Long, dark tunnel seen for California's economy

September 24, 2008|Marc Lifsher and Peter Y. Hong | Times Staff Writers

Housing prices will hit bottom some time next year, but the California economy will be in distress for months to come, according to a closely followed UCLA economic report scheduled to be released today.

In a series of dire predictions echoed by experts throughout the state, the UCLA Anderson Forecast says that unemployment will continue to increase, consumer spending will decline and tax revenues will plummet.

"We can expect 'doldrums' to be the operative word describing the California economy over the next 18 to 24 months," said Jerry Nickelsburg, an author of the quarterly report on the national and state economies.

Government layoffs and job losses in sectors such as retail, he said, will offset any benefit from the settling of real estate prices.

Economists and business owners said the UCLA forecast -- which predicted the current housing bubble -- matches their expectations and the experiences of Californians.

The proposed $700-billion federal bailout of the financial system will have little effect on these longer-term trends, several economists said.

The massive government relief plan, if implemented, will stop the downturn in housing, said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto, "but is unlikely in the short term to reverse the sharp falloff in wealth and the loss of jobs that's already occurred."

The problem is that the housing crash caused severe job losses in construction and finance, and pulled down property values and consumer spending, leading to a shortage of tax revenue for the state. So even if housing levels out, it will take months or years to repair the damage in other sectors.

"By mid-2009 we don't see [construction] being a drag on the California economy anymore," Nickelsburg said. "Other services and government will become a drag."

State and local governments are now seeing property tax collections fall because of lower property values and foreclosures. Sales tax revenues are also slipping as strapped individuals spend less.

Government employment declined by 6,000 jobs from July to August, according to state figures. Retail jobs are also being cut in areas such as clothing, electronics, sporting goods and building and garden supplies, the UCLA report said.

There could be other looming dangers in the economy, said Sung Won Sohn, an economist with the Martin V. Smith School of Business and Economics at Cal State Channel Islands. Among them are commercial building, high-tech manufacturing, logistics and warehousing.

Other economists point to travel, tourism and entertainment, all areas in which people have reduced spending following the housing crash.

The forecast also predicts that increased government intervention in the economy will spur inflation and result in higher taxes -- no matter which candidate is elected in November.

The forecasters declined to use the term recession to describe the situation at either the state or the national level.

Edward Leamer, also an author of the report, said the housing turmoil did so much damage in large part because the economy is too dependent on consumer spending.

"The low rates of interest, the innovations in the financial markets and the tax cuts have turned us into a consumption-loving, debt-ridden, foreign-depending society," he wrote in the forecast.

As homeowners lost equity in their homes -- or lost them altogether -- they were no longer able to borrow against the properties to pay for remodeling jobs, vacations, college tuition or other expenses.

Massive defaults on home mortgages also caused banks to tighten lending, not only to individuals but to businesses as well. Businesses unable to finance new ventures have in turn laid off workers and unemployment in the state has climbed to 7.7%, with 240,000 jobs lost in the last year.

Michael D. Pattinson, chief executive of Barratt American Homes, a Carlsbad builder, said he laid off 100 of the company's 130 employees this year. Barratt American built 500 homes a year during the height of the housing boom, but has only 20 under construction now. Pattinson says that the credit crunch has kept him from getting loans to build additional houses for which he says there is still demand, and that with financing he could have saved at least 20 of those jobs.

Government jobs will drop further in 2009, as declining tax revenues and budget cuts cause more layoffs and open positions to be left unfilled, said Howard Roth, chief economist for Gov. Arnold Schwarzenegger.

Other sectors that might have compensated for declines in government spending and construction also appear troubled, said economist Sohn. Tourism and exports, for instance, will probably be weakened as foreign consumers face their own economic challenges.

"We're beginning to see a marked slowdown in Asia," he noted, with Japan's economy "already in recession," China's once-torrid growth slowing to about 9% a year and South Korea's annual growth shrinking to 3.5% or lower.

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