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Budget woes, building drop-off may prolong state's hardships

June 16, 2009|Alana Semuels

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state's budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today.

"California is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year," wrote Jerry Nickelsburg, senior economist at the forecast.

Driving California's difficulties are a shrinking state budget, a disappearing non-residential construction market and sluggishness in housing construction.

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California's population, sowing the seeds of another housing bubble, the report said.

The state's fiscal woes make the picture bleaker. The budget for the 2009-10 fiscal year will probably lead to program cuts and layoffs on top of spending decreases in last year's budget.

"California's state government . . . has no choice but to contract at the worst time," Nickelsburg wrote.

The cuts don't affect only government jobs. Some of the program reductions will be in healthcare and education, damaging two sectors that haven't yet experienced massive job losses in California during this recession.

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted.

The state's regulatory agenda is making it more expensive to do business here, and higher-education cutbacks will probably affect the state's competitive advantages in the long term, he said.

The situation looks a little less bleak nationally.

"It looks like we're beginning to come out of it, and that the worst is over," said UCLA senior economist David Shulman, who wrote the national section of the forecast.

Action by the Federal Reserve and Treasury to ease the credit market stopped the economy from declining any further, Shulman said, making it easier for companies to borrow money to pay their bills. Although borrowing is still challenging, the credit market is more malleable than it was three months ago.

That should also help ailing countries such as Japan, Mexico and Germany, Shulman said. Their rebound will in turn increase demand for U.S. goods, which has slid so steeply that economists predict exports will drop 12% in 2009.

Still, Main Street might not feel the effects of any of this for some time. UCLA forecasts that the national unemployment rate will continue to rise, peaking at 10.4% in 2010. June job numbers will be especially ugly, Shulman said, as college and high school graduates dependent on seasonal employment find that the traditional companies just aren't hiring.

What's more, the new administration is still shaping its healthcare and energy policies, making it difficult for companies to make decisions about big investments, Shulman said. A healthcare institution, for example, doesn't want to make major changes until it knows if the government is going to change how it gets paid.

There is a bright spot, though, said Larry Harris, a professor of finance at USC's Marshall School of Business. Consumers are becoming more confident and are beginning to spend again, as are some companies. "People are no longer as afraid as they used to be," he said. "They're starting to get on with their business."

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alana.semuels@latimes.com

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