January
2008 Quarterly Forecast > California
The California Report: Now is the Winter of Our Discontent
By Ryan Ratcliff
Much like what will be found in the national forecast, the central theme of the California forecast remains the same: real estate weakness will create a sluggish economy, but will not be enough to tip the state into a recession. There are, however, a number of state-level developments that have cast doubt on some of the finer points that support our no recession forecast. This installment will concentrate on several of the key recent developments.
Overall job creation for California has come to a standstill. Job loss in real estate-related sectors continues to be the main source of weakness as measured by the official Current Employment Statistics payroll series (CES). But lately, we are also experiencing weakness in retail trade and the normally strong professional business services. Furthermore, an alternative employment survey suggests that these real-estate-related job losses may have been deeper and more rapid than the CES indicates. Known as the Quarterly Census of Employment and Wages (QCEW), this alternative survey gives us an imperfect preview of the annual employment revision to be released in March. However, there is some good news: the QCEW suggests that some of the non-real estate weakness may be revised away in March. On balance, the bad news from real estate wins, with the QCEW showing an even weaker state labor market; however, employment growth still remains positive
California’s unemployment rate has risen over 1% since the beginning of 2007—something we’ve never seen outside a recession. What’s more, most of the rise in California unemployment has come while US unemployment has mostly remained flat – again, something we’ve never seen before. These anomalies make us think that part (but not all) of this increase is likely due to a statistical aberration in the labor force numbers. During most recessions, unemployment rises mostly because overall job growth goes negative. This time, the unemployment rate has risen because weak but positive job growth has been swamped by near record growth in the labor force. This explosion of labor force growth seems a bit suspicious given the gradual slowing of California’s population growth. The unemployment rate in California is clearly going up, but the particulars of this increase suggest that it may be somewhat overstated.
News for the state budget is pretty grim. According to estimates from the Legislative Analyst’s Office, a combination of revenue shortfalls and unanticipated higher expenditures will not only completely wipe out the $4.1 billion reserve from the budget, but leaves California with an unprecedented budget deficit in 2008. The inevitable budget cuts make a major slowdown in Government employment growth inevitable in the second half of 2008 and on into 2009. However, we look for a repeat of 2003: private sector weakness will have mostly run its course by the time Government employment experiences a 1% contraction in 2009.
The net result of all these developments? The combination of real estate weakness, government belt tightening and Hollywood labor disputes all create a sluggish economy for most of our forecast, but we still do not see enough systemic weakness for a recession.
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