SAN FRANCISCO (Reuters) -
The economy of California, the
most populous U.S. state, will remain weak this year as the
downturn in its housing market persists, but strong exports and
agricultural activity will help offset that drag, according to
a UCLA Anderson report released on Wednesday.

"Though you still hear talk of recession these days, it
does not appear that California will exhibit the kind of job
loss that typically goes with a national recession," the report
said. "Indeed, for California this is primarily a housing
related adjustment to a very overheated speculative market."

"The carnage is palpable but contained as California
benefits from some very traditional industries and its position
in the sun on the edge of the Pacific Rim," the report added.

California's job losses in once torrid home-building and
home-financing have been severe, but payrolls in services are
growing along with exports and agriculture, two important
activities in the state that are gaining momentum after not
growing much in the recent past, the report said.

They will help prop up pay gains and restrain the rise of
unemployment.

"We are looking for a 2008 growth rate of 1.5 percent in
personal income after adjusting for inflation. Not a barn
burner, but not bad in a slow economy," the report said. "Most
of that growth will take place later in the year. Through 2009
the growth rate will increase towards more normal trend
levels."

"We have shaved a couple of tenths off the unemployment
rate having it now top out at 6.1 percent by the end of the
year and slowly falling back down thereafter," the report
added.

HOUSING TURMOIL EASING?

California may also catch a break from its housing slump.

The state's home sales and its housing prices are falling
amid weak demand, a glut of foreclosed properties and tightened
mortgage lending standards. As a result, UCLA Anderson's
forecasters see the state's homes, among the priciest in the
nation, becoming increasingly affordable.

"Suffice it to say, the housing market has yet to hit the
affordability bottom, an event we think will occur before year
end," their report said. "When that happens, home prices and
mortgage interest rates will once again stimulate the demand
for housing, though not nearly to the extent we have seen in
recent years."

California's mortgage industry will not necessarily benefit
from that recovery. Earlier this decade it boomed by providing
risky loans to borrowers who previously had been shut out of
the mortgage market.

The subprime mortgage debacle forced many of the lenders to
close shop and few now are willing to back risky borrowers to
the extent they had previously.

"The home mortgage finance industry, centered in
California, was structured, in part, to provide financial
services for a market which has now disappeared. As a
consequence it will suffer a permanent loss of jobs," the
report said.

That will be felt hardest in Orange County, south of Los
Angeles. The county had been the epicenter for California's
mortgage industry. If Orange County's other sectors do not
start growing faster, its regional economy may not fully regain
jobs lost from the mortgage industry's implosion until 2012 or
2013, the report said.

As for new home construction, the end of its steep decline
is within sight. UCLA Anderson forecasters predict a recovery
by early next year.

(Editing by Diane Craft)

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