By and  on March 21, 2007

With more than 36.5 million residents and an economy larger than Canada's, what happens in California never stays in California.

The rest of the nation looks to the Golden State as a financial, political and cultural harbinger. Although economists maintain that California is generally in good financial health, citing low unemployment and strong business development, they also acknowledge there are problems. The housing market has cooled, energy prices are volatile and building-material costs are rising. These are weaknesses that may hurt many sectors, including apparel retailing and manufacturing.

In fact, some retail executives already see evidence of this happening. Mark Werts, owner and founder of the four-unit contemporary specialty store American Rag Cie, said his business has felt fallout from declines in residential real estate.

"Things have been more challenging since the correction in the housing market," said the Los Angeles-based retailer. "When the housing market was booming along in 2005 and [early] 2006 and everyone's house was increasing $200,000 a year, people felt rich. They went out to dinner more, they vacationed more….To say we're not impacted by the housing market would be like going out on a cloudy day and saying it's sunny. People are more careful with their [spending]…and take longer to make decisions on the sales floor."

Still, California should have moderate economic gains and inflation this year, said Elizabeth G. Hill, chief fiscal analyst for the state legislature.

Unemployment last year was at its lowest this decade, 4.2 percent, compared with 5.4 percent in 2005 and 6.2 percent in 2004.

"Personal income and jobs statewide are a little stronger than the nation as a whole,'' Hill said. "We have a very diversified economy. When some sectors are doing well, that can offset some of the softness in other areas — particularly in housing.

"We see risks to the economy,'' she said. "Most worrisome are housing and energy. We've seen a slowdown in the residential housing market that's affected employment…and oil prices per barrel have been quite volatile."

In addition, state government continues to have budgetary woes. In a report released in November by the Legislative Analyst's Office, Hill noted that California would face an operating shortfall of $4.5 billion to $5 billion by the end of this year. For 2007-2008, expenditures were forecast to exceed revenues by more than $5.5 billion. The gap largely was attributed to "the state's real estate downturn."

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