STATE FACES ECONOMIC SLOWDOWN UCLA SURVEY PREDICTS MILD NATIONAL RECESSION.

Byline: Chris Sieroty Staff Writer

The longest economic expansion in U.S. history will end with a mild national recession in mid-2001 and make California's high-tech economy vulnerable to a less-severe slowdown, a University of California, Los Angeles, survey predicts.

The survey released Monday by the UCLA Anderson School of Business said the national recession won't last long and won't be deep. But economists predict that the Bush/Clinton economic expansion will come to an end.

For California, an economic slowdown - short of a recession - was predicted.

The forecast said the state will experience a cutback in venture capital for companies across the board, and the end of stock options as an attractive recruiting tool.

``This is not a recession, but a moderate downturn in the (California) economy,'' said Tom Lieser, senior economist at UCLA's Anderson School and author of the California Forecast.

Economists at UCLA define a recession, generally described as an extended slowdown in business, as two consecutive quarters of a decline or negative growth in the nation's Gross Domestic Product.

On the national scene, Edward Leamer, author of the National Forecast, said the mild recession will be felt in the second and third quarters of next year but that the economy ``will bounce back strongly in 2002.''

``A downturn in the national economy of modest proportions will make it harder for high-tech companies, many of which are located in California, to raise capital,'' said Lieser.

Among the warning signs signaling the end of the expansion are tight labor markets, scarce capital and meager investment opportunities.

Any economic downturn will have a greater impact on the San Francisco Bay Area, which has been more dependent on venture capital than the rest of the state, wrote Lieser.

The fall in the technology-laden Nasdaq stock market index of almost 50 percent since March has heightened the risk to the California economy. But those same firms helped drive the state to record prosperity, leaving a wider cushion than the rest of the nation for economic hard times.

``The importance in this index of companies with either head offices or significant operations in California has led us to reassess the risk that the stock market shakeout could cause real damage to California's high-tech economy,'' Lieser wrote.

Unlike the aerospace business a decade ago, California's new high-tech market is worldwide in scope, driven by an Internet phenomenon that is still in its early stage of evolution.

According to Lieser, these factors should limit the extent and duration of the downturn to a relatively short period of time.

``Jobs labeled 'high-tech' or 'New Economy' are not immune from economic downturns,'' he said. ``The high-tech sector, with its high proportion of young firms, is more vulnerable to the kind of credit cycle on which this forecast is based.''

Dennis Meyers, an economist with the California Department of Finance, agreed, saying: ``We are still in the Internet development stage. Some shakeouts of less viable e-businesses are going to happen, but we will be left with even stronger companies.''

The forecast also predicts that nonfarm employment will rise 3.6 percent this year, up from 3.1 percent in 1999. The rate of job growth is expected to slow to 1.9 percent next year, followed by 1.8 percent in 2002.

``We are not yet seeing any reduction in growth rates,'' said Lieser. ``The signal has been more on a national level than in California.''

Meyers said growth should slow by 2002 but not at the rate forecast by the survey.

Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., agreed, predicting a growth rate around 2.5 percent in 2002.

The Anderson survey found that employment growth in the five-county Southern California region continued to expand this year, albeit at a more moderate rate.

Employment grew by 2.7 percent for the year to date in Los Angeles County, compared with 2.9 percent in 1999.

Riverside and San Bernardino counties have grown by 4.9 percent so far this year. Last year the so-called Inland Empire experienced a growth rate of 5.8 percent.

Kyser said the remarkable growth of the Inland Empire was due in part to firms leaving Los Angeles and Orange counties for less expensive land costs.

Orange County will experience a growth rate of 3.1 percent, while Ventura County will register a growth rate of 4.2 percent.

In agricultural-based Central California, unemployment rates are expected to remain high, while growth rates will range from 0.8 percent in Merced County to a high of 4.1 percent in Modesto County.

Tulare County will lead the region and the state with an unemployment rate of 14 percent, compared with 13.8 percent last year.

Growth in Northern California is also expected to slow by the end of the year with Sacramento experiencing a rate of 3.3 percent, which is down from 5.3 percent last year.

San Francisco employment will grow by 2.6 percent, while San Jose should experience a growth rate near 2.1 percent.

``California is definitely a collection of economies and what drives it is different from north to south,'' said Kyser.

Although California has yet to close its unemployment gap with the nation, the survey forecasts that this year will end with a 4.9 percent average jobless rate for the state, just 0.8 points above the national rate of 4.1 percent.

However, with slower job growth projected for next year and 2002, and the state picking up population at a steady rate, the result will be an unemployment rate of 5.4 percent next year and 5.9 percent in 2002.

The survey predicts California's unemployment will rise above 6 percent by the end of 2002.

New residential building permits in California never really broke out of the range of 130,000 to 140,000 units per year in 1999 and 2000. Lieser predicted moderate permit numbers over the next two years, with 134,000 next year followed by 146,000 in 2002.

``We do have a chronic shortage of housing which is manifested by the high cost of housing,'' Lieser said.

``The relationship between stock market gains and housing prices in the San Francisco Bay Area has been very pronounced,'' he said. ``In the Greater Los Angeles area and in San Diego County, the high home prices reflect a scarcity of housing.''

Lieser expects home prices to hold steady next year.

As for exports, the survey found that the increase of 21.5 percent in worldwide sales has been a major determinant of the continued strong gains in income and employment in the state.

Mexico will continue to be the leading destination for California exports, growing by 32.4 percent this year. Japan was the second-largest destination for the state's exports, while Canada was third, followed by South Korea and Taiwan.

``There will be slower growth with some of our trading partners but it will be stable growth,'' said Kyser. ``The big news is in Mexico where they recently installed a new president and avoided a recession that in the past had followed a presidential election.''

``Anything that gets compared to year 2000 for the state is going to look disappointing because you had spectacular growth in employment, personal income and retail sales,'' Kyser said. ``It's a slowdown but no one has used the word recession.''

In the past, UCLA's forecast has generally predicted both the seriousness of the early-1990s downturn in California, and the strength of the state economy's rebound since 1993.

The forecast, for example, seven years ago predicted that the state's high unemployment rate, 9.4 percent, would decline to about 7.7 percent by the end of 1996. The state's unemployment rate actually declined to 7.2 percent by the end of that year.