As Goes California, So Goes America? Better Hope Not

Housing woes seem to be pushing the Golden State's economy into recession.

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Jan Hatzius and the econ team at Goldman Sachs think California's economy is tanking—and that may bode poorly for the economy overall. Their case, in short, is as follows:

1) Historically, every increase in the three-month average of the California unemployment rate by more than 0.6 percentage point has been associated with a national recession.

2) The 3-month moving average of the California unemployment rate now stands at 5.5%, 0.7 percentage point above the cyclical low of 4.8% seen in December 2006.

3) Together with the regional recessions already visible in Florida and Nevada, a California recession would mean that the housing bust has pushed an area responsible for 20% of US GDP into an outright downturn. ... We suspect that a California recession would form one additional argument for additional monetary easing. At a minimum, we would assume that that San Francisco Fed President Janet Yellen will be arguing for another rate cut at the December 11 FOMC meeting.

One more interesting point: In response to the slowdown, Gov. Arnold Schwarzenegger has ordered up big budget cuts. Hatzius opines that "statewide budget cuts may be necessary for California's credit rating, but they also have the potential to exacerbate the slowdown in economic activity."