State's Economy Starting to Show Signs of Cracking California: Analysts point to a slowing in real estate markets and exports and imports. Shift is also tied to the national slump, energy crisis, but no one talks of recession.

By STUART SILVERSTEIN MARLA DICKERSON, EVELYN IRITANI, Times Staff Writers

California's economy has looked bulletproof lately, producing the state's lowest unemployment since the Vietnam War era, but chinks are appearing in the armor. New figures show that exports and imports are slowing. Once-hot real estate markets are cooling. Factory overtime hours have contracted and recruiting on college campuses is down. While none of the state's major business forecasters is predicting a California recession, these analysts say the much-anticipated slowdown is near--or already here. The downshift--tied to the national downturn and California's energy shock and dot-com collapse--is increasingly being felt on Main Street. Sales at Target stores, California's No. 1 retailer, have dipped since December, according to Gerald L. Storch, vice chairman of Target Corp. Entry-level hourly employees, he said, have gotten a little easier to hire. And at the administrative headquarters for the company's Mervyn's division in Hayward, resumes are flowing in from veterans of dot-com failures. "They're saying Mervyn's looks really good now. It's a stable company," Storch said. At first glance, that type of worker insecurity isn't justified from the latest unemployment rate figures, which depict California as the picture of health. The numbers for February put California's jobless rate at 4.5%, the best since 1969. But pure timing accounts for some of the strength in the state's economic indicators. California trailed the rest of the country entering and recovering from the last recession. So even as the national economy sputters, it's not surprising that the state still has momentum. In addition, analysts say, employment statistics and other economic barometers don't reflect up-to-the-minute developments. For example, there often are gaps of several weeks or more between the time when companies announce staff cutbacks and the firings begin. "By the time this slowdown is in full bloom in the data, the slowdown will be over," said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy, who expects a brief, mild downturn for the state economy this year. Still, Levy said, because last year was so strong, this year will seem "very slow" by comparison. The change is evident on campus, where aspiring MBAs are being forced to hunt for jobs for the first time in years. "It's a 180-degree turn from last year," said Alysa Polkes, director of the MBA Career Management Center at UCLA's Anderson School of Business. Back then "it was all we could do to answer the phone calls from dot-coms desperate for our talent." With the dot-com bubble popped and other high-tech employers scaling back, students are lining up to interview with banks and other traditional employers. But Polkes said even those firms aren't extending as many offers this year because of mergers and economic uncertainty. She said students are polishing their resumes and interviewing skills with a new sense of urgency, and forming peer groups to motivate each other, "kind of like Weight Watchers or AA."

Economists Enlisted to Explain Slump UC Berkeley's Haas School of Business is inviting economists on campus to address students about the slowdown, said Ilse Evans, executive director of MBA admissions and career services. "Students are nervous," she said. "Employers aren't coming on campus with jobs on a platter." Among the business statistics already available for early this year, some of the most worrisome concern California's trade with the rest of the world, one of the drivers of the state economy. High-value air freight shipments through Los Angeles International Airport declined 9.8% in January, the first drop since the Asian financial crisis of the late 1990s. Air freight shipments through San Francisco International Airport--85% of which are technology goods--have been down since October. Container traffic through California's leading ports--Long Beach, Los Angeles and Oakland--also showed a larger-than-expected contraction in February. Long Beach was hit the hardest, with declines of 12.5% in imports and 7.8% in exports. Those declines are linked to the spread of economic weakness among such countries as Japan, South Korea, Taiwan and Singapore, which rank among California's top 10 trading partners. Analysts believe the slowdown in those nations will worsen in the coming months. At temporary help agencies, which often are quick to feel economic swings, business still is brisk. But Sue Foigelman, who oversees the Los Angeles County and Orange County offices of temp industry giant Manpower Staffing Services, said her customers "have started to become more hesitant" in their hiring decisions. In fact, Foigelman speculates that many of Manpower's orders are coming from businesses whose managers "aren't sure about what will happen in the economy, so before hiring a full-time person, they're getting a temporary person to fill the gap." Even so, she said, Manpower's business volume statewide is up just a little over 10% so far this year, versus a gain of 35% in 2000. The recent stock market swoon is a particular concern for California. Some economists link the surge in home prices and strong consumer spending of the last few years to the upbeat mood created by zooming stock prices, particularly among many of the state's high-tech companies. The recent stock market plunge, analysts say, is likely to undercut that. Nasdaq fallout is pounding parts of San Francisco's commercial real estate market. Vacancy rates in the dot-com-heavy South of Market area have gone from virtually nil last summer to more than 17% at the end of February, while rental rates have plunged 30%, according to real estate firm Grubb & Ellis in San Francisco. "People are surprised at the speed" of the reversal, said Colin Yasukochi, director of market research for Grubb & Ellis. ". . . It has been a lot like the stock market."

Potential Buyers in Bay Area Down Even the Bay Area's vaunted home market has lost a step or two. While median prices are still moving up, those numbers don't tell the whole story, according to Miles McCormick, who sells real estate for Coldwell Banker in Menlo Park. McCormick says two or three buyers now compete for a typical listing, down from an average of nine or 10 last year. He says properties in the $5-million-and-up range are sitting for weeks on the market, and young technology turks aren't plunking down 100% cash as often as they used to. The stock market slump also could pose a huge problem for state government. Californians' stock profits--from stock options and and capital gains--are expected to account for 20.8% of the state's general fund tax revenue this fiscal year, up from barely over 5.6% five years ago. If those stock profits dry up, so could the state budget surpluses. "It's a real risk," said Ross C. DeVol, director of regional and economic studies for the Santa Monica-based Milken Institute. In fact, DeVol said, there's a chance that falling revenue from stock-related transactions could hit the state at the same time reduced trade with Asia, Canada and Mexico makes its impact. Likewise, the state's withholding tax revenue, taken from California workers' paychecks, has grown more slowly during February and March. The revenue for the two months is up about 7%, a solid gain, but nothing like last year's 18.9% increase. "It does reveal a slowdown. I don't think there's any question about it," said Ted Gibson, the chief economist for the California Department of Finance.

Pluses Remain for State Economy Still, no one is predicting recession. In fact, California's economy has plenty working in its favor. For instance, even as the state's manufacturers have announced layoffs and reduced working hours, they remain far healthier than their counterparts across the country. "We don't have a lot of heavy, durable goods manufacturing, which is where the brunt of the trouble has been so far" nationally, Gibson said. That's in contrast to the last California recession, which stemmed mainly from the huge retrenchment of the aerospace industry. This time, Levy said, high-tech is the main culprit in the slowdown. But unlike aerospace, which remains half its former size, the tech sector should eventually bounce back because businesses need to keep up with the latest advances. Any downturn in Hollywood likely wouldn't be long-term either. In the short run, the industry could be crippled by threatened strikes by actors and screenwriters, possibly beginning as soon as May 1. Even if there are no walkouts, the heavy backlog of television shows and films stockpiled by the studios almost guarantees declines in production this year. Still, Hollywood isn't going away. So once any strikes are settled or the production backlog is whittled down, the entertainment industry will crank up again. The real wild card is energy. California's business reputation will suffer for years if it can't secure affordable, reliable power for companies and consumers. Every week that the state fails to come up with at least a stopgap solution, the risk grows of firms shifting production to other states or shuttering local facilities. Meanwhile, rolling blackouts may have some tourists rethinking their summer travel plans. While there are no reports of widespread cancellations yet, hoteliers and meeting planners around the state have received calls from anxious clients, says Bruce Baltin, a hotel expert with PKF Consulting in Los Angeles. The tourism industry also is anticipating declines in business travel because of a softening in the national economy. Baltin says continued headlines about blackouts could keep some leisure travelers home as well. "People start picturing themselves stuck in an elevator," Baltin said. ". . . It's hanging out there like a dark cloud" over the industry. In fact, dark clouds are gathering over a broad spectrum of California industries. In coming months, the leading economic indicators are expected to reflect the chill some are already feeling. "It's pretty clear that we were riding on a boom," said Cynthia Kroll, regional economist at the Fisher Center for Real Estate and Urban Economics at UCBerkeley. " . . . I don't see any reason to believe we'll be immune [from a slowdown] this time around."

-- Tom Flook (tflook@earthlink.net), March 24, 2001