California economy braces for hit from coronavirus panic. ‘We don’t know how to control it’

Is it 2008 all over again?

From empty cargo containers to shuttered school districts to canceled business conferences, the coronavirus outbreak is starting to eat away at the economy, in California and across the country — and could bring serious problems to the Sacramento area.

The stock market’s stunning drop of 2,013 points Monday intensified fears of a global recession, with one leading California economist predicting the slowdown could be worse than the financial crisis of 2008. The Dow Jones average has fallen 19 percent in less than a month.

In 2008, “we knew how to control it, we knew the problem, it was a financial problem,” said Sung Won Sohn, an economic consultant and business professor at Loyola Marymount University in Los Angeles. “When you talk about coronavirus, we don’t know how to control it yet. We don’t know how bad it’s going to get .... Low interest rates are not going to solve the problem.”

Sohn said a recession isn’t a certainty — he put the likelihood at 50 percent — but said the federal government’s struggle to get a handle on the coronavirus outbreak wasn’t inspiring confidence. Cases of coronavirus worldwide have risen past 109,000.

Another mark of instability: a dramatic drop in oil prices. While inexpensive oil is normally good for the economy, analysts said Monday’s drop of more than 20 percent was a sign of falling economic activity. Also contributing to the decline was a price war between Russia and Saudia Arabia.

Few areas of the state’s economy would be spared in a significant recession. Already the disease is disrupting California’s international trade — imports and exports — as well as tourism. Manufacturers are seeing shortages in components.

Sacramento isn’t as dependent as coastal cities on international trade — but it remains a government town that relies on a healthy state economy to keep thousands employed. About 9 percent of the region’s 1 million workers are employed by state government, not including the state universities. Nearly 25 percent of the workforce draws a government paycheck of some sort.

The 2008 recession, marked by crashes in the financial and real estate markets, devastated Sacramento. Not only did the region’s housing market go into a free-fall, the recession dried up state government revenues. As deficits climbed into the tens of billions of dollars, the region’s unemployment rate topped 12 percent and most state workers had to take unpaid days off on Fridays through much of 2009 and 2010.

“I think it’s a bit early to be predicting ‘furlough Fridays,’” said economist Jeff Michael of the University of the Pacific. But he added “the recession odds are at their highest level since 2007.

“I’m sure the (state) Department of Finance is marking down their revenue projections right,” Michael added. “That’s certainly going to hit the budget.”

H.D. Palmer, spokesman for the Department of Finance, said the state won’t issue new revenue forecasts until the traditional “May revise” is issued in early May. He said the calculations will reflect tax collections from April, the most important revenue month of the year.

Palmer said, though, that finance officials are watching the coronavirus and COVID-19 developments closely.

“Of course we’re looking at it,” he said.

Gov. Gavin Newsom has been warning for some time of a potential economic slowdown, and his official 2020-21 budget proposal, released to the Legislature in January, said that “even in a moderate recession, revenue declines could be significant.”

California tax revenues are particularly dependent on income tax payments from wealthy individuals, whose incomes can vary widely from year to year. In 2017, for instance, 90 percent of the state’s personal income tax revenues came from Californians who earned at least $100,000.

Palmer said California these days has a built-in cushion: The state has built up a $21 billion reserve. “This puts us in a far better position to address a potential downturn than the state has been in recent memory,” he said.

Coronavirus, tourism, trade

In a state where tourism is a $145 billion-a-year industry, coronavirus could prove disastrous. A day after Newsom advised elderly Californians to stay off cruise ships, the Grand Princess finally staggered into the Port of Oakland on Monday, after nearly a week in limbo.

Michael said the impact on travel could worsen. The economist questioned whether college basketball fans would be willing to fly to Sacramento for March Madness — the first two rounds of the NCAA men’s basketball tournament at Golden 1 Center on March 20 and 22.

Empty seats wouldn’t be “enough to kick Sacramento into a recession, but you have businesses and hotels and restaurants planning on a big weekend,” Michael said.

Plenty of businesses in California have curtailed employee travel. Last week the California Independent System Operator — a Folsom organization that operates the state’s electric grid — announced that it wouldn’t hold this month’s board meeting in person. Instead, board members will attend by teleconference.

Scott Vandenberg, general manager of the Hyatt Regency across from the Capitol, said business hasn’t suffered too badly yet.

“We are pretty much status quo; we’ve had a few small cancellations,” he said.

How confident is he that the rest of his bookings will hold up? “Right now I feel about 80 percent,” he said.

Coronavirus’ immediate impact is worse in the Bay Area, where the tech economy and tourism are more closely tied to Asian markets. The effects range from a slowdown in iPhone shipments from Apple’s Chinese supplier, to the cancellation of “A Midsummer Night’s Dream” at the San Francisco Ballet after Mayor London Breed ordered the temporary shutdown of the theater.

“You look at the hotel deals you can get, the flight deals you can get, you can imagine that demand isn’t what some of these companies were expecting,” said Jeff Bellisario, executive director of the Bay Area Economic Institute.

California ports lose cargo traffic

Cargo traffic is suffering. The Los Angeles and Long Beach ports have forecast a 15 percent drop in cargo traffic for the first three months of the year.

“Shipping lines have already announced unusually high numbers of what they call ‘blank sailings’ from China because of the extended closure of Chinese factories,” said Jock O’Connell, an international trade consultant in Sacramento. “Blank sailings” refers to voyages that were canceled because of the scarcity of cargo.

The drop in cargo traffic will have multiple impacts. Consumers will see fewer goods on shelves. And because fewer cargo containers are arriving in the United States, that means exporters will face a shortage of empty containers for hauling their goods. “This is having a serious impact on agricultural exporters in California,” O’Connell said.

Sacramento Airport watching traffic figures

Sacramento International Airport officials said passenger numbers were better in February from a year ago — but they fear that if the outbreak continues to worsen, they would expect traffic to diminish. That could lead to a cutback in available flights.

Airlines that fly out of Sacramento have issued statements in the last few days attempting to calm growing fears about flying risks, saying they are cleaning planes thoroughly each day.

In a statement to The Bee, Southwest, the most-traveled carrier at Sacramento International Airport, says it hasn’t suspended any flights yet. United said it is prepared to take planes out of service if it is informed by the U.S. Centers for Disease Control and Prevention that a passenger who had been on the plane has come down with the virus.

Economists worry that consumer confidence will falter, depressing one of the most important sectors of the economy.

“The economy can’t depend on people buying toilet paper and hand sanitizer,” Bellisario said, referring to the binge purchases that have popped up. “We need people out buying homes and cars and refrigerators.”

So far, sales of major items seem to be holding up. Rick Niello, whose Niello Co. owns 12 dealerships in the area, said business remains strong — for now.

“All customers are subject to the same news reports,” he said. “I haven’t seen anything to give me concern, but call me in two weeks.”

Similarly, Steve Galster, of Weichert Realtors Galster Group in Fair Oaks, said a few home sellers are refusing to hold open houses for fear of having their houses contaminated. Otherwise, “the houses are still selling,” he said.

“I don’t know how it’s going to turn out in the long run, but right now people are buying houses,” said Kevin Carson, divisional president of The New Home Co., a major homebuilder.

This story was originally published March 9, 2020 at 3:17 PM.