Wednesday, December 08, 2004

Economists say housing slowdown could cool recovery

Solid growth forecast in state
Economists say housing slowdown could cool recovery

Tom Abate, Chronicle Staff Writer

Californians can expect "solid but not spectacular" economic growth in 2005, according to a report scheduled for release today.

But the prestigious UCLA Anderson Forecast said the economic outlook for 2006 is clouded by a possible cooling of the state's overheated housing market.

The forecast also noted growth of "informal employment" in the state -- a category that includes everything from legitimate self-employment and contract work to the hiring of workers off the books. The trend could be depriving the state of tax revenue and the workers of legal protections.

"I'm scratching my head and wondering how come people in Sacramento aren't paying attention to this,'' said UCLA Anderson Forecast economist Christopher Thornberg.

UCLA economists said the Bay Area is rapidly recovering from the stunning fall it suffered at the beginning of the decade when the technology crash turned San Jose and San Francisco into the two biggest job-losing areas in the nation.

"The Bay Area has been adding jobs back, albeit slowly, over the past 12 months,'' the forecast said, predicting "it will begin to add jobs back in a real way in 2005.''

Looking at the state as a whole, the forecasters said that while California's payroll job growth rate of 1 percent over the last nine months has lagged the nationwide rate of 1.5 percent, the state is about to catch up.

In 2005, they predict, payroll employment in California and the nation will both grow at a rate of 1.6 percent.

In California, the biggest percentage of job gains next year is expected in professional and business services, education and health, leisure and hospitality, and construction. Even manufacturing, which has lost jobs in four of the last five years, is expected to post a 0.9 percent increase in 2005. Only state and local governments are expected to shed jobs, due to the state's budget mess.

If the economy maintains its positive course, UCLA economists predict, California payroll growth will accelerate to 1.7 percent in 2006, surpassing the national rate, which is expected to slow to 0.9 percent that year.

But the Anderson economists said housing prices could be overheated in some areas nationwide and particularly in California. If housing prices fall or stop appreciating, the state's economy could grow more slowly than forecast.

"California is in a housing bubble,'' Thornberg said, noting that prices have gone up 60 percent since the late 1990s. This compares with a 50 percent price run in the late 1970s and a 41 percent increase in the late 1980s, he said.

Economists have mulled the question of a housing bubble and what might happen if prices were to deflate.

Home prices are not likely to collapse, Thornberg said. In previous cycles, prices haven't actually fallen, but have stayed flat for several years, something that could happen again this time, he suggested. Still, he expects foreclosures to hit some people who bought late in the cycle, on variable rate loans, on the assumption they could sell if they couldn't manage the debt.

If this prognostication is borne out, Thornberg predicts, it will slow consumer spending, a key element of the economy. "People are spending because they think their houses are worth a lot,'' he said, suggesting they will tighten their purse strings if prices flatten or fall.

The Anderson report also noted that California has about a quarter of the nation's informal jobs, those that don't register on traditional surveys of employers, far above its 11 percent share of traditional payroll jobs. In Los Angeles, 1 out every 5 jobs is in this informal sector.

Though many of these non-payroll jobs may be created by self-employment or contract work, the forecast said some employers may be "moving their workforce off the books'' to avoid costs, "creating a situation in which more and more of the (state's) economic activity ... is done outside of the view of state employment regulators.''


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