UCLA economists spark debate with call on housing.

Last week's Anderson Forecast caused a stir when UCLA economists postulated that California's economy was vulnerable to a dip in the housing market--reasoning that too much of recent job growth is tied to housing.

But there is more than one way to slice an economy, and a number of California-based experts don't agree with all of the Anderson Forecast's conclusions. Last week, several disputed the notion that a stagnant housing market will spark a downturn.

"There won't be any growth in housing over the next year, but it doesn't mean there will be a collapse," said Stephen Levy, director . of the Center for Continuing Study of the California Economy in Palo Alto.

One of the Anderson Forecast's big concerns is that too much of the state's economy is leaning on itself for support--California businesses relying on demand from Californians.

And there's no arguing with the numbers: More than half of the 243,000 jobs created in California over the past two years were directly related to the housing market, according to the study. But that doesn't necessarily mean there will be a gaping hole when the real estate sector cools down.

"This happens every time we come out of a recession," said Nancy Sidhu, senior economist with the Los Angeles County Economic Development Corp. "It is almost always the case that during a recession interest rates drop, housing becomes very strong and leads the economy out of a recession. Gradually, other industries gather strength and begin to grow under their own momentum."

Internal vs. external

Regional economic activity can be divided into two categories: businesses that serve local demand and those that serve outside demand.

Construction and real estate serve local needs. So do service providers such as doctors, retailers and cable companies. Accountants, lawyers and staffing firms are also considered part of the internal sector.

Businesses that serve outside demand are companies such as computer firms that sell hardware and software around the world, or apparel manufacturers that produce clothing for export.

UCLA senior economist Christopher Thornberg contends that too much of California's growth depends on local demand.

"As long as real estate continues to grow, it's going to continue to feed internal demand." Thornberg said. "But at some time in the near future, real estate is going to cool." Last week, Thornberg and his colleagues at UCLA predicted that this will lead to a recession in California and the United States.

Levy is not troubled by the same data. "When your economic base works well, most of your jobs are internal," he said. "We are traditionally a state that brings people in--we're adding more than 300,000 per year--and as long as that continues, it will generate job growth."

Keitaro Matsuda, senior economist with the Union Bank of California, agreed that construction has been the strongest growth sector in the California market.

"But I really don't think that when housing jobs start to disappear or slow down that we'll have to have some sort of collapse of the state's economy," he said.

Matsuda said service-sector jobs are starting to increase: professional and business services added 62,400 jobs in 2004. "The service sectors will lead growth, and we'll have less dependence on construction," he said.

In addition, California's economy has strong ties to international trade, Levy said, pointing to a 20 percent rise in exports from California in 2004 and a reviving entertainment sector. "Post-production days are up to a record. We have a large tradable sector in entertainment," he said.

Indeed, the Anderson Forecast called exports a "ray of hope" that could help stave off recession. The weak dollar has been largely credited with the resurgence in Hollywood activity.

Others point to technology as a bright spot. John Kraft, chairman of the Soft ware Council of Southern California, said 2004 was a "significant uptick" for the 222 small and medium-sized businesses on the council. He said many of his companies have doubled and tripled in size over the last year, and the venture capital community has gotten much more active. "More importantly, IT organizations are buying software again," Kraft said.

California exported about $112 billion worth of goods last year. Computer and electronics products made up 40 percent of the total, according to Matsuda, mostly coming from Northern California.

Defense and aerospace, prominent tech-related sectors of L.A.'s economy, are doing well, although they are not hiring as they used to. There are about 40,000 aerospace jobs in L.A. County, where there used to be 300,000. "Apparently they've stopped falling, and they went up by almost a thousand, which is not bad," Levy said.

Machinery accounted for 12 percent of state exports last year. Transportation equipment made up another 11 percent of exports, and it was the fastest-growing sector growing by more than one-third from 2003, Matsuda noted. Much of that increase was aircraft- and aerospace-related equipment.

"I'm not that pessimistic for the export outlook for California," said Matsuda.

[GRAPHIC OMITTED]