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April 2009 Quarterly Forecast
> The California Economy: Running Out Of Gas
Jerry Nickelsburg, Senior Economist, UCLA Anderson Forecast
As the recession deepens, the diverse engines of California’s economy find themselves running on fumes. The consumer related retail, wholesale, manufacturing and trade sectors contracted sharply with the collapse in consumer demand in September; the housing, finance, and home related retail and manufacturing sectors entered their 11th quarter of contraction; non-residential construction was slammed by frozen credit markets; budget constraints resulted in furloughs and layoffs at the state and local government levels; exports and imports fell and the logistics industry contracted; and even the so called recession proof entertainment industry saw a restructuring to the new media sped up by the downturn.
It is clear that California is experiencing economic symptoms not unlike the 1980/81 or 1973/75 recessions and that this could well be the worst post-WWII downturn yet. And the help from Washington is like the Pony Express, it is going to arrive in California, it will be welcome when it comes, but it will be slow getting here. The rapid infusion of demand contemplated in Stimulus II will be muted as local government budgets are forced to contract.
If there is any good news in the picture it is that the correction in the housing market is almost complete and the downturn in the retail sector is nearing the end of its run. But, there does not appear to be anything uniquely Californian to bring us out of the recession.
The keys to California’s recovery are the recovery in U.S. consumption improving the demand for imports from Asia and the demand for products from California’s factories, the resumption of non-residential, public works and multi-family residential construction growth, and the return of growth to the retail sector.
The downward pressure on income and employment from housing will carry over into the second quarter, but will have abated before the recovery begins. With new opportunities in alternative energy and propulsion, and new investment in medical technology, software and research, we expect California’s personal income to grow more rapidly than average coming out of the recession in 2010.
On an annual basis our expectation is that total employment will contract by -2.6% in 2009 and will continue to decline at an -0.6% rate in 2010. Once growth returns in 2011 employment will begin to grow at a 1.8% rate. Employment growth will not exceed labor force growth until the full force of the recovery is in place in 2011. Real personal income growth will be -0.8% in 2009 and then return positive growth at 0.7% and 3.8% in 2010 and 2011 respectively. This slowing in the growth rate of personal income portends continued problems in state government finance until the 2010/2011 fiscal year.
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