The California economy has fallen into a deep recession and will contract through the first half of 2009, according to the latest UCLA Anderson Forecast, released this week.

“The forecast for the next three quarters is one of contraction in economic activity, followed by the beginning of a slow recovery,” senior economist Jerry Nickelsburg said in a report. “California and other local governments are struggling with falling revenues for the 2008-2009 and 2009-2010 fiscal years and are unable to counteract this with an economic stimulus.”

The state’s recession is continuing to worsen, with the already-deep housing downturn made worse by a downturn in the broader economy. California home prices have already fallen by 25% from their peak in the third quarter of 2006, according to the Office of Federal Housing Enterprise Oversight. Nickelsburg predicted that the declines would stretch into the second half of next year.

He forecast that residential construction permits will decline 17% next year before surging 32% in 2010, as home prices fall back into line with long-term averages.

The housing crisis has now expanded to consumer spending and caused a sharp decline in job creation.

“From August to November, labor markets in California changed radically,” Nickelsburg wrote. “Retail and wholesale employment, transportation and warehouse employment, and temporary services employment are taking a nose dive.”

The state’s unemployment rate jumped to 8.2% in October, the highest since September 1994, according to the California Employment Development Department.

The jobless rate will jump to an average of 8.7% for 2009 and remain at that level in 2010, according to the UCLA forecast. Real personal incomes will drop 0.6% next year and rise only 0.9% in 2010.

“Overall, our outlook for California is for a very weak first three quarters of 2009,” Nickelsburg concluded.

The UCLA Anderson Forecast is the most widely watched predictor of the California economy. Government agencies, such as the Los Angeles Department of Water and Power and the nonpartisan Legislative Analyst’s Office, rely on the report to forecast revenues and spending needs.

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