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State's Outlook More Bullish

Job gains and personal income growth will rise faster over the next two years, a UCLA forecast indicates.

June 22, 2004|Bill Sing and Annette Haddad | Times Staff Writers

The best of California's economic recovery could be yet to come, as job creation and personal income growth speed up over the next two years.

But don't expect anything approaching the exuberant expansion of the late-1990s boom. And do expect the hot housing market to cool, although sharp price and sales declines are unlikely.

Those are among the latest predictions of the widely watched UCLA Anderson Forecast, which is to be formally released today.

This quarterly report, more bullish than the last in March, reflects a growing consensus among economists that California's economy has finally turned the corner toward a sustainable, robust recovery.

Although the state's job creation pace lags behind the nation's now, that will turn around soon after three straight months of job gains, according to UCLA and other economists. The UCLA forecast says rising incomes, better job balance, stronger foreign trade and an emerging comeback in the state's crucial technology sector are all behind the bright outlook.

Several factors, however, will inhibit growth from reaching the late-1990s pace, the forecast says. They include state government's lingering budget problems, a continuing sluggish manufacturing sector, rising interest rates and soaring gasoline prices, which squeeze drivers in California more than those in most other places.

The UCLA forecast calls for the Golden State to add 120,000 nonfarm jobs this year, followed by 283,000 next year and 313,000 in 2006. By comparison, in the late 1990s, annual payroll growth routinely topped 300,000 and peaked at 497,000 in 2000.

Personal income, the other key underpinning of overall economic growth, also is expected to rise faster, with Californians enjoying inflation-adjusted gains of 2.2% this year, followed by 2.7% next year and 2.9% in 2006.

That would be far behind the 7.6% growth seen in 2000 and the increases of 4% or more each year from 1995 to 1999.

"Those were remarkable years for this state; it will be a while before we get back" to similar growth levels, said Joseph Hurd, senior economist at UCLA Anderson Forecast and author of the forecast.

The primary regional drag on job growth, he said, will continue to be the Bay Area, which is still recovering from the tech bust of 2000. Hiring there has finally turned positive and will continue to grow, but not at the rate of the state's hottest region, Riverside-San Bernardino, Hurd said.

Job growth in Los Angeles County also has been sluggish, although it is picking up thanks partly to growth in international trade and general business services.

Stepped-up hiring in such industries as technology, manufacturing, financial services and multimedia will produce another benefit: higher-paying jobs, said Sung Won Sohn, chief economist at Wells Fargo Bank.

That would be welcome news given the trend of faster growth in lower-wage positions.

Even with an uptick in employment and personal income, California's sizzling housing market is poised to cool, as rising mortgage rates make buying a home a more costly undertaking, the UCLA forecast says.

Since early May -- in anticipation of the Federal Reserve's raising borrowing costs this summer -- mortgage rates have edged higher. The rate for a 30-year fixed mortgage stands at 6.32%, up from last year's average of 5.67%.

Hurd predicted that fixed-rate mortgages probably would rise as high as 7.5% in the next year, tempering demand and causing prices of existing houses to "go down a bit or level off." That would be in contrast to the torrid pace of home appreciation throughout much of California in the last two years, a key economic driver and wealth creator in the state.

"We don't see how we can keep having housing prices rising at double-digit rates," Hurd said. Still, he said, it would take a significant event, such as devastating fires or riots, to cause prices to "collapse" -- a decline of 15% or more.

Forecasters at Chapman University in Orange see prices falling a modest 4.4% in 2005. That would follow a predicted 3.1% gain this year, down sharply from the 17% and 20.3% increases in 2003 and 2002, respectively.

As both adjustable- and fixed-rate mortgages "start creeping up, it makes it much more difficult for people to qualify" for home loans, said Esmael Adibi, an economist and director of Chapman's Anderson Center for Economic Research.

Adibi sees mortgage rates climbing as high as 8% next year. That, combined with an anticipated 195,000 permits expected to be filed this year for the construction of new single and multiple housing units statewide, will increase the number of homes on the market, pushing down prices.

"Inventories are not going to be as tight as they used to be," Adibi said.

Both Hurd and Adibi acknowledged that the strength of California's housing market depended on mortgage rates. If they rise more than expected, "there will be more downside risk," Hurd said.

But he added that the risks of sharp declines in home prices or the pace of sales "are very small given pent-up demand and the state of the economy."

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