SOURCE: Milken Institute

May 08, 2008 09:00 ET

U.S. Recession Is Here; Impact on California to Be More Severe Than for Rest of the U.S., According to Milken Institute

LOS ANGELES, CA--(Marketwire - May 8, 2008) - Whether or not the National Bureau of Economic Research calls it a recession, consumers, homeowners, investors and businesses won't waste any time on the semantics because it will certainly feel like one. A new report from the Milken Institute states that the recession has arrived, with real GDP declining at an annual rate of 0.6 percent in the first quarter of 2008, followed by 0.9 percent in the second. The study states that the Commerce Department's "advance" report on first-quarter GDP will be revised to show a decline rather than the 0.6 percent gain currently estimated.

According to the report, The Economic Outlook for the United States and California: Slow Growth or Recession? the combination of a housing market correction, soaring oil prices, a weak labor market, overextended consumers and credit markets turmoil outweigh any gains seen in the export markets. However, the report also notes that actions at the federal level to enact fiscal stimulus measures should mitigate the depth and duration of the problem, making it the mildest recession in the post-World War II period.

"The headlines about subprime and oil prices tell part of the story," said Ross DeVol, director of regional economics at the Milken Institute. "But looking at the ripple effects throughout the economy illustrates the real impact that Americans will feel at the ground level."

The report also looks at what the national recession means for California. The impact on California will be more pronounced than in other states because of the high concentration of mortgage originations (both traditional and subprime), targeted job losses in the construction and financial services sectors, and decreased import activity in the state's ports and logistics operations.

California's economic issues will have a direct impact on the budget. According to the report, at the current rate of expenditures, the 2007-2008 general fund would be $9.7 billion in deficit, and at the current growth rate of expenditures, the gap between general fund revenue versus expenditures for the 2007-2008 fiscal year could reach $20.2 billion.

Hard choices lie ahead for California, as noted in the report's budget outlook. It is highly improbable that voters will accept the deep expenditure cuts required to address the budget gap, and while the Legislature is currently at a political stalemate, alternative methods of generating revenue, including tax exemption redefinitions and tax increases, may be the only way forward for a budget compromise.

The report is available at www.milkeninstitute.org.

About the Milken Institute: The Milken Institute is a nonprofit, independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. It is based in Santa Monica, Calif.. (www.milkeninstitute.org).

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