ECONOMY: North County jobs recession just getting started, analysts say

State low on cash for unemployment benefits, considers tax hike

By CHRIS BAGLEY - Staff Writer | Saturday, November 29, 2008 4:00 PM PST ∞

Snowballing economic weakness is poised to cause joblessness rivalling the recession that hit Southern California in the early 1990s, when sharp cuts in federal spending led to tens of thousands of job losses on military bases and for defense contractors, economists said last week.

And state officials say California is running out of money to pay unemployment benefits. The state government is considering higher taxes on employers, reduced benefits and increased debt.

Nearly 108,000 people were out of work in San Diego County last month, pushing its unemployment rate to 6.8 percent from 4.8 percent in October 2007, the California Employment Development Department reported Friday.

Revised estimates from the U.S. Commerce Department on Tuesday show the nation's economy shrinking at an annual rate of 0.5 percent in the July-September quarter, faster than the 0.3 percent rate estimated in October.

Delayed reaction

Companies don't typically hire or lay off workers until several months after their business takes a turn, because of the complexity of the process, economists say. That means the slowing business reflected in third quarter will probably show up in the fourth-quarter unemployment numbers, said Chapman University economist Esmael Adibi.

Adibi points to the recession that hit the U.S. ---- and particularly Southern California ---- in the early 1990s. Reduced military spending in 1991 catalyzed the recession, but its effects were still showing up in Southern California's joblessness into 1994, Adibi said. San Diego County's unemployment rate peaked in July 1993 at 8.6 percent, even as some industries were beginning to pick up steam.

"I would not be surprised if we get close to that number" some time in the next two years, Adibi said. "The changes that are occurring month by month are incrementally very big. Nobody's really hiring and creating jobs, with the exception of health care."

Based on San Diego County's work force of 1.6 million people, 8.6 percent unemployment would entail an additional 28,800 people out of work.

Unofficial unemployment

Another economist said that will probably also be true in inland areas, whose economies were based more heavily on the imploded construction and real estate industries. Riverside County's unemployment rate peaked, also in July 1993, at 12.4 percent.

"I'm afraid for Southwest Riverside" County, said Brad Kemp, director of research at Beacon Economics, a consulting firm.

The area's economy has also depended heavily on people who commute to coastal areas that offer high-paying jobs but are expensive in terms of fuel costs, Kemp noted. He also said the area has more shopping centers than its population can support in the long run. When consumers cut back sharply on spending, as they are doing now, the pain is particularly sharp in such areas, he said.

The numbers of people out of work in both San Diego County and the two-county region of Riverside and San Bernardino hit new records last month, according to the state's jobs agency.

But even those reports underestimate the severity of the situation among construction jobs, said Alan Nevin, chief economist for the California Building Industry Association. Nevin estimates that only about half of the people who have lost home-building jobs since the peak were on payrolls. The rest ---- about 9,000 out of 18,000, based on state data ---- were either in the country illegally or were being paid in cash for other reasons. Any future cuts in home construction will fall more heavily on American citizens, Nevin said.

Frayed safety net

Federal and state governments have jumped since mid-month to keep rising unemployment from further damaging the rest of the economy. Economists say the efforts are important, but small relative to several steps that the U.S. government is taking to stimulate the economy and shore up the financial system.

Legislation signed by President George Bush on Nov. 21 provides federal money to states to pay an additional seven weeks of benefits for workers who stop receiving benefits after 39 weeks, a period that had already been extended from the standard 26 weeks. The federal money allows California and other states with higher-than-average jobless rates to cover an unemployed worker for a total of 59 weeks.

The average weekly benefit check is about $300 nationwide.

The state's jobs agency is losing $25 million to $27 million a day as it pays out benefits from its own fund, putting it on track to run dry some time in January, a spokeswoman said. The fund had $1.6 billion in early October. State officials hope to obtain a federal loan next month, but almost certainly will not be able to repay it in September, when it would come due, she said.

In the meantime, Gov. Arnold Schwarzenegger is asking legislators to keep the fund out of debt by cutting benefits and raising taxes on employers.

Under the proposal, unemployed workers would receive up to 45 percent of their former salary, down from 50 percent now. The maximum weekly benefit would remain at $450 a week. The cuts would reduce benefits for those who now collect more than $300, including some of those at the maximum of $450, the spokeswoman said.

Only employees earning at least $2,400 in a year would be eligible for benefits, up from the current $1,125 threshold.

Employers would have to pay a maximum of 8.1 percent on the first $10,500 of each worker's earnings, up from 6.2 percent of the first $7,000 today. That equates to a range of $168 to $850 in annual unemployment taxes per employee, up from a range of $112 to $434 today.

The extension of unemployment benefits will almost certainly be more effective than the $600 checks the federal government sent out earlier this year. Surveys showed recipients using that money to pay off debt. In contrast, unemployed workers tend to spend most or all of each benefit check, providing a more immediate stimulus to the economy, Adibi said.

Rising unemployment notwithstanding, Kemp and Nevin said they expect the economy to regain its strength in 2010. That will happen even in the housing sector, which went from spectacular boom to spectacular bust in the course of a couple of years, they said.

"You're not losing any core industries now," Kemp said. "It's a short-term problem, not a long-term problem."

Contact staff writer Chris Bagley at (760) 740-5444 or cbagley@nctimes.com. Bagley blogs about local economic trends at http://bizblogs.nctimes.com.