California’s recession to be worse than nation’s

SANTA MONICA
May 8, 2008 7:44am

In a new report, the Milken Institute says the recession has arrived nationally and especially in California.

The Southern California think tank says Thursday that if the U.S. economy has the sniffles, California’s economy has a full-blown cold ? with all the associated aches and pains.

According to the report, “The Economic Outlook for the United States and California: Slow Growth or Recession?” the combination of a housing market correction, soaring oil prices, a weak labor market, overextended consumers and credit markets turmoil outweigh any gains seen in the export markets.

However, the report also notes that actions at the federal level to enact fiscal stimulus measures should mitigate the depth and duration of the problem, making it the mildest recession in the post-World War II period.

"The headlines about subprime and oil prices tell part of the story," says Ross DeVol, director of regional economics at the Milken Institute in Santa Monica. "But looking at the ripple effects throughout the economy illustrates the real impact that Americans will feel at the ground level."

The impact on California will be more pronounced than in other states because of the high concentration of mortgage originations (both traditional and subprime), targeted job losses in the construction and financial services sectors, and decreased import activity in the state's ports and logistics operations, the report says.

California's economic issues will have a direct impact on the state’s operating budget. According to the report, at the current rate of expenditures, the 2007-2008 general fund would be $9.7 billion in deficit, and at the current growth rate of expenditures, the gap between general fund revenue versus expenditures for the 2007-2008 fiscal year could reach $20.2 billion.

The report notes the ripples of the housing collapse are washing across other sectors of California’s economy.

“As home sales decline, so do purchases of new furniture, appliances, and other home-related items,” the report says.

It points to job cuts by furniture stores including store closures, layoffs by building material and supplies dealers, and reduced employment of real estate agents and brokers over the past twelve months.

“Because California had a number of subprime mortgage originators and several are out of business, the fallout has been brutal in financial services employment,” the report says.

Overall, the financial activities sector has slashed 43,000 jobs over the past 12 months, the Milken report says. “These are high-paying jobs that produce their own ripple effects throughout the state’s economy. Many more jobs are likely to be cut over the next year,” it says.

The report doesn’t see much light at the end of the tunnel.

“The housing market will be the primary cause of the more severe economic contraction in California than for the nation overall in 2008. Existing home sales are expected to bottom out in the second quarter, at 234,900 units, an anticipated peak-to-trough decline of 58.2 percent and the worst decline since the Great Depression,” it says.

The report predicts that foreclosed properties will swamp the California housing market and keep prices depressed.

“We expect the foreclosure rate to rise to 3.05 percent by the third quarter of 2009. The foreclosure rate was just 0.23 percent in the first quarter of 2006. During the last housing downturn in the mid-1990s, the foreclosure rate peaked at 1.99 percent in the first quarter of 1997,” the report says.

The Milken Institute describes itself as a nonprofit, independent economic think tank “whose mission is to improve the lives and economic conditions of diverse populations around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity.”