UCSB Forecast: CA May Be Headed for Depression


billwatkinsAs California’s recession steadily worsens with no end in sight, the state’s economy may descend into a full-blown depression, according to a new statewide forecast released Wednesday.

The state’s budget meltdown weighs heavily on California’s economy, according to the respected UCSB Economic Forecast, fueled by the political ineptitude of the Capitol’s leaders, who show that “even when faced with extraordinary crises, California is unable to make hard decisions.”

“California’s economy continues its descent into the depth of its most serious recession since World War II,” economist and Calbuzz contributor Bill Watkins writes in the forecast.“…It is possible that when this is over this recession will meet the technical definition of a depression in California.”

The UCSB forecast ( membership), presented to a business group today in Salinas, presents a gloomier picture than some other recent economic reports, which have projected a recovery beginning in 2010.

By any measure – employment, housing, retail, tourism, industrial, banking – the UCSB study found little evidence for optimism and plenty for California’s economy continuing “to perform far worse than will the U.S. economy.”

Forecasting “continuing job losses and declining economic activity,” Watkins said his analysis of economic data and trends found “no signs of any positive innovations in the forecast horizon.”

The state budget mess presents a two-track problem, because tax increases and spending cuts both accelerate a negative feedback loop that deepens the slowdown in the overall economy:

“California’s budget issues are likely to be made worse by continuing economic decline,” he wrote. “Perversely, the budget then negatively feeds back into the economy.

“The problem is not likely to see relief, at least in terms of increased revenues, before late 2011. Therefore, it is likely that the uncertainty associated with the budget and the declining spending or increased taxation will be a drag on California’s economy for several quarters to come.”

Watkins also cast a jaundiced eye on the efforts of the governor and the Legislature, saying politicians of both parties have simply reverted to knee jerk positions during an extraordinary crisis that requires bold leadership and innovative solutions:

“It is truly striking to see politicians of both parties use the same arguments in the current budget debate that they have used for years” in the wake of the May 19 special election debacle, he said.

“Interpretations of that election have varied, but it’s impossible to interpret the election as a resounding affirmation of the status quo. But, based on what I’m hearing from Sacramento, that appears to be the position that our political leaders are taking.”

— By Jerry Roberts and Phil Trounstine

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There are 8 comments for this post

  1. avatar OC Progressive says:

    A much more accurate projection than anything coming from Chapman or the business school at UCLA.

    California leaders should be focusing like a laser on any changes that might bring revenues back to California, without affecting Californians.

    Start with estate tax reform. Not too long ago, California has an estate tax that was fully deductible against the federal estate tax. If we restored that provision, California would now have another 1.2 billion this year.

    The Republicans pushed through 2.5 billion in corporate tax cuts which would primarily benefit multinational corporations. That money should stay in California and benefit individuals and small businesses.

    Oil extraction taxes would tax oil companies, and, indirectly, all oil producers.

    We also really need to push for fair pension plans, where every government worker in California, at every level, pays half of the cost of their pension contribution, and half of the cost of any post retirement benefit costs.

  2. avatar gogosian2010 says:

    Classic definitions from “:the un-washed” = RECESSION is when others have lost their jobs! DEPRESSION is when I lost my job!

  3. avatar SezMe says:

    Watkins finds it “truly striking” to see politicians sticking with their positions established over several years? Really? Is he also struck when the sun rises in the east?

    His attitude is especially naive when it comes to the Republicans. To think that they would forego their head-in-the-sand tax policy is foolish. Look what happened to Maldanado.

  4. avatar California Taxpayer says:

    Yes, look what happened to Abel Maldanado! He voted to increase taxes and the economy continued to collapse! Until the Democrats realize that they must cut spending to match existing revenue, nothing is going to happen because the people who really pay the taxes are voting with their feet. That just leaves fewer and fewer people to support the ever increasing tax burden. And please do not blame Prop 13 because that is just a red herring.. This state is, I am affraid, doomed to collapse. into a lasting depression.

  5. avatar Bill Bradley says:

    No. California is not heading for a depression.

  6. avatar Silent Sleuth says:

    I don’t think most people really understand what a depression is. This is not a depression nor, as Bill says, will it become one, kids.

  7. avatar SezMe says:

    California Taxpayer: That woosh sound you just heard was my point passing completely over your head. Maldanado was subject to a recall petition because he dared to violate Republican orthodoxy. My comment had nothing to do with the state’s economy.

    By voting with their feet, are you saying California is bleeding taxpayers? Got some evidence? Where is eMeg moving to?

  8. avatar Sac Economist says:

    Don’t waste your time with this ‘forecast.’ Tossing out overblown language-like the ‘D word’-is a great tactic to get attention.

    Its a time-honored strategy of up-and-coming forecasters to stake out an outlier position and amp up your retoric to get some noteriety and hope things go your way. If they do, you can crow for years about being the ‘lone voice’ who really knew what was going on. If you’re absolutely wrong, you know no one in the press or the public will go back and check. In either case, you get cited in a lot of articles and gain the all-important name recognition that you can capitalize on later.

    Similar to this article, the ‘analysis’ that went along with the Project’s earlier outlooks was heavy on hyperbole, peppered with conservative agenda but very light on specifics or real analysis. The text for their March outlook said they expected employment to decline “throughout the forecast horizon” but the actual numbers showed job growth returning in 2011 (as well as better home sales and construction, and positive GDP growth). This was similar to the overall pattern projected by the other leading forecast projects. The charts in the Project’s latest road-show powerpoints conveniently end at 2010-a very short ‘horizon’ indeed. (available here: http://www.ucsb-efp.com/Downloads/Presentations/Default.aspx)

    While you could argue that a disaster was narrowly averted last October, neither the California nor US economies are anywhere near depression-like conditions. California is doing marginally worse than the nation solely because during the expansion we were relatively more dependent on housing and subprime finance than the rest of the country. Thus the bursting bubble was going to hit this state harder. Notably, Nevada, Arizona and Florida–other real estate/subprime-dependent areas–are also doing worse than the nationa and arguably are in as bad or worse shape than California.

    I’m not saying the the worste is over yet, but there are some definite signs that the recession is about to reach bottom if it hasn’t already; home sales are way up, home prices have stabilized, unsold home inventories have improved, job losses continue but are slowing, the Dow has improved. Nothing’s coming up roses yet, but Depression is way off the mark.

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