Despite gloom, Calif. business climate has glow

Deficit hurts, but statistics show recovery has begun


RIVERSIDE, Calif. - When Van Daele Communities, a builder, put eight new houses on sale here recently, 52 people camped out for as long as four days to have a chance to buy.

"We've never seen it like this in 25 years," said Mike Van Daele, the company's chief executive. Housing prices are appreciating as much as $10,000 to $15,000 a week, he said.

On the north side of town, new manufacturing plants stretch through what were once orange groves. Some are humming to life with companies making plastic bottles, stereo speakers and other products.

"The economy's terrible, it's rotten - look," Robin C. Treen, a commercial real estate broker, said with sarcasm as he drove a visitor around.

Riverside hardly looks like a center for a political rebellion rooted in economic anxiety, yet that is precisely what it is. The residents of this inland county east of Los Angeles voted overwhelmingly to oust Gov. Gray Davis and replace him with Arnold Schwarzenegger. Voters told pollsters they were concerned about California's economy, though the economy is doing relatively well.

In a way, it is the story of an entire state. Despite the political upheaval, the growing budget deficit, the electrical power crisis and the bursting of Silicon Valley's bubble, California's economy, by many measures, has done better than the rest of the nation's in the past few years.

Military spending in the state is up about 40 percent since 2000 after plunging in the 1990s, according to and the Defense Department. Housing prices continue to rise in most of the state. Some places are creating jobs faster than almost anywhere in the country.

At 6.6 percent, California's jobless rate in August remained higher than the nation's 6.1 percent. But the gap is far smaller than in the early 1990s after the military industry collapsed.

"California has obvious problems," said James Diffley, an economist at Global Insight, a consulting firm that follows regional trends. "But the economic performance has been surprisingly good."

This could offer Schwarzenegger his best hope for erasing the state's expected $8 billion deficit. Having promised not to raise taxes and to protect education spending, his deficit reduction plans depend to an unusual degree on the health of the economy and the speed at which revenue from current taxes comes in, economists say.

But the health of the economy, at least relative to other states', means that a bounce strong enough to eliminate the deficit on its own is unlikely. Many consumers have bought cars and houses in recent years, leaving less pent-up demand than at the end of most slumps.

And neither technology, a pillar of California's economy, nor finance, seem to be on the verge of a hiring surge. That could leave Schwarzenegger with some of the budget problems Davis had, forecasters say.

Concern about the economy is considered one of the reasons voters recalled Davis and replaced him with Schwarzenegger last week. Polls of voters showed that 83 percent said the state's economy was in bad shape. Nationally, 56 percent of people rated the economy negatively, according to a recent New York Times/CBS poll.

Californians might view similar economic conditions more negatively than people elsewhere because the boom here in the late 1990s was so great. Also, until the 1990s, they were used to their state routinely outstripping the nation economically.

"Things aren't horrible here, but it's not as good a situation as we used to have," said Michael Bazdarich, forecasting center director at the University of California, Riverside.

But many in business in California said what sent them to the electoral barricades was not the economic statistics overall but concern about the state's business climate. In interviews, business leaders repeatedly noted soaring costs for electricity and workers compensation, the increase in the vehicle tax and a new law requiring companies with 20 or more employees to offer health insurance to all their workers.

Businesses attribute much of this to the Davis administration. They say many of their complaints were ignored.

"That's the way we feel, we keep getting slapped around," said Debbi Huffman Guthrie, who runs a Riverside roofing company her grandfather started in 1921 but which she said she recently considered closing.

Schwarzenegger tapped into such anger, making the retention and attraction of industry a main theme of his campaign.

"I wish he would have stormed the governor's office the day he won," said David Harrigan, owner of Plascor, a bottle maker in Riverside.

Schwarzenegger's immediate challenge will be the deficit, which stems in part from rising spending in the late 1990s, when the Internet boom swelled tax revenue.

He has offered few specific economic plans, aside from vowing to cut wasteful spending and promising not to raise taxes. Indeed, he said he will repeal a recent increase in the car tax, which would add $4.2 billion to the deficit in the short term.

But changing regulations that businesses oppose will, in many cases, require legislation, and the legislature is controlled by Democrats.

After all, the state can prosper only by continuing to invest in education and maintaining a strong work force and a good quality of life, said state Treasurer Phil Angelides, a Democrat. "Our ticket to prosperity is not to become the cheapest place in the world to do business."

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