Don't believe all you hear about California economy

Despite gloomy portrayals by candidates for governor, the state is staging a recovery.

Last February the softwaremaker Electronic Arts went looking for a new site to consolidate three company operations into a state-of-the-art digital gaming studio. The California firm, worth an estimated $13 billion, came to a decision three weeks ago. The winner: Playa Vista, an enclave of Los Angeles.

The maker of electronic video games decided to stay in the Golden State largely because of the labor force. "L.A. has a phenomenal talent base," says John Batter, a vice president and general manager of the firm's Los Angeles operation.

To hear the gubernatorial candidates talk about it, you'd think California has become a Third World nation, a Bangladesh where people wear a lot of spandex. As the would-be governors pitch their wares for the Oct. 7 recall, they tell the same bedtime story: How the California dream has turned into a nightmare.

Yet their gloomy scenarios may be a bit melodramatic, even by California standards. True, the state is facing a serious budget problem and, like the rest of the nation, is struggling to pull itself out of an economic hole.

But the economy here is doing better than many states, and California still has some built-in strengths that others don't. Successes like Electronic Arts or Lockheed Corp. - busy building 100 C-17 military cargo planes in Long Beach - were created by a hothouse of growth ingredients that only California can serve up: a pool of educated workers, prestigious universities, great weather, entrepreneurial vigor, and a walletfull of venture capital.

It's the formula generating a $1.36 trillion economy - the fifth largest in the world. It draws 40 percent of the nation's venture capital to the state and has helped create an explosive housing market as well as awaken the slumbering high-tech industry.

It's gathering momentum despite the continued effects from the Sept. 11 terror attacks, a national economic downturn, the impact of the SARS epidemic on state travel and business, and the effects of the Iraq war.

Still, there are concerns in the corporate community - notably, the "hostile business environment" in Sacramento. "It's the inherent strength of the California economy trying to overcome [a drag on it]," says Jack Kyser, chief economist at the nonprofit Los Angeles County Economic Development Corporation. "It's like a high-powered vehicle stuck in a ditch. It's trying to get traction."

Political one-liners aside, the state is showing some verve:

• Job creation in California beat the rest of the nation for the last three years, according to the Center for Continuing Study of the California Economy in Palo Alto. Since May 2000, the state has lost 20.7 percent of its computer and electronic manufacturing jobs, while the US has lost 21.8 percent.

• The state's 6.6 percent unemployment rate is much less than in the early 1990s recession, when it hit 9.7 percent, though it remains above the 6.2 percent national average.

• The software and technology industries are showing signs of recovery, with a 6 percent annual increase in investment, according to the Milken Institute in Santa Monica, Ca. "That's the first piece of good news that will help the California economy overall," says Ross DeVol, director of regional economics for the think tank.

• California has attracted 40 percent of US venture capital so far this year. Steve Bengston, a managing director of PriceWaterhouseCoopers, says while the amount is not what it was during the boom-boom '90s, the first six months of 2003 brought California $3.5 billion - more than three times No. 2, Massachusetts. "By any historical standard, there is quite a bit of venture capital in California, at the levels of about 1995 and 1996," he says.

Even so, Silicon Valley is still waiting for the full comeback. The mantra here: When will it hit? Most experts think it will never rocket as it did in the dotcom boom of the late 1990s, but it will be strong nonetheless. "At some point that strength will reemerge," says Steve Levy, director of the Center for Continuing Study of the California Economy.

These days, the hot industry is home building. Fueled by lower interest rates, the state's banks have enjoyed a refinancing frenzy. New California housing permits are running 25.9 percent ahead of the first 6 months of 2002. "Keep building at this level and you will probably have the largest number of new housing units constructed in the state since 1989," says Mr. Kyser.

Hollywood, which had been losing jobs, has added 3,000 new positions in the past year. International trade, tourism, and agriculture are challenged but hanging in there. California's three ports, launching pad to Pacific Rim nations, are busy.

None of this is to say the state doesn't have problems. Businesses, for one, are upset with Sacramento's penchant for regulation. Worker compensation rates are out of control, leaders say. California employers pay the highest rates in the nation.

The result is that companies like Chocolates à la Carte, a Los Angeles confectionary, watched their rates soar from $250,000 last year to $500,000 this year, resulting in layoffs. A recent survey of businesses by the California Chamber of Commerce tapped into a mother lode of frustration. "We have never seen this level of anger from the business community on any issue," says the agency's Sara Lee.

Translation: It will be an issue for whoever the next governor is.