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According to the UCLA Anderson Forecast, the California state economy will be making positive gains as predicted by economic analysts and expected by California residents alike. Still, the forecast predicts that those gains would be small due to negative forces hindering the economy.

While most Wall Street analysts predict a return to normality after the recession, says Mike Bazadarich, senior economist with the UCLA Anderson Forecast, “we don’t see a recovery coming because there is nothing to recover from.”

More specifically, the recession was not a typical recession because the growth of the 1990s was atypical as well.

Bazadarich attributes the atypical growth of the 1990s to the astronomical gains in Internet and stock options of that time, which the state government benefited greatly from because of income taxes and profit capital gains.

Consequently, when the stock market leveled off and spending did not, a deficit resulted, Bazadarich explained.

It should be noted that the Southern California economy is growing solidly, though slowly. Christopher Thornberg, senior economist at the Anderson Forecast, refers to the Inland Empire and San Diego regions as “gangbusters.”

Despite the cuts in the state budget, Southern California fares better than the Bay Area because of the large defense sector located here, writes Thornberg in “The Regional Report” of the June Forecast.

The defense sector has seen a new surge in demand as a result of the ongoing war on terrorism, and the conflict in Iraq, he writes.

This budget deficit is one of the factors preventing the state economy from picking up speed.

In “The California Economy in 2004 to 2006: Neither a Tortoise, Nor a Hare,” Sr. Economist Joseph Hurd of UCLA Anderson Forecast writes that Sacramento’s deferral of the deficit through interest — free borrowing from cities — does not ultimately solve the problem.

Ultimately, in 2006 and 2007, Hurd writes in the report, “the state has to come up with billions of dollars to give back to the other entities.”

If the revenue and spending are imbalanced, as is the case now, there will have to be more spending cuts for sub-state agencies and/or new sources of the revenue.

Hinged upon the problem of decreasing state revenue is the resulting lay-off of employees in the government sector.

Hurd also notes in the article that sub-state agencies and units have already laid off about 45,000 jobs from 2003 to 2005, and there is little chance that any of these jobs will resurface in 2006.

The declining budget would hurt Sacramento the most because of the large number of government jobs there, Thornberg said.

They are already starting to feel the effects of the budget cut. But the state is not the only one running a deficit – the federal government and American households are also spending more than they have before.

The rising consumer credit debt will also slow down the state economy with the consequential increase of interest rates, Hurd said.

Despite the state budget deficit and rising interest rates, the California state economy will have mediocre, but solid growth, Hurd added.

This growth is demonstrated by the labor market’s 0.8 percent growth in payroll and a 0.7 percent decline in unemployment rates. Both of these are positive signs for the upcoming year.

Although this growth may seem small, it’s still a positive sign for the upcoming year.

Unfortunately, these figures may not translate optimistically for the Bay Area. Hurd speculates that the decline in unemployment rates in that region is unfortunately due to more “discouraged workers,” or workers who have given up looking for a job.

Thornberg agrees, “The San Jose area is still losing jobs, and now San Francisco is slowly regaining jobs.” 

Positive signs of steady growth, however, can be seen in the construction and real estate sector. “The long building shortage will keep demand fairly strong,” writes Hurd in his June forecast.

Throughout the past few years, this sector has been strong because Californian demographics push for the creation of new homes and many more housing permits, Hurd said.

The rocketing prices of homes will slow down the sales of existing homes, but not cause the market to collapse.

The report, “The California Economy in 2004 to 2006,” also cites other positive signs of a better state economy as higher incomes, better job balance and good foreign trade.

This foreign trade, specifically from Asian economies, actually benefits only and mostly Los Angeles and Long Beach, writes Thornberg. “Additionally Southern California continues to be a place to move to, both internationally and domestically.”

These observations, juxtaposed with the budget deficit problem and loss of jobs in the government sector show that the 2005 California state economy will continue to struggle and begin growing at a steady pace.