California economy weak, but no recession seen: report

SAN FRANCISCO (Reuters) - Mortgage defaults and a "sustained lull" in home building will weigh on California's economy for at least another year but will not tip the state into a recession, according to a forecast released on Wednesday.

"Overall, our forecast is that California is in for at least another year of these economic doldrums, with rising unemployment, weak job growth and a slowdown in all broad indicators," said a report by the UCLA Anderson Forecast.

Barring a substantial worsening in housing or another source of weakness suddenly appearing, California's sluggish economy "will not spiral into a full-blown recession," the report said.

Economist Ryan Ratcliff of the forecasting unit wrote in the report that rising mortgage defaults in California have begun to slow payroll job growth and lift the state's unemployment rate.

Mortgage-related job losses have "swamped" financial service payrolls while construction payrolls are being trimmed, Ratcliff wrote. However, other sectors are adding employees so California will maintain very weak payroll growth through late 2008, he added.

He forecast overall job growth in California of less than 1 percent through this time next year, worse than initially projected because of unexpectedly deep cuts in mortgage-related payrolls. The state's unemployment rate is expected to peak at 5.9 percent at the end of next year.

Calabasas, California-based Countrywide Financial Corp. CFC.N, the largest U.S. mortgage lender, said on Friday it would cut up to 12,000 jobs amid deepening troubles in the home-financing business.

Many lenders are struggling due to increased defaults by risky "subprime" mortgage borrowers who are unable to make monthly payments on their adjustable-rate loans as their interest rates rise.

In California, those borrowers are mostly working families who stretched their finances to afford a home, according to Ratcliff.

In the past, distressed mortgage borrowers would have slashed their spending to raise cash to keep mortgages intact, but now many appear willing to throw in the towel early on their loans, Ratcliff noted.

Their mortgage may have become so large that sacrificing spending makes little difference or there may be a lack of refinancing opportunities or large fees when refinancing is available. As a result, foreclosure is the "least terrible of a set of terrible choices," Ratcliff wrote.