Power woes, high-tech meltdown leave California near recession

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Power woes, high-tech meltdown leave California near recession

Los Angeles-AP -- Economists at U-C-L-A say the technology meltdown combined with California's power woes will keep the state's economy teetering on the brink of recession the rest of the year.

The Anderson Forecast says California's economy is slowing rapidly even without considering the energy problems. The experts say California's economy will struggle to keep from shrinking as the unemployment rate moves toward a predicted peak in 2003.

A separate report by Cambridge Energy Research Associates criticizes the state's plan to take control of the power grid and shield consumers from the full cost of electricity. The report says that will increase the state's debt and discourage conservation.


-- Martin Thompson (mthom1927@aol.com), June 28, 2001


More complete version of article.

Economists: Power, High-Tech Woes Put State on Brink of Recession (AP) 6.28.01, 2:08p -- An information technology meltdown combined with the state's power woes will keep California's economy teetering on the verge of recession for the rest of the year, according to a UCLA Anderson Forecast released Thursday. Even without the effects of difficult choices facing the state as it deals with a summer of expected rolling blackouts and rescuing cash- strapped utilities, California's economy is slowing rapidly and will struggle just to keep from shrinking, economists at the University of California, Los Angeles said.

A separate report, prepared by Cambridge Energy Research Associates, criticizes the state's plan to take control of the power grid and shield consumers from the full cost of electricity. The report concludes the state's current plan will lead to 112 hours of rolling blackouts this summer.

The report says that a contrary strategy of allowing consumers to bear the full brunt of rising electricity costs will actually end the power crisis earlier by reducing wholesale costs and allowing the state to eliminate the huge debt it has accumulated paying for power since January.

The CERA report concludes that the state's current plan will not encourage conservation, thus plunging the state deeper into debt as it issues bonds to pay for expensive wholesale power.

Instead, CERA recommends the state raise electricity rates enough to cover current wholesale costs and pay off the $20 billion the state had already spent buying power. Such a plan would decrease consumption, forcing wholesale prices down quickly. Lower demand would also decrease rolling blackouts this summer to 12 hours, the report predicts.

The UCLA economists estimate that consumer spending in the first quarter, adjusted for inflation, declined 3.3 percent as paper riches based on vanishing stock options, known as the "wealth effect," disappeared.

"The recent weakness of taxable sales ... likely means that the wealth effect on consumer spending, which was an important determinant of the 1999-2000 gains, is now dead in California," said Tom Lieser, senior economist at the Anderson Forecast.

Lieser said Californians, jittery over the reliability of the state's power supply and worried about their jobs, have lost much of their confidence in the economy.

That concern is backed by the numbers, which show unemployment on the rise, Lieser said. The unemployment rate is already at the highest it has been in two years and will rise mainly because of sluggish job growth into 2003.

Lieser predicts the annual growth rate in non-farm jobs for the year will barely reach 2 percent. That number drops to 1.3 percent in 2002, then rises to 2.1 percent in 2003.

Lieser said unemployment in the state will reach 1.6 million by mid- 2003 before turning around. The unemployment rate of 4.9 percent in May is predicted to average 5.2 percent for 2001, then increase to 6 percent next year and 6.3 percent in 2003.

One bright spot is that state exports remain high. Lieser said exports in the first quarter showed a 13.2 percent year-to-year growth from the same period last year.

On the national front, Edward Leamer, director of the Anderson Forecast, said the risk of recession has dropped slightly to 80 percent from his earlier prediction of 90 percent.

Leamer said the interest rate cuts and President Bush's tax cut have helped the economy slightly, but not enough to prevent recession.

"We still expect sluggish growth through the rest of the year and two quarters of negative growth commencing no later than 2002 Q1," Leamer said. "Although the interest and tax-rate cuts may help the train move faster, there is no light at the end of the tunnel."


-- Martin Thompson (mthom1927@aol.com), June 28, 2001.

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