=DJ BIG PICTURE: How California Could Shock U.S. Economy
(This article was originally published Thursday)
By John McAuley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Electricity is flickering in California and
it's disrupting economic activity within the state.
And, even in the unlikely event that the disruption doesn't spread,
the Californian economy is so large that it could turn out to be the
straw that breaks the back of the nearly 10-year old U.S. economic
expansion.
"The Californian economy would be the sixth largest in the world if
California were a nation," confirms Fred Furlong, a regional economist
at the Federal Reserve Bank of San Francisco.
Indeed, that assertion can be documented using Commerce Department
data. Gross state product for California was $1,118.9 in 1998 (the
most recent data), which accounted for slightly more than one-eighth
of U.S. GDP in that year.
Thus, based on size alone, disruptions to the Californian economy
are likely to have major impacts on the overall U.S. economy.
If Californian GSP were to fall by 1%, or roughly $11 billion, that
would translate into a 0.12% decline in U.S. GDP.
"There are serious, but intermittent problems in Californian
manufacturing," said Norbert Ore, chair of the National Association of
Purchasing Management's business survey committee, after releasing the
results of the NAPM's January manufacturing index. "Some manufacturers
say they are incurring no problems, others have talked about bringing
in generators ."
In addition, Ore is less optimistic about the California situation
than he is about the U.S. economy as a whole. About the latter, he
says the NAPM index "may be signaling a bottom in January-February,"
but concerning California's problems, he said "it looks like it will
have a pronounced and prolonged effect."
The Best And Brightest Sectors Dim
Importantly, California is the home of Silicon Valley, where most of
the companies at the cutting edge of technology are headquartered.
Indeed, the gross state product data show that the concentration of
output from these industries in California is one and a half times
greater than for the nation as a whole.
For instance, the product originating in the electronic equipment
and instrument industries accounted for 3.9% of California's gross
state product, while these high-tech sectors account for 2.7% of the
nation's GDP.
There are two crucial aspects about these industries. First, these
high tech industries are also among the highest value-added producers
in the economy.
Indeed, the role of computers, communications, and
semi-conductor-based technologies, in general, have been singled out
by Fed Chairman Greenspan in particular as fundamental to the
"extraordinary growth in labor productivity (that) has been elevating
standards of living and has been containing cost and price pressures,
even as the economy operates at unusually high levels of labor
resource utilization."
Second, their high-tech production processes are highly dependent on
electricity as an input. For example, while nationally the two
industrial sectors account for 2.7% of GDP, according to the Federal
Reserve, they use 5.5% of the electricity generated.
The Threat Won't Just Go Away
So far, the electricity disruptions in California have been of two
types.
Most recently, there were a series of rolling blackouts that hit
various regions, mainly in the northern half of the state. Whenever a
region was blacked out, all electricity customers - residential,
commercial, and industrial - in a region were affected. According to
the San Francisco Fed's Furlong, "the amount of electricity offline in
January looks like it was a little less than 1% of normal
consumption."
This is not to trivialize things, however. One reason that blackouts
didn't occur sooner was that electrical utilities were taking
advantage of their option to impose "interruptible power outages" on
nonresidential, mainly industrial customers.
These customers can choose how much of their load - up to 50% - they
put in the "interruptible" category in exchange for lower rates. The
problem is that given the series of stage three emergencies to date,
the utilities have already used up almost all the interruptions they
had available to them.
Last year, by contrast, the utilities never exhausted their
interruptible power.
Thus, the utility companies are nearing the end of their reserves -
if interruptible power can be seen as reserves. That means the
prospects of blackouts are about to become much greater than they were
in January.
And that will cause problems, especially in Silicon Valley.
Some representatives of high-tech companies in the state have warned
that the blackouts could become so disruptive that firms might have to
move production out of the state.
Such a move would have little macroeconomic effect if production
were merely shifted from California to Texas. But it would have
enormous effects if the shift were to El Salvador or Malaysia.
-By John McAuley, Dow Jones Newswires, 201-938-4425;
john. |
