Weak outlook for state seen by the UCLA Anderson Forecast

Weak outlook for state seen
Many are working under the table, UCLA group says

Tom Abate, Chronicle Staff Writer

Wednesday, September 28, 2005


California's economic outlook is "mediocre at best" in the short term, according to an influential forecasting group, which says the state's job recovery has been too dependent on a housing boom that could go bust.

The report set for release today by the UCLA Anderson Forecast also highlights the growing importance of the informal economy -- consisting of nearly 2 million Californians who are working, but not at payroll jobs, in many cases getting paid off the books without having taxes withheld.

The UCLA Anderson report arrives at a time of growing consumer pessimism. The Conference Board's Consumer Confidence Index, based on a survey of household spending plans, fell to 86.6 in September from 105.5 in August, its biggest drop in 15 years, the research group said Tuesday.

This indicator is closely watched in an economy where two-thirds of output is driven by consumer spending. Economists disagree whether the swoon was a temporary reaction to the back-to-back hurricanes or the start of a purse-tightening trend.

In related news, the Commerce Department said Tuesday that the volume of new home sales fell 9.9 percent in August, a bigger-than-expected drop that could signal a slowdown in the hitherto hot housing market. Even with the drop in volume, however, the median sale price rose 2.5 percent to $220,300.

The Commerce Department news underscored the message of the UCLA Anderson report. The UCLA forecasters have long said that California's home prices have outstripped their underlying fundamental value. In Wednesday's report, prepared in advance of the Commerce release, the forecasters said one sign of a cool-down would be a slowdown in volume.

In recent months, Federal Reserve Chairman Alan Greenspan has cautioned about the overheated housing market. Just this week, the Fed chief took note of the increasing number of risky mortgages -- such as those with interest-only payments -- to warn that if housing prices cool, some borrowers and lenders "could be exposed to significant losses."

The UCLA Anderson report noted that a disproportionate share of the net job gains in California has come from the housing sector. Scott Anderson, Northern California economic specialist for financial services giant Wells Fargo, has run similar analyses that have arrived at the same conclusion.

"The job recovery in the nation as a whole, but in California especially, has been tremendously dependent on housing and remodeling,'' said Anderson (who has no relation to the forecasting unit). When he compared payroll job totals from August 2004 to August 2005, he found that 12.3 percent of all net payroll growth nationwide came directly from construction.

In California, it was 27.3 percent. In the Vallejo-Fairfield economic zone, the ratio was even higher, with 42 percent of all net jobs coming from people who swing hammers or perform other construction-related tasks. "This is a major risk,'' he said. If housing cools and construction slows or reverses, it could drag down the job market.

For its part, the UCLA Anderson Forecast warned that a recession could occur in the event of a severe collapse of housing prices. But their official forecast projects that a slowdown in job growth to 1.2 percent in 2006, compared with an estimated 1.6 percent in 2005, is more likely.

Howard Roth, chief economist for the California Department of Finance, agreed that construction has buoyed the job market but said other sectors have started to grow as well. That could make a housing cool-down and construction job retreat less of a problem than would otherwise be the case.

Roth noted that between the first half of 2004 and the first half of 2005, professional and business services, as well as trade, transportation and utilities, two well-paying employment sectors, have each added more jobs than construction, which saw a payroll gain of 53,300 during the period.

Leisure and hospitality, though not as remunerative as the other three sectors, have also added more than 46,000 jobs -- evidence, Roth said, that payroll employment gains are broadening.

On the growth of the informal economy, UCLA Anderson economist Christopher Thornberg noted that roughly 1.9 million Californians, or 12.4 percent of the overall workforce, seem to be working at something other than a standard job. Some are contract workers and on the books, but others are under the table.

"This should be an ongoing concern for policymakers, as little is known about what these folks do, the type of benefits they may or may not have, and of course whether or not they pay taxes,'' Thornberg wrote.

Sandi Mason, an employment specialist with the Bureau of Labor Statistics in Washington, said federal job counters don't know much about this phenomenon other than that it exists and is an appreciable part of the workforce in many states.

Idaho, for instance, has a slightly larger percentage of informal workers than California, she said. Washington, Montana, New Hampshire, Oklahoma and Texas are also right above or below the 10 percent mark.

Wells' Anderson said employers may want to pay employees off the books to beat the rising costs of health care benefits.

A 53-year-old San Francisco man contacted through The Chronicle's Two Cents reader response network said he has to work underground because he has no other way to make ends meet. He asked that his name be withheld because he works odd jobs to supplement some government assistance income.

But most of the Two Cents query respondents were as upbeat as San Francisco lawyer Gilion Dumas, who says she has willingly worked roughly half of her 14 years in law on a contract basis. "I pay all my own expenses, and while I get none of the benefits of being an employee, I also avoid all the irritations and office politics of regular employment,'' she said.


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E-mail Tom Abate at tabate@sfchronicle.com.

California jobs



Job creation in California during the current expansion has been more

heavily concentrated in a few fields, notably construction, than during the

1993 to 1995 rebound.



Numbers are from August to August



1993 to

1995 2003 to 2005

Finance -22,600 10,400

Construction 26,700 57,700

Leisure 34,500 41,300

Retail trade 21,600 27,900

Real estate 100 4,200

Education and health 22,400 24,000

Professional services 16,700 16,300

Wholesale trade 10,300 6,000

Transportation 11,300 3,400

Information 16,400 6,300

Durable goods 17,600 5,600

Non-durable goods 14,500 -2,800

Administrative 54,300 32,000

.

Source: UCLA Anderson Forecast, Sept. 2005

The Chronicle