LAG SEEN IN '06, '07 ECONOMY.

Byline: Gregory J. Wilcox Staff Writer

A slowdown should hit the national and state economies late this year and in early 2007, but the remaining question for California is how much damage the weakening housing market will bring, according to a UCLA Anderson Forecast that will be released today.

The forecast's economists believe that a recession is unlikely because of modest growth levels as measured by gross domestic product at the national level and employment at the state level. Nor are any economic shocks looming.

"Right now, we're calling it a soft landing," said UCLA senior economist Christopher Thornberg, who wrote the state outlook.

The forecast calls for:

Total nonfarm employment in California to increase 1 percent this quarter, 1.5 percent the next, 0.9 percent in the third and end the year at 0.8 percent.

A similar growth range is anticipated next year. Most of the growth will come from construction, retail trade, finance, professional and technical services and administrative support positions.

Manufacturing is still doing OK, but that is because worker productivity is increasing rather than firms increasing the payroll.

The nation's GDP should grow by 3.2 percent, 2.4 percent and 3.2 percent, respectively, between this year and 2008. And, as in California, the housing boom is coming to an end.

Economist Daniel Blake, director of the San Fernando Valley Economic Research Center at California State University, Northridge, said the forecasted levels of job and GDP growth are sustainable.

"The soft landing is good news. If the housing market really crashed and something else really crashed as well, that could lead to a recession," Blake said.

Senior UCLA economist David Shulman, who wrote the national outlook, said in some parts of the country the real estate sector may slip into recession, but it won't drag the rest of the economy with it.

Nor will it be a Goldilocks economy, a term Shulman coined in the early 1990s to describe one that is neither too hot nor too cold.

"This is in line with what we had in the mid-1980s and mid-1990s," he said of what economist term mid-cycle slowdowns.

"The primary risk to the forecast is that the slowdown we envision turns into something worse," Shulman cautioned.

Important economic drivers - lower interest rates and cheaper oil in the 1980s and the Internet gold rush in the 1990s - helped mitigate the prior mid-cycle episodes.

Now rates are rising and oil is expensive, but Shulman believes that strong capital spending and a leveling off in the decline of net exports could play a similar role in the coming economic shakeout.

The housing boom, both construction and the resale market, has been the prime driver of the national and state economies for the past several years.

The peak is past but it might not be a crash landing.

UCLA first raised the possibility that a price bubble had formed in June 2004, then tempered that assessment in later outlooks.

Thornberg notes that California has seen an impressive increase in housing prices at a time when the economy went from bad to moderate to OK.

Now an adjustment is coming. Sales have been falling under year-ago levels for five months and appreciation rates are narrowing.

Prices have been higher than a year ago on a consistent basis, but have been flat in many areas since last summer. Thornberg believes they could remain so for at least a year.

And this will have a ripple effect.

The reduced rate of appreciation will slow taxable sales growth, too, which will impact the state's budget. But Thornberg does not see substantial state revenue losses like the ones in 2001 and 2002.

"The economy is going to be fragile. That's important to keep in mind," he said.

greg.wilcox(at)dailynews.com

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