Despite new jobs and growing tax revenues, California’s economy is coping with high home costs and shrinking apparel manufacturing.
California, which has a bigger economy than Canada or Spain, casts a wide shadow on overall U.S. prosperity.
Several key indicators show that the most populous state, with the nation’s largest apparel industry and retail market, is now coming out of its economic slump. State revenues are growing, jobs are being created and there’s a revived technology industry — as well as strength in agriculture, tourism and, of course, entertainment.
State officials said California added 547,200 jobs from November 2003 to January 2006, compared with 149,500 jobs from January 2000 to November 2003, according to the state Employment Development Department. Last year alone, California netted an increase of 287,800 jobs. In February, the Milken Institute said California claimed five of the top 30 U.S. metropolitan areas in terms of new jobs in 2005. The state’s unemployment rate, which hit 6.9 percent during the dot-com downturn of 2003, stood at 4.9 percent in January.
The personal incomes of Californians are forecast to increase 5.6 percent this year, according to Global Insight Inc., an economic and financial analyst and forecasting company based in Waltham, Mass.
“We’ve got California growing even faster than the nation in 2006,” said Jim Diffley, a managing director at Global Insight, forecasting that national income will rise 5.2 percent.
The value of all products and services generated in the state totaled $1.53 trillion last year, putting California eighth among all
global economies. A survey by Union Bank ranked “opportunities for growth” as the top reason for small businesses to open in California, and it estimated that 40 percent of small businesses in the state are planning to make capital expenditures in 2006.
Still, California must navigate through several economic challenges, from costly workers’ compensation insurance and the highest average home prices in the U.S. to rising energy costs and a state budget deficit, even though tax revenue is running higher than anticipated. In addition, California’s apparel industry continues to shed jobs.
Gov. Arnold Schwarzenegger, a Republican, who won office in a recall election in 2003 and is seeking reelection this year, outlined a $125.6 billion budget in January that proposes higher spending for schools, health care, prisons, highways and transit systems. He also wants to boost the state minimum wage by a dollar to $7.75 over the next two years. The governor is awaiting a bill on the wage increase from the Democratic-controlled legislature, said Schwarzenegger spokesman Vincent Sollitto. An increase in the minimum wage would likely help retail spending.
The chief fiscal analyst for the California legislature, Elizabeth G. Hill, warned in February that the state’s economic risks include increased energy costs and a steeper-than-expected cooling-off of real estate sales and construction activity. “A more pronounced slowdown in California’s economy during the next two years…could easily reduce general fund revenues by as much as $4 billion from our projected level in 2006-07,” Hill wrote in her budget analysis.
The price of California real estate is so high that an increasing number of people can’t afford to live in the state, which means companies are unable to hire some qualified workers, which can force businesses to relocate to less expensive markets.
“High housing prices are going to constrain California’s growth in the next decade,” said Kenneth Rosen, chairman of the Fisher Center of Real Estate at the University of California at Berkeley. He said that if it weren’t for high home prices, California’s economy could grow at a rate of more than 2 percent, instead of the projected 1.4 percent.
The 2005 median price for a single-family home was $715,700 in the San Francisco Bay Area and $529,000 in the Los Angeles metropolitan region, including Long Beach, the National Association of Realtors said. Those figures compare with a median price of $194,500 in Raleigh, N.C., and $247,400 in Phoenix.
That’s why Patagonia, the Ventura, Calif.-based outdoor clothier, is taking matters into its own hands. The privately held company is looking for real estate on which it can build apartments for new employees who are unable to immediately buy housing, said founder Yvon Chouinard. The firm also is considering moving some employees to Reno, Nev., where it is doubling the size of a 171,000-square-foot distribution center, while keeping marketing and design teams in Ventura. “If housing prices don’t come down soon, if the bubble doesn’t burst, we’ll be forced to do that,” Chouinard said. “We’re not able to attract the best people for the lower jobs.”
Even as overall employment rises, Japanese carmaker Nissan announced in November that it will relocate its North American headquarters and transfer about 1,300 jobs to Tennessee from Gardena, a suburb 15 miles south of Los Angeles, partly to take advantage of more favorable tax rates. Engineering and construction firm Fluor said it will move its headquarters to Irving, Tex., which is outside Dallas, from Aliso Viejo, although its engineering and operations divisions will remain in California.
These departures are a recurring theme, U.C. Berkeley’s Rosen said. In the 2001-2004 period, representing the most recent data available, 250,000 people left California for neighboring states, including Nevada, Arizona and Colorado. (For more on corporate relocations to Nevada, see p. 10.)
Apparel companies worry that a higher minimum wage would further erode California’s apparel manufacturing base. “It’ll certainly be a negative to the overall business,” said Jeff Silver, operations and finance chief for Jerry Leigh Inc., an apparel maker that produces less than 20 percent of its products in California. “Every step in the supply chain will be affected.”
With 136,600 workers, the textile and apparel industry is the 10th largest employer among California industries, behind sectors such as tourism, international freight, aerospace, technology and entertainment, said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. Last year, Los Angeles County lost 4,900 jobs in apparel manufacturing and is projected to shed another 2,500 this year, he said. “The industry seems to be bottoming out,” he said. “We have become a design and marketing center.”
Growth in California is generated by three geographical regions. The Bay Area is buoyed by tourism, international freight business and a revived technology industry led by Apple, Google and eBay. Southern California has a diversified market fueled by port activity, tourism, entertainment, technology and apparel. And the Central Valley, which stretches from Bakersfield to Stockton, is adding distribution services to its agriculture-based economy.
As the state’s biggest city, Los Angeles is susceptible to a real estate slowdown that would constrict tax revenues. Mayor Antonio R. Villaraigosa projected a deficit of $271 million in his new budget. Meanwhile, the city will have to earmark an additional $200 million for its pension funds while projecting new revenue growth of only $300 million, said Joe Ramallo, spokesman for Villaraigosa. “He’s looking first at cutting waste and eliminating inefficiencies before looking to raise any fees or taxes,” Ramallo said.
Another concern is lack of job growth in the entertainment industry. “We’re losing some movie production to other countries and other places in the U.S.,” said Howard Roth, chief economist for the state’s Department of Finance.
Still, for many companies, the benefits of being in the Golden State are worth the price. They are firms such as jeans maker 575 Denim, which must ensure that its flagship brand stays ahead in the competitive premium denim market and can justify a $90 wholesale price. The Los Angeles-based company plans to increase its staff of 240 employees by 20 percent this year. “I want to make sure everything is behind the product,” said 575 Denim founder and designer Frank Mechaly. “It would be impossible to do if the facility were in China.”
Schwarzenegger’s administration acknowledges that there will always be companies seeking the least expensive location to do business. “California does not compete purely on cost,” said the governor’s spokesman, Sollitto. “We recognize that there will always be places that will be cheaper to live or there will be states that will spend taxpayers’ money to lure companies. And California will not and cannot do it.”
Sollitto said that Schwarzenegger revamped the workers’ compensation insurance system so that premiums paid by companies and nonprofit organizations were almost halved, saving employers at least $8.1 billion over the last three years.
And industry executives such as Moshe Tsabag, chief executive officer of Hot Kiss in Los Angeles, are bullish on California. Tsabag predicted that a larger teen population will help boost his wholesale volume by 25 percent to $50 million this year. He said Hot Kiss will open its first branded store in Los Angeles in 2007, with additional shops slated later for New York, Miami and Chicago. “We have a healthy economy in California,” Tsabag said.
California’s economy is but one piece of a highly segmented pie, said Dick Baker, president of surf brand Op, which is owned by Warnaco Group Inc. “The consumers today, what they are wearing is very similar in Tokyo and Biarritz [France] and Orange County and Rio de Janeiro,” he said. “It’s a very international product base.”
To retain and grow businesses in California and accommodate five million new residents in the next decade — the state has a current population of 36.1 million — Schwarzenegger outlined in January a multiyear, $222 billion public works package promising 1,200 miles of new highway and more than 2,000 new schools, among other improvements. The proposal, which would be financed using state and federal money and $68 billion in new state bonds, would be a boon to the construction industry. The borrowing requires approval from the legislature and voters.
Another idea that’s been floated for years is a partnership between private enterprise and the government to build an exclusive toll lane for trucks heading to and from the Los Angeles-Long Beach ports, the biggest in the U.S.
Demand for energy also will escalate. Schwarzenegger wants to improve the state’s energy outlook by importing liquefied natural gas from overseas and investing in transmission lines from the Rocky Mountains to California.
“The governor’s focus is on the big picture in improving the business environment,” Sollitto said.