Budget Cuts Threaten California's Recovery

THE window has closed on the prospects for recovery for the world's seventh-largest economy this year. The next opening: spring of 1994, say a number of economists.

California is suffering from its worst recession since the 1930s. While the nation continues in modest recovery, the Golden State is being socked yet again by the prospect of further layoffs, this time in government. As details of California's new $52.1 billion state budget trickle out to cities and towns, local governments are contemplating the cutting of thousands of employees, from parks to libraries to welfare and service agencies.

"The cuts that are being considered are mind-boggling," says David Hensley, director of the Business Forecasting Unit at the University of California at Los Angeles (UCLA). In his quarterly report released today, Mr. Hensley predicts that a minimum of 21,000 jobs will be lost in state and local government in the fiscal year beginning July 1. The number could be far higher because state estimates that it would transfer billions in property-tax revenues away from local governments to public schools were in itially much lower.

"My sense of things is that the public does not have any indication of how bad these losses can be and what the multiplier effects will be," Hensley says. When earlier state estimates hinted that $1.3 billion might be withheld from local governments across the state, Los Angeles County alone estimated 9,500 lost jobs, he notes. But the final state figure, approved this week, is double that: $2.6 billion.

"These new layoffs have definitely helped pull the rug from any chances the state might have to escape from the doldrums this year," adds Jack Kyser, chief economist for the Los Angeles Economic Development Corporation. "Housing and construction are still off, aerospace is way down, and manufacturing numbers are dropping statewide."

The overall bad news is being mitigated by some improvement in recent economic indicators.

The state rate of unemployment, for instance, which reached a high of 10 percent in November 1992, had fallen to 8.7 by last month. Auto sales jumped at a 21 percent annual rate the first quarter of this year, based on Department of Motor Vehicle registrations. And revised data from the United States Bureau of Labor Statistics show that the cumulative drop in jobs in California during the recession has been 562,000, far lower than a previous estimate of 800,000. National action

But the overall health of California is linked to the economic vitality of the US, say most here. That means more improvement here depends in part on actions of the Clinton administration and Congress, which are still wrestling with efforts to find an acceptable balance between new taxes and deficit-reducing cuts in the national budget.

"The critical gut issue for California recovery is at what speed the nation recovers and what the Clinton administration will do to accelerate that," says Robert Arnold, senior economist at the Center for the Continuing Study of the California Economy in Palo Alto. "Right now, we are relying on low interest rates to get out, which has meant the slowest recovery since World War II."

In keeping its California forecast gloomy, the UCLA forecasting unit has downgraded its estimate of US gross domestic product (GDP) growth from its March report's 3.5 percent to 2.5 percent. But both Mr. Arnold and Mr. Kyser say that adjustment is overly negative. "The Japanese economy will be in recovery soon and, with fingers crossed, so will Western Europe," Kyser says. "I don't see the US falling off that far next year."

Other key indicators from the Hensley quarterly report are:

* House prices have continued to fall over the past three years, with most markets showing consistent price declines through April. Despite such sinking prices and record-low mortgage rates, which have made housing more affordable in California, home sales have not been strong enough to spur new construction.

"We have speculated that falling house prices are undercutting demand because potential buyers fear they will suffer a capital loss," the report says. A sharp drop-off in net immigration also undercuts demand for housing.

* Manufacturing jobs have dropped 4.5 percent this year and may drop 2.2 percent in 1994. The decline in aerospace jobs is 16.2 percent, up from a 10.8 percent drop in 1992. Losses of 9.1 percent and 7.5 percent are predicted for 1994-95, respectively. Conversion prospects

Kyser, however, sees other reasons for optimism that are not reflected in statistics: a new high-tech council in Los Angeles, which will oversee the conversion of aerospace firms to other uses; new Los Angeles Mayor Richard Riordan, who will take office July 1 and is expected to ease regulation of businesses in southern California; new funding initiatives in the Rebuild L.A. effort, and a good year projected for tourism.