Research Facts & Figures > Economic Forecasts & Updates > Q4 2009 Quarterly Forecast > California

Will California Watch the Take-Off From the Tarmac Once Again?

The Answer Seems To Be, At Least Initially, Yes

Jerry Nickelsburg
Senior Economist
UCLA Anderson Forecast

This recession has been deep and wide. From housing and finance to retail, logistics and manufacturing, California has seen economic activity diminish. Now that there are signs of the end of the recession in the U.S., the focus turns to California, which initially led, but now lags the nation in the current cycle. The difficulty we have to go through before joining the recovery is the incipient contraction of state and local government. Comprising 16% of all payroll jobs, this sector alone will damper the impact of the forces of recovery for the balance of the fiscal year. But the news is not all bad, though our takeoff will be delayed, we will ultimately get off the tarmac and take wing once again.

The good news comes from outside of Sacramento. The housing market is beginning to pick up. Now that prices in the coast cities have adjusted to levels which make existing homes more affordable, sales are increasing and conditions are becoming ripe for new residential construction. Already we have seen a jump above the trend levels of the 2003-05 housing boom in recent construction and finance jobs. In trade and manufacturing, there is fresh evidence that demand for California’s export goods is beginning to increase. Though the consumer goods and services sectors remain very weak, consumer confidence surveys and the response to the “cash for clunkers” program provide indicators that consumer demand may be on the verge of recovery and the implosion of hospitality, retail, wholesale and transportation employment may be coming to an end.

The downside is unemployment. The numbers are ugly to say the least and will remain so for some time. More rapid growth than can be expected over the next twelve months would be required to bring the unemployment rate down. The overall outlook is not much changed from our June forecast. We are expecting little growth through the middle of 2010 and a take-off towards the latter part of next year.

What Does The End of A Recession Look Like?

We are now in that phase of the recession where the downturn is slowing and the economy is ready to turn around. In terms of magnitude, the reduction in government jobs, the government section being the last to make major cuts in this downturn, does not rise to the level of the reduction in aerospace jobs in 1991 nor to that of internet job loss in 2001. But, it will have a larger impact than the disappearance of the sub-prime mortgage finance industry in Orange County in 2006. So it is a minor earthquake, felt statewide, but without too much damage. With increasing state revenues in fiscal 2010, the adjustment to a smaller government is expected to be over by mid-year 2010.

In 2011, things change dramatically. Government will not longer be cutting programs. The stimulus money from Washington will finally be flowing in significant amounts and California, with its technology advantage stands to get a greater proportion of the energy, infrastructure and medical innovation research monies than the rest of the U.S. So while 2010 will look a lot like the structural change years of 1970, 1991, and 2002, the subsequent year will look more like the early 1980s with California growing faster than the U.S.

Conclusion

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