California budget troubles

California
Budget analyst’s bleak outlook
By Capitol Staff (published Thursday, January 17, 2008)
Legislative Analyst Elizabeth Hill, who examines budget issues for the Legislature, has offered an assessment of California’s economic outlook. Hill, although hired by a Legislature controlled by Democrats, is a nonpartisan analyst who each February compiles a detailed assessment of the governor’s proposed state budget. Her study serves as the linchpin of the Capitol’s budget negotiations. In addition to her budget analysis, Hill provided her view of the state’s economic outlook. What follows was taken from Hill’s report on California’s economic climate, which offers an overarching view of business conditions, employment, and fiscal and population growth.

California’s economic situation and outlook are generally similar to the nation as a whole, although the turmoil in the state’s housing and mortgage markets has been more pronounced than nationally, making its outlook a bit more sluggish.


Economic growth in 2008 is expected to be slow, especially in the first half of the year, with recovery beginning later in the year and continuing into 2009. After healthy gains in 2004 through 2006, economic indicators suggest that economic growth slowed for the state as 2007 progressed. For example, growth in both wage and salary employment and taxable sales declined, the unemployment rate rose, and new residential building permits dropped.

The key forces behind the economic slowdown that is being experienced in California are the same as for the nation. Those are sharply declining real estate markets and, to a somewhat lesser degree, high energy and gasoline prices. In fact, the adverse effects of these negative forces tend to be even greater in California than for the rest of the country because of the state’s volatile real estate sector and its higher-than-average gasoline prices and gasoline consumption.

While both of these factors are expected to negatively impact California’s economic performance in 2008 and 2009, this is especially true for the real estate sector. A major real estate correction is currently under way that is expected to get worse before it runs its full course. Although its initial major adverse effects appear to be primarily falling on homeowners, housing-related industries and financial institutions directly involved, there will undoubtedly also be various eventual negative spillover effects on the economy at large.
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