As California cools, US economy feels chill

Vibrant even after energy crisis, Golden State's finances now dimming as tourism, high-tech slow.

California, the economic booster engine that didn't flag even as the country foundered through most of 2001, is finally stressing at the bolts.

Vexed by a high-tech bust, slowing exports, sky-high energy prices, and a growing budget deficit, the nation's largest state economy is now struggling.

California's woes, while felt most intensely here, represent a significant challenge for the broader US economy.

"California's growing list of problems is removing the state as one of the last serious props to the national economy that was keeping it out of recession." says Ross Devol, chief economist for the Milken Institute, a Santa Monica-based economic think tank. "From January to August, the state was still going strong. But ... the downward pull has just gotten too strong."

Although a Golden State recession isn't likely to be as bad as the long, nasty downturn in the early 1990s, California was dealt a severe financial blow by the slowdown in tourism after Sept. 11.

But the southern Californian economy, which cranks out $600 billion in goods and services, may eventually benefit from the war on terrorism - perhaps as soon as next summer.

Military production

Southern California's aerospace and defense firms - local operations of Boeing, TRW Inc., and Northrop Grumman - will likely supply much of the gear needed to fight terrorists at home and abroad, from surveillance technology to advanced communications and avionics.

And if Americans remain reluctant to travel, the state's many technology firms may wind up producing the teleconferencing, videophones, and other communications gear suddenly in demand by businesses nationwide.

"We think these and other factors point out that California's current downturn will improve by the second half of next year," says Lisa Grobar, director of the Economic Forecast Project at California State University, Long Beach.

But those possibilities are drowned out, for now, by the state's immediate woes.

"California is definitely seeing a

slow down from all directions within the state, reverberating from the US economy, and the global downturn as well," says Jack Kyser, chief economist for the Los Angeles Economic Development Corp.

Simultaneous downturns in Europe and much of Asia have hit home in a state with wide-ranging exports and imports.

For example, falling demand for new commercial jets abroad and in the US ripples into the state's prefabricated metal producers.

The state's agricultural valley has also suffered from plunging produce prices.

On the import side, ports and storage and handling facilities have been hurt by fewer orders from Asian countries. Fewer tourists are visiting California's attractions.

Nor has the slowdown at home and abroad spared the state's "new economy."

The dotcom collapse of firms that couldn't turn a profit has affected Silicon Valley like no other region in the nation.

Energy woes

Then there are a host of industries, such as textiles, suffering from electricity prices that have shot up as much as 150 percent.

The energy crisis, spawned by a failed utility-deregulation effort, pushed down the state's bond rating and transformed a $12 billion surplus into a $12 billion deficit. Money legislators had hoped to spend on hiring teachers and improving transportation went to electricity contracts that kept the power flowing.

"The botching of the energy crisis by Gray Davis and other leaders has definitely hurt the fiscal situation for California," says Joel Kotkin, a senior fellow at the Davenport Institute for Public Policy.

Taken together, some 260,000 Californians may lose their jobs by the middle of next year, according to a study by the Milken Institute. Other analysts, though, say that figure is overblown. The state's own department of finance puts worst-case job losses at 140,000.

"California's economy is not at risk of a prolonged, deep recession like the one in the first half of the 1990s," Howard Roth, principal economist of the state Department of Finance, said in a report last week. "The state's high-tech sector is struggling, but there are few imbalances in the economy."

One of the intangibles that has economists worried, however, is consumer confidence. A recent survey by the Public Policy Institute of California shows that 60 percent of respondents think the state is headed for economic bad times for the next 12 months. The figure is important, because two-thirds of the state's economy is based on consumer spending.

Still, some analysts point out a few bright spots. Recent deals that Hollywood writers, actors, and directors have made with producers have averted potentially devastating strikes.

Also, tourist destinations, including Disneyland and Knott's Berry Farm, are looking inward for growth - turning to millions of potential visitors within the state.

"One of the state's biggest industries is now tapping into the huge population within its own borders," says Kyser.

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