THE world's seventh largest economy is sputtering.California's already beleaguered defense industry teeters on President Bush's proposals to slash the nation's nuclear arsenal. Real estate and manufacturing in the state show no signs of rebound. Construction, banking, and retail slumps continue despite eased mortgage rates. All this is happening after this year's $7 billion increase in state taxes. California has lost 240,000 jobs this year, a 2 percent decline that exceeds the national rate of 1.5 percent. Total personal income growth, which was 7.4 percent last year, will be only 2.8 percent this year. The state projects 5.8 percent personal income growth next year. Housing-start permits are down 24 percent over last year, and non-residential construction is down 27 percent. Citing these statistics, state Treasure Kathleen Brown told Gov. Pete Wilson last week that the state "has been through a deeper recession than previously thought."
No recovery here The assessment triggered new debates among state lawmakers over whether to raise taxes again or cut spending. California already has the largest state deficit in United States history ($14.3 billion). "It hasn't been helpful for economists to declare the recession has ended," says Steve Levy, director of the Center for Continuing Study of the California Economy. "The more important thing to realize is recovery hasn't started. We are stuck at the bottom." California entered the recession later than the US as a whole. Newly revised figures on traditional indicators - employment, housing permits, housing starts - have led economists to revise predictions of recovery later into 1992. "Even when the nation begins to surge in these areas, California will lag behind," says Art Shaw, chief economist for the Los Angeles Chamber of Commerce. The state's vacancy rates in commercial office space reflect vast overbuilding, he says. Lynn Reaser, senior economist for First Interstate Bancorp in Los Angeles, describes a reactionary climate that has kept the economy off kilter: "There was a strong surge in real estate in the spring which people extrapolated into a stronger trend than was realistic," she says. "When that collapsed prematurely, people extrapolated that into a loss of confidence that is also somewhat unwarranted." One bright spot on the Golden State's horizon is reduction in mortgage rates that have pent up demand for home sales and refinancing. But stories of California banks burned by overlending are rampant. And new regulations forced by the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) - the federal thrift bailout bill establishing risk guidelines for banks - have kept money tight. "Enforcment of FIRREA has meant absolutely illogical, draconian, and severe measures," says Mr. Shaw. "No matter how much the Fed loosens the purse strings, banks here are not extending credit except to top customers." Some see California's wide ethnic diversity as a victim of a general restructuring of the service sector - a painful consolidation and layoff period due to increased international competition in the late 1980s. "It's now time for services to follow the layoffs in middle-management we've seen for years in manufacturing," says Shaw.
All at once Part of California's problem is the confluence of so many negatives. "Now we are going through the downsizing of defense on top of recession. This is retarding our growth," says Mr. Levy. The state's employment has hovered at 7.7 percent in September; the national average was 6.7 percent for last month. Though the B-2 Stealth bomber and "star wars" systems received renewed endorsement in recent administration announcements - good news for Northrop Corporation and several companies with a hand in the Strategic Defense Initiative program - several systems singled out for cuts are California-based: * General Dynamics's San Diego division manufactures Tomahawk cruise missiles that carry nuclear warheads targeted for reduction. * TRW Space and Defense Sector in San Bernardino builds the Peacekeeper MX missile. * Rockwell International Corporation in Anaheim employs nearly 2,000 in systems integration, logistic support, and electronic components for the Minuteman III, the Midgetman, and the Peacekeeper MX. One long-term benefit of suspending these programs is a statewide shift away from military industries, observers say. New emphasis is being placed on biotechnology and industrial design. Though such economic prognoses reflect downturns in virtually every corner of the state economy, economists say the state's long-term outlook is still very strong. Foreign trade - specifically Pacific Rim trade - is growing; there is a revolution in demand for technological and capital goods from the Mideast, Eastern Europe, and Mexico. Some experts also argue that the historic influx of population in California - 840,000 last year - is an economic plus. "With such a continued influx of people, the numbers of everything else ... have to follow upward," says Levy.