Led by a real estate slowdown, the California economy will continue to slow into 2007 but avoid an outright recession, according to the quarterly UCLA Anderson Forecast to be released Thursday morning.

The forecast calls for payroll employment growth to remain sluggish at around 1 percent for the rest of 2006 and through 2007 as weakness in the construction and finance sectors is offset by slow but steady growth in service employment.

"In order to have a recession, two economic engines have to slow substantially. The way things look now, we only have one engine real estate/construction slowing while the rest of the economy is either growing somewhat or holding its own," said Ryan Ratcliffe, an economist with the UCLA Anderson Forecast.

Among the areas expected to hold steady is manufacturing employment, thanks to a robust aerospace sector. This marks a significant contrast from earlier this decade, when statewide manufacturing employment in the durable goods sector (big-ticket items like refrigerators and cars) plunged 20 percent.

Because no recession appears in the offing, housing prices are unlikely to experience significant declines at the statewide level, even though housing sales volume has fallen substantially, the forecast says. However, certain areas with high concentrations of new homes, like San Diego and Sacramento, may see price drops. Los Angeles County should see housing prices flatten but not drop substantially, Ratcliffe said.

On a down note, the forecast noted that the pace of inflation has far outstripped income growth over the last six years, a trend that's expected to continue well into next year.

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