Forecasts say area economy will do better than 'sluggish' state in 2008

California will manage to avoid sliding into a recession even as the credit crunch and housing meltdown take their toll on jobs and growth. A number of economists and studies predict the state will squeak by with sluggish growth and revive toward the end of 2009, while the nation's economy endures what one forecast called a "near-recession experience." At the same time, Silicon Valley and the Bay Area are performing better than the state or nation because of rising global demand for high-tech products. "The Bay Area economy is actually the bright spot in California," said Ryan Ratcliff, an economist with the University of California-Los Angeles Anderson Forecast, which released a report recently.

The collapse of the subprime loan market unfolded with dizzying speed over the summer. Mortgage defaults and foreclosures soared as borrowers found themselves unable to make payments on adjustable-rate loans, major lenders announced layoffs and stopped making many loans, and the housing industry experienced a decline in sales and in prices in some markets. The question has been whether increasing mortgage-interest rates will shrink consumer spending and slow the economy even further. So far, the impact has been relatively small, according to the UCLA forecast and one released by the University of the Pacific Business Forecasting Center.

"The consumer continues to spend," said Sean M. Snaith, who helped prepare the University of the Pacific's California and Metro report, which foresees a decline in housing prices through 2008 that "will not remotely resemble a bursting bubble."

UCLA's Anderson Forecast on the California economy also found "little evidence that mortgage defaults have led to wider financial distress for consumers." Defaults on home loans will peak in the first half of next year, the UCLA study said. Real estate markets will continue to be a drag on California growth for at least a year to come. But the economy should return to more or less normal levels of growth in 2009. UCLA's economists are predicting "sluggish" growth but "no recession" in California, though they added that "the difference between the two is getting smaller all the time."

Nationally, UCLA foresees 1 percent growth in the national economy for the next two quarters, with spending on consumer goods shrinking some. Silicon Valley and the Bay Area are outperforming the state and nation in terms of job growth, said Stephen Levy of the Center for Continuing Study of the California.

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San Jose Mercury News Reporter, Pete Carey
September 12, 2007