free fall, and the rest of the country is flat,'' says Robert Edelstein, a real estate expert at the University of California at Berkely.

For California, experts say two big question marks are the duration of the current, four-year drought - somewhat relieved by several recent storms - and permanent damage from the winter freeze, the state's worst since 1910.

``In the previous, major drought of 1977, higher prices for fewer farm goods actually brought more revenue to farmers,'' says Hensley. ``That could happen again.''

Economists say current downturns here have provided a lesson.

``The region is not immune from national recessions, as so many people were trying to have us believe,'' says Mr. Edelstein. ``Resilient, yes. Immune, no.''

And Mr. Vincent says: ``The bottom line is - where the US goes, California goes with it.''