(December 9, 2003) California’s overall economic outlook is improving for 2004, although increasing costs of doing business in the state are hampering job growth, according to a report on the U.S. and California economies released by the California Chamber of Commerce.

The report from the Chamber’s Economic Advisory Council was presented to the Chamber Board of Directors last week. It presents an overview of the national and state economies, and breaks down California’s economy by selected industries.

View the full report.

United States
The U.S. economy was strong in the third quarter of 2003, with the gross domestic product rising 7.2 percent, and consumer spending up 6.6 percent. This was supported by the federal tax cuts and the tail end of the refinancing boom. The gross domestic product growth rate is expected to drop back down to about 4 percent in the fourth quarter.

California

Numerous events in 2003 had an impact on state economic indicators, including the recall of Governor Davis, the budget crisis, skyrocketing workers’ compensation costs, the passage of SB 2 — the $7 billion health care tax — and the late October wild fires in Southern California.

In spite of these factors, there are indications that the state has started a modest economic recovery. The number of new business incorporations is growing. Additionally, new home building is a bright spot all around California, with new housing permits up substantially over 2002.

The study suggests that after losing 125,500 non-farm jobs in 2002, and an estimated 4,400 more in 2003, California should move back into a growth mode in 2004. The strength in job creation will depend on the perceived attitude toward business in Sacramento. Currently, it is expensive to add a job in the state, and the council predicts that firms will be guarded in their hiring until they sense a change in the business climate.

Brief on Conditions in Selected California Industries

• Agriculture – Overall conditions are mixed, although labor costs are up, and the industry is concerned about workers’ compensation costs and the implications of SB 2.
• Banking and Finance –   There has been continued strength in consumer lending, but weakness in mortgage lending could have an impact on future earnings.
• Commercial Real Estate –   Overall investor demand for buildings is strong, as interest rates are favorable. However, weak job markets have shut down demand for space.
• Entertainment –   2003 has not been the best year for the motion picture/TV production industry, with employment in Los Angeles County down compared to 2002. Runaway production continues to be a concern, as are rising costs of doing business in the state.
• Foreign Trade – Retailers are exercising tight control on their inventories, although container shipping levels at California ports are up by 20 percent over the year.
• Manufacturing –   While manufacturing employment in California is still declining, there seems to be a slowdown in job losses. Manufacturing has been hard hit by increases in the cost of doing business in the state.
• Natural Resources – Water: California water districts that obtain water from the Colorado River finally reached an agreement on how they will divide the water from the river and how they will work on reaching their entitlements in 2003. No water shortages are expected next year. Electricity: There are no expected shortages of power this year, barring extreme circumstances.
• Retailing –   Many retailers have been cautious about inventories, and middle range retailers are struggling for sales. Auto sales in the state slumped since the increase in vehicle license fees (VLF), new data was not incorporated since the VLF increase was repealed.
• Residential Real Estate – New home uilding in the state has been turning in a strong performance, although the year-to-year increase has been narrowing.
• Technology –   News about the technology industry has been improving, as have employment numbers, although ongoing challenges for Silicon Valley are the still-high costs of doing business, as well as home prices.
• Tourism –   There had been a slow improvement in the state’s tourism industry over the summer, but the wild fires have raised a new challenge. The restaurant business continues to struggle due to workers’ compensation insurance costs, and the industry is nervously looking at the implications of mandated health care. The hotel industry is seeing increases in occupancy rates, but properties have had to cut room rates to get “heads in beds.”

In conclusion, the report found that the state’s economy is moving slowly forward, and the outlook for most of the state’s key industries in 2004 is more favorable. However, businesses remain cautious about adding workers, because of the high costs of doing business in California.

The Chamber council is chaired by Jack Kyser, chief economist for the Los Angeles Economic Development Corporation. View the full report.

Staff Contact: Sara Lee