MECAWI demonstration outside Detroit's MGM Casino Hotel dealing with the city's mortgage crisis on November 27, 2007. PANW editor Abayomi Azikiwe third from left. (Photo: Cheryl LaBash).
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By Krishna Guha in Washington and Matthew Garrahan in Los Angeles
Financial Times
Published: January 16 2008 23:39
California and Florida – the biggest and fourth biggest state economies in the US – are either in recession or on the brink, many economists now believe.
While state-level data are patchy, the available figures suggest that economic activity is probably contracting in Florida and may be declining in California as well.
With Nevada and Arizona, they represent a new group of housing boom-turned-bust states that could join the rust-belt states of Michigan and Ohio in recession even if the US as a whole escapes with only weak growth.
The four former boom states account for about one-fifth of US gross domestic product. California’s economy alone would rank among the 10 biggest in the world, while Florida’s would rank in the top 20.
Their plight is likely to feature prominently in the presidential primary campaign.
Technically, states do not have recessions - only national economies do. But the US has a long history of so-called regional recessions.
Existing home sales fell 36 per cent in California and 30 per cent in Florida in the year to November 2007, against a national decline of 20 per cent. Median sale prices fell 12 per cent in California and 10 per cent in Florida, against only 3 per cent nationwide.
Both states have large inventories of unsold houses. Florida has a huge excess of condominiums and rising insurance premiums, while California is uniquely vulnerable to the dysfunction in the jumbo, or large denomination, mortgage market.
Government-sponsored Fannie Mae and Freddie Mac can only purchase mortgages up to a certain size. The price of the average home California exceeds this limit. The state is also the national capital of the subprime finance industry, which is in meltdown.
Jobs growth stalled in both states from August onwards. Unemployment is up by about a percentage point in each over the past year.
Ross DeVol, director of regional economics at the Milken Institute, told the FT that he believed California was now in recession. He said the Hollywood screenwriters’ strike – in its third month – was the “straw that broke the camel’s back”.
However, the Federal Reserve beige book suggests California continued to grow at the turn of the year, with support from high-tech and aerospace.
“I am not prepared to say with certainty the California economy is in a recession,” said Bill Lockyer, California treasurer. “But clearly we are in a period of broad-based deceleration.”
The signs of recession are even stronger in Florida, where retail sales tax receipts for November - a proxy for consumer spending - were down 5 per cent year on year, on a three-month rolling average basis.
John Robertson, senior economist at the Atlanta Federal Reserve, told the FT: “All the indicators in Florida are consistent with an economy that is contracting not growing”.
The bright spot for both states is tourism and exports. The sharp fall in the dollar against the euro has helped Florida, but California has benefited less as the dollar has not fallen much against Asian currencies.
Faced with rising budget deficits, both states now look poised to cut spending and/or raise taxes - moves that could amplify and prolong regional recession.
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