The current recession in California has lasted three years, longer than any other postwar downturn, and has cost the state 585,000 jobs, for a drop of 4.7%.

Defense cuts have contributed significantly to the severity of the downturn. According to the California Commission on State Finance, the volume of real defense dollars going to California has fallen 21%, or $13 billion, since the peak in 1988.

Largely as a result of the defense cuts, the number of aerospace jobs has fallen 137,000 since that year.

Economic troubles in the construction and real estate sectors also are more severe than they would be in a "typical" California recession.

Residential markets have suffered, but most of the more serious problems have been on the commercial side.

The weakness has been reflected in construction activity, property values, and rental rates.

California's problems are not confined to the defense and real estate sectors, however. Non-aerospace manufacturing has lost 150,000 jobs, or 9.1% of the total, since California's downturn began, while employment in wholesale and retail trade has fallen 6.9%, a loss of 207,000 jobs.

Loans Down 11%

Banks have struggled during recent years as well.

The volume of loans outstanding at large California banks has fallen 11% since the peak in early 1991.

At the end of the first quarter, 6.48% of bank loans were delinquent. That's lower than one year earlier, but still well above the 4.11% delinquency rate in the middle of 1990.

Partly as a result of California's broad-based economic problems, state and local governments have faced severe fiscal troubles in recent years.

For the fourth consecutive year, lawmakers this June addressed a large budget shortfall this time amounting to $8 billion.

State Budget

This year's solution to the budget impasse will result in cutbacks in public services, particularly those provided by local governments.

By reducing the funds available to government employees and recipients of public aid or services, the budget cutbacks will tend to have a constraining

effect on economic growth in the state.

Some measures of California's economic health have been flat for the past year or so.

For example, taxable sales (adjusted for seasonality and for changes in the "snack tax") have been more or less flat since the end of 1991.

Also, the number of existing homes sold has not fallen below where it was at the end of 1991.

Moreover, the number of construction jobs was the same in June as it was six months earlier, a big change from the persistent declines seen previously.

At the same time, though, the number of housing permits issued has fallen again, after a brief upturn (on a seasonally adjusted basis) around the beginning of the year. And total payroll employment continues its persistent decline.

While there is some evidence that the worst of the downturn is past, it is important to distinguish between the end of a downward trend and the beginning of a normal recovery.

For one thing, California is likely to see additional large defense cuts during the next few years.

Extraordinary Times

These defense cuts alone would normally not be enough to keep California from recovering. Historical relationships suggest that even unexpectedly slow growth in the national economy, with the number of jobs rising only 1% a year, would be more than enough to offset the anticipated defense cuts and any associated secondary effects.

However, these clearly are not normal times. Overbuilt commercial real estate markets and persistent fiscal problems also will continue to be drags on California's economy during the next few years.

Nevertheless, the apparent stabilization of taxable sales and home sales means that there are fewer sources of downward pressure than there were earlier in the recession.

Taken together, these factors suggest that California is likely to "bump along the bottom," with little trend either up or down, during the next year.

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