As it did when the housing bubble began to burst, California is leading the way in the next leg: a consumer bust.
Squeezed by rising unemployment, inflation in food and energy costs and plunging home values, Californians are cutting back on spending. Besides causing woes for state and local government, the cutback is giving California's economy another knock and makes further job losses, home repossessions and banking problems more likely.
The figures are pretty bad. The median home price has fallen by 29 percent in the year to March, according to the California Association of Realtors, and repossessions are increasing.
Unemployment hit 6.2 percent in March, up 1.2 percentage points from the same month last year.
But most important, in the 10 months to the end of April, sales tax receipts in California are actually down in absolute terms. Gasoline tax receipts are essentially flat. When you factor in that there would have been considerable inflation during the period, and that some essentials like gasoline would have risen sharply in cost, the picture is clear: Californians are tightening their belts.
And California matters. It accounts for 13 percent of the U.S. economy. It was also where more than a third of the non-mainstream home loans, like subprime and Alt-A, were made in 2006 and 2007, making it very important to the health of the banking system
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