SACRAMENTO -- Gov. Jerry Brown's recently released 2014--2015 budget generally foresees the very slow economic recovery trend will continue yet with increasing consumer confidence, and the overall economy is expected to improve, with steady growth over the next few years as unemployment rates for the nation and state continue to drop, combined with increases in housing prices and new job creation.
At the same time, the economic outlook in the $106.8 billion budget contains the specter of a potential slide into new recession as early as six months from now, based on historical data. Yet the budget does foresee a $5.6 billion state budget surplus by the end of the fiscal year.
"On average, economic expansions last approximately five years, and as of December 2013 the current expansion had lasted four and a half years," said Irena Asmundson, chief economist with the Department of Finance, which advises the governor on fiscal policy.
"The longest expansion we have experienced lasted approximately 10 years. While there are few signs of inflation or tight supply conditions that would trigger a contraction, it would be a historical anomaly to not have a recession over the next few years."
One possible trigger for a negative turn in the business cycle could be an unexpectedly large adverse reaction to monetary changes by the Federal Reserve, she said.
Federal fiscal policy has generally been a drag on growth over the past few years, and supportive monetary policy through low interest rates and bond purchases have helped counteract that. The strong performance of the stock market in 2013 is likely linked to these policies, the state economic outlook added.U.S. job growth
While the national unemployment rate fell to 7 percent in November, down from 7.8 percent at the end of 2012, job growth has been fairly robust with an average of 189,000 jobs added per month in the U.S. during this period -- meaning that the nation has recovered 94 percent of jobs lost nationwide during the recession.
The increased labor force from new entrants has kept the unemployment rate elevated, according to the budget summary, and there are few signs of wage pressures that might lead to increased inflation -- projected to stay below 2 percent through 2015.National construction
The construction industry continues to be the main driver of growth for the U.S. economy with purchases of durable good rising strongly over the past few years. This will likely slow by 2015 as pent up demand begins to decline in the wake of the recession.Private domestic investment
At the same time, private domestic investment in the nation, such as purchases of producer’s equipment, has been increasing faster than the rate of consumption, and should add to GDP growth over the next two years.Federal spending
After years of public sector cuts, government expenditures are not expected to decrease overall GDP growth. However, net exports continue to be a drag on growth, as import growth outpaces exports.U.S. GDP rising
After rising to a high of 4.1 percent in the third quarter of 2013, national GDP quarterly rates are forecast to steadily increase from 1.7 percent in Q4 of last year to 3.4 percent by Q3 of 2015, with a slight decline to 3.1 percent in Q4 of that year.California’s unemployed
In California, the recovery spread to more sectors of the economy in 2013 and the unemployment rate fell more quickly than the national rate, to 8.5 percent in November down from 9.8 percent at yearend 2012. This percentage is projected to drop to 7.9 in 2014 and 7.3 in 2015.State labor statistics
Job growth remained robust throughout 2013. In estimated numbers for the previous year, the California labor force includes 18,590,400 individuals of which 17,012,200 are currently employed -- up by 18,400. Those unemployed number 1,578,200 (down by 34,300). Nonfarm jobs number 14,748,200 (up 44,300), and initial claims for unemployment insurance totaled 278,900 (down 44,900). Cal jobs are expected to grow by 340,000 a year through 2016.
The 2014 budget also includes $268 million for workforce development, the same as in 2013, and predicts an increase to $10 per hour for the state’s minimum wage in 2016 -- a rise of 25 percent.Education spending
There is an extra $10 billion, in the 2014--2015 budget under Prop. 98, to invest in K-12 up to community college education, as well as to wipe out late payment "deferrals" of $6 billion. The Prop. 98 guarantee would rise to $61.6 billion next year and reach $69.6 billion in 2017--2018.Personal income
Average personal income for California residents in 2013 was estimated at $1.813 billion, a figure expected to increase slightly to $1.896 billion in 2014.Housing permits
New housing permits are estimated at 87,000 for 2013, rising to a projected 114,000 in 2014 and 134,000 in 2015.Housing prices
The housing market has been recovering with prices of existing homes up some 25 percent in October, compared with a year earlier.Consumer Price Index
While the Consumer Price Index rose 2.2 percent in 2012, slower increases are projected in coming years -- 1.6 percent for 2014, 1.8 percent for 2015 and 1.9 percent for 2016.
In summary, the overriding message in California’s 2014--2015 budget economic outlook is that the state is experiencing a broad-based recovery, but one that seems to ignore the elephant in the room. 'Wall of debt'
While predicting a short-term budget reserve surplus of $5.6 billion by the end of 2014--2015, the budget does not include (as current expenses) the $217.8 billion in unfunded retirement liabilities or California’s $354.5 billion long-term liabilities that comprise a "wall of debt" for future generations.
It does, however, propose a constitutional amendment (in lieu of Prop. 58 and ACA 4) to strengthen the Rainy Day Fund, or Budget Stabilization Act, that would include a provision to allow supplemental yearly payments to help reduce this combined $572.3 billion outstanding state indebtedness.
