California May Lag Nation as It Maneuvers Into Recovery By SHELLY GARCIA Senior Reporter Signs that the economy is rebounding are increasingly appearing on the horizon, but California may lag behind the national recovery. That was the message delivered by Scott Anderson, senior economist at Wells Fargo Bank at the 20th Annual AeA Capital Sources Conference, held Oct. 15 at Skirball Cultural Center. Anderson told the audience that the high labor costs in California coupled with the impending changes in health care legislation could adversely affect job growth in the state. And the likely repeal of the vehicle registration tax could balloon the state’s budget deficit to $12 billion, further impeding chances for a recovery anytime soon. “The economic war is far from won in California,” Anderson said. On the national front, many signs point to a recovery underway with job growth resuming by the third or fourth quarter of next year. Consumers, many still flush with cash from cash-out refinancing, have largely held onto that money, and $1.7 trillion in tax cuts expected over the next 10 years will only add to those coffers, boosting spending power further. “We believe this war chest of money could come back into the economy,” Anderson said, noting that household liquidity is now at record levels. At the same time, manufacturers have seen inventory levels reduced by $238 billion since the first quarter of 2001, indicating that production should begin to rev up shortly. And dramatic increases in depreciation tax credits under President Bush’s tax cut plan, are expected to boost business investment by 10 percent over the coming year and a half. “This will definitely help boost investment this year and in 2004,” Anderson said. Anderson said the U.S. economy grew by 5.8 percent in the third quarter, gathering momentum that will almost certainly continue despite such issues as the slower pace of job growth nationwide. Other reports have echoed that projection. Production increase A Chapman University index of factory activity released in recent weeks, for instance, showed improvement across all industry sectors for the third quarter of 2003 and indicated that production and new orders are on the rise in California as well. Some of the improvements logged so far, particularly in manufacturing, can be attributed to such dynamics as lower interest rates rather than a real boost in revenues, Anderson said. Going forward, Anderson and others say that the weak U.S. dollar, making U.S. exports more attractive to foreign companies, is likely to carry the ball on improved revenues along with a bright outlook for consumers’ income growth and, as a result, spending power. Anderson said 90 percent of consumer spending depends on income growth, and the tax cuts now underway will increase consumers’ income growth by 2 percent this year. Interest rates, too, are expected to remain at current levels at least until the second quarter of 2004, and the fed rate could remain at current levels even longer. “The fed won’t think about raising interest rates until unemployment falls to 5.5 percent,” Anderson said. Job problem Indeed, job growth is the fly in the ointment. Nationally, 2.6 million jobs were lost since 2000, 1 million of those since the recession ended in 2002. “This recession has, by far, been the longest prolonged period for job losses,” Anderson said. The recent economic growth in the face of such workforce reductions is due to what Anderson said is a rate of productivity growth, 5.4 percent in 2002, that hasn’t been seen since the 1950’s. The thinking is that companies begin to add jobs when gross domestic product increases above 5 percent, but in California, job growth is likely to be slower. Average hourly wages in California topped out at $15.01, more than $3 higher than the national average, more than $12 higher than Mexico and a staggering $14.37 higher than the average wage in China – $0.64 per hour. “The California worker has to be 15 times more productive than the Chinese worker for a company to want to remain in California,” Anderson said. Add to that the rising costs of health care, workers’ compensation and other taxes that rank California fifth highest for costs of doing business, and the outlook for job growth continues to be dim. “The economy in California probably will continue to fester,” said Anderson. The conference, presented by the Woodland Hills office of the AeA, a national technology trade association, was geared to help companies that want to raise capital and enter new markets through acquisitions and other financial strategies.