Government sector to drag down economic recovery, forecast says
Another day, another economic forecast. This one, from Sung Won Sohn at Cal State Channel Islands, predicts a U.S. unemployment rate of 9.6%, a California unemployment rate of 12.6% and national GDP growth of 2.8% next year.
It also suggests that weakness in the government sector is going to hamper an already sluggish recovery.
"In this soft economy, tax revenues have been falling, forcing the state and local governments to curtail spending, primarily by cutting payrolls," Sohn writes.
Government spending, primarily in the form of payrolls and welfare payments, usually contributes 0.25 of a percentage point to economic growth each year. Next year, Sohn predicts, government will contribute negative 0.25 of a percentage point -- a significant drag on an economy that is predicted to grow only 2.8%.
Despite California's dire budget problems, government weakness will not have as much of an effect in the state as it will nationally, Sohn says. Government makes up nearly 20% of all nonfarm jobs nationally and in California, according to the Bureau of Labor Statistics. But other industries in California, such as technology, will be able to drive the recovery in the state in ways they won't in the nation.
Don't get too optimistic, though. Sohn says there might be a double dip in the housing market as delinquent mortgages rise. This problem started in California and will continue in the state, holding down its recovery.
-- Alana Semuels
Photo credit: James & Vilija via Flickr