1. Production and job levels in the nation are falling, as expected, since September 11th. The Gross Domestic Product (GDP) fell by 0.4% in the third quarter of 2001 and will probably fall by a larger amount in the fourth quarter. Job levels in the nation fell by 415,00 in October and by 750,000 during the past five months. As a result, the U.S. unemployment rate rose to 5.4% in October, up from 3.9% one year ago. It is very likely that the national economy is in a recession defined as a period of economic downturn lasting at least six months.

2. There are powerful economic forces working which should both shorten and soften the national recession. The main responsibility for fighting recession lies with federal policymakers who have a large anti-recession "toolkit".

Interest rate cuts put extra cash in the hands of consumers and businesses by reducing interest payments and lowering the cost of borrowing for future spending. For example, many homeowners are refinancing their mortgages to reduce monthly payments. The Federal Reserve Bank has lowered short-term interest rates by 450 basis points (4.5%) since the beginning of the year. Long-term rates are falling as well with mortgage rates near 6.5%--the lowest level in 30 years.

The federal government has tax and spending tools to boost the economy when recessions occur. Because the federal government can run short-term budget deficits, Congress can and has both cut taxes and increased spending. Tax rebates earlier this year and proposed tax cuts and benefit increases (for unemployment and health insurance) directly put cash in the hands of consumers. Spending increase for security, the war effort in Afghanistan, and infrastructure can directly increase the demand for production and hiring.

Cost decreases also boost disposable income for consumers and businesses. The Producer Price Index fell by 1.6% in October-the largest one-month fall in history, led by a 21% decline in gasoline prices. Energy prices, including gasoline, have been falling rapidly during the past three months.

There are other positive signs which indicate that the economy did much better than might have been expected recently. Productivity rose by 2.7% in the third quarter. Inventories fell by the largest amount for any three quarter period in history, indicating that firms have already made significant reductions to bring inventories in line with sales. For the moment at least, all major stock indices have surpassed their September 11th levels.

3. Despite the positive forces in play to fight the recession, it is not certain that the downturn will be over in six to nine months. Additional terrorist acts would certainly dampen consumer spending and prolong the downturn. It is the uncertainty facing consumers and businesses that have caused recent sharp drops in business travel, tourism and home sales. Holiday travel and spending will provide the first indication of how much spending is returning to normal. It is likely that consumer spending will bounce back if there are no more fear-provoking incidents, but that is a big if for the economy.

The other uncertainty is regarding whether federal policymakers will agree on a stimulus package that is effective. There is much partisan debate now over the content of the federal stimulus package. For CCSCE's views, see the op-ed article under point 6 written before the Governor's economic summit on November 2, 2001.

4. The California economy, and particularly the Bay Area economy, are participating in the national economic downturn. The economic impacts in California to date are milder than in the nation.

The state's unemployment rate in October was 5.7%, slightly above that national rate. For the year ending in October the state's unemployment rate by 0.8% while the national rate shot up by 1.5%.

Job levels in the state fell by 4,000 in October while nation job levels fell by 415,000. Compared to one year ago, job levels have risen by 165,000 in California and fallen by 378,000 in the nation.

Silicon Valley is in a recession and the Bay Area is moving into recession. Job levels are down by 27,300 over year-earlier levels in Santa Clara County and down by 6,500 jobs in the Bay Area. The unemployment rate in Santa Clara County rose to 6.4% in October, up from 1.6% in October 2000. The adjustment to falling tech orders has been swift and sharp.

In Southern California there is no recession yet. Job levels are modestly up compared to a year ago and there have been no major recent declines as in the bay Area. Unemployment rates in Los Angeles County at 5.9% are now below those in both San Francisco and Santa Clara counties and rates in Oange and San Diego are near 3.5%.

Some job losses in the travel/tourism sector were reported in October and more will be reported in the November data. Air transportation, hotel and amusement sector jobs fell by almost 9,000 while restaurant jobs showed a small gain-all on a seasonally adjusted basis. The number of tech manufacturing jobs has declined by approximately 30,000 from peak levels and total manufacturing jobs are down by 70,000 from the high. So there are continuing job losses in certain industries, but they are not enormous in a state with more than 16 million jobs or in comparison to the 1.1 million manufacturing jobs lost nationwide in the past year.

The number of home sales is down throughout the state and home prices and rents are beginning to fall in the Bay Area. But home prices in Southern California and Central Valley markets have all hit all-time highs in the past three months.

It is very likely that job levels will fall for a few months as California cannot fully escape the national downturn and is still at risk from the slowdown in tech and foreign trade.

5. CCSCE will update our long-term projections and analysis in California Economic Growth-2002 Edition which will be published in the spring. By then the length and depth of the current downturn will be clearer and we will be better able to identify whether long-term economic and demographic trends have been affected by current events. At this point, there is no reason to expect substantial changes in the state's long-term outlook and challenges.

6. Below is an op-ed article which was written before the Governor's economic summit on November 2nd.

Econ 101: Now is the Time for Stimulus

In the short-term the federal government has the main responsibility for fighting recessions. The first priority for the Governor and business leaders is to urge our congressional delegation to support effective anti-recession policies.

Economic guidelines for such policies are clear. Anti-recession efforts need to be 1) immediate, 2) temporary and 3) large enough to have an effect. Policies that meet these criteria include temporary payroll tax cuts and rebates, temporary measures to accelerate business investment, extensions of unemployment and health insurance benefits and additional workforce investment funding to meet the needs of unemployed workers.

One kind of increased federal spending which is not yet being widely discussed is temporary revenue sharing for state and local governments. Governor Davis should be a leading voice in introducing this idea into the federal debate.

A federal program that provides funding to replace state and local revenues lost to recession can meet all three criteria-immediate, temporary and large. If state and local governments are forced to cut spending, it will directly offset much of the anti-recession efforts now being undertaken. In California cuts in state and local spending of $15 billion would completely offset our share of the federal stimulus package.

Moreover, revenue sharing will allow states and cities to continue vital public services including activities like education and infrastructure which are critical for long-term economic prosperity. To allow public services to be thrown into uncertainty and disarray would be an unintended victory for the terrorists.

While states have only a small role in fighting recessions, states and regions have the major role in providing the foundations for economic growth and quality of life. Governor Davis has put forth an agenda of investment in education and infrastructure to reverse the long declines in public support for these programs. These investments are California's best hope of maintaining a climate where businesses and residents want to live and work.

California has unequaled leadership in private sector innovation. Even in the present downturn, it is clear that our industries have strong long-term prospects. The only question is whether we will have the education, housing, transportation and other infrastructure to match the power of our industries.

One anti-recession action the state can take is to accelerate existing infrastructure investments and fund new infrastructure projects where the money can be spent quickly. Fighting recession does not provide a rationale for pork projects but the legitimate infrastructure needs of California communities have been well documented by your infrastructure commission and many others.

My next suggestion goes against the Governor's desire not to raise taxes. But I believe that his agenda of raising investment in education and infrastructure is worth asking Californians to sacrifice. I believe it is time to consider a temporary income tax increase to protect California's economy from more disruption.

Such a tax hike should meet the three criteria set our above. It should be temporary-no more than 18 months to two years. It should be large enough to protect vital state services and provide funds to help localities. It should be enacted as quickly as possible to prevent dislocations in current year budgets and eliminate the need for deep cuts in next year's budgets.

The Governor's leadership will be needed particularly to make sure that local governments do not suffer at the expense of the state. That means arguing for federal aid for localities as well as states and not using more local government funds to balance the state budget. Local governments and school districts provide services that are critical foundations for economic growth in California.

An income tax increase is probably fairest. Such an increase will not affect our poorest residents or residents who are temporarily unemployed or residents whose stock option and capital gain income has temporarily dropped.

I know that the Governor has articulated an important principle that the state should "live within its means". California remains a wealthy state, despite the short-term downturn. Our means include an economy of $1.4 trillion with wages, incomes and housing values well above the national average. Moreover, as we both agree, California's long-term economic prospects are bright.

Californians have recently shown increasing support for investments that improve our economy, environment and quality of life. Governor Davis and the legislature have asked Californians to step up and they have responded.

It is time to ask us step up again and make a small sacrifice to keep California headed in the right direction.