UCSB: '08 ‘mild' recession predicted

California is headed into a recession driven by a collapsing real estate market, rising unemployment and declining retail sales, according to an economic forecast being released today.

Local governments will bear the brunt of the state's budget crisis and will find it difficult to provide their current levels of service as funding sources begin to dry up, the forecast says.

It predicts that the state's economy will be hit harder than the nation's as a whole, which will barely avoid a recession this year but could face an even worse recession as a result of federal government policies.

Those are some of the conclusions of the UCSB Economic Forecast Project's economic outlook for 2008, being delivered today by Bill Watkins, the project's executive director, at a seminar in San Diego.

“Perhaps this sounds worse than it is,” Watkins said in his executive summary. “Our forecast is for a relatively mild California recession, while we expect the United States to narrowly avoid a recession.”

While Watkins predicts California's recession will be mild, the forecast cites recent statistics from the real estate industry - one of the state's main economic engines - that are startling and foreboding.

In the fourth quarter of 2007, the median price of existing single-family homes fell 15.8 percent from the fourth quarter of 2006, the largest single decline in 24 years, according to the report.

Even worse, the median price fell 21.9 percent in January and

21 percent in February this year over the same periods in 2007.

Sales of existing homes in the fourth quarter of 2007 plunged

36.5 percent from a year earlier, a decline that Economic Forecast Project real estate economist Kirk Lesh described as “astonishing.”

Cascading home prices and sales have, in turn, led to “a dramatic increase in foreclosures,” Lesh said in his analysis of the real estate industry.

In January, almost 20,000 homes were sold in foreclosure auctions, a “staggering 454 percent increase” over 2007, Lesh said.

He noted that the subsequent rapid increase in home rental rates was surprising. When home sales began to fall in the fourth quarter of 2005, rental rates for all apartment units immediately began increasing and have continued to rise.

The forecast calls for the decline in home sales to continue through 2008, offsetting the federal government's Economic Stimulus Act, which increased the conforming loan limit in 39 California counties, including Santa Barbara County but not San Luis Obispo County.

But Lesh said the move has come too late to relieve the liquidity crisis.

The real estate market turmoil has spread to other areas as well, resulting in a “disastrous” drop in retail sales led by building materials, which declined 5 percent in the fourth quarter of 2007 from the previous year.

With the real estate market expected to continue its decline and competition from the Internet increasing, retail sales are expected to continue dropping.

Watkins said factors contributing to the state's economic woes include the difficulty of attracting new businesses, noting that “business everywhere sees California as an expensive and difficult place to do business.”

The still relatively high housing costs make attracting a workforce more difficult, too, and California's budget woes increase the uncertainty of success for businesses thinking of moving to, expanding in or remaining in the state.

Unemployment is expected to increase by 6.5 percent by the third quarter of this year, Watkins said.

Especially hard hit will be the finance, insurance and real estate sector, which lost 12,000 jobs -

4 percent of its workforce - in the fourth quarter of 2007.

The construction sector is suffering even more, losing 49,000 jobs - 6.3 percent of its workforce - in the fourth quarter, and the continued decline in the housing market is expected to maintain that job-loss trend, according to the forecast.

Retail jobs will decline through the first three quarters before starting a slow recovery, the report predicts, and public sector jobs are also expected to be lost with the start of the fiscal year in July.

Technical jobs, which Watkins called the state's “most dynamic sector,” previously were expected to remain strong, but they will take “a direct hit” from the lack of sufficient venture capital.

On the national level, Watkins said “economic growth will be so slow that the difference between the very low growth forecasted and a recession is a bit academic.”

The national economy is expected to be stagnant in the first half of 2008. Only industries and businesses that benefit from a weak dollar will see some hope.

Watkins blames the Federal Reserve for much of the stock market's volatility, claiming it has trained market participants to take excessive risks because they believe the Fed will bail them out.

The Fed's “knee-jerk reaction” is postponing a recession that will eventually be more serious than it would have been if the Fed had stepped in earlier with regulation and more aggressive tactics, Watkins said.

Associate editor Mike Hodgson can be reached at 739-2221 or

mhodgson@santamariatimes.com.

March 27, 2008