Yes, we're in a recession. So, when will it be over?

One thing is increasingly clear: Sonoma County is in a mild recession.

But the clarity ends there. Uncertainty abounds.

When will the housing market stabilize? Will gas prices stop rising? What will be the economic and tax policy of the next president?

Those questions make it hard to determine whether the local economy is anywhere close to hitting bottom -- or how long it will take to bounce back.

"It's difficult for anyone to know when the recession will trough," said Robert Eyler, chairman of the economics department at Sonoma State University. "There is still a lot of uncertainty."

Sonoma County slowly began to slip into recession in April 2007, according to an index created by SSU that has correctly predicted every local recession and recovery since 1972. The downturn will continue through at least spring 2009 and likely extend longer, according to a new forecast prepared for The Press Democrat by the SSU Center for Regional Economic Analysis.

Still, Sonoma County will fare better than California and the rest of the nation because of a strong wine industry boosted by exports and a tourism industry strengthened by people vacationing closer to home.

The SSU forecast punctuates a week of bad economic news. Last week, oil prices soared to an unprecedented $142.99 a barrel while blue chip stocks tumbled to their lowest level in almost two years. The Dow Jones industrial average is now down 20 percent from its record high in October, a trend traditionally viewed as the threshold of a bear market.

While many questions are still unanswered, the SSU forecast provides a glimpse of the cause of the current downturn and what may lie ahead.

The recession was largely triggered by the crumbling real estate sector. The county's median home price has fallen 29 percent since peaking in late 2005.

But a large part of the continued economic pain will come from consumers who are uncertain about the future.

Americans' expectations of how the economy will look in six months is at a historic 40-year low, according to a June report by the Conference Board. And that could become a self-fulfilling prophecy.

"When consumers aren't confident, they tend to avoid making any major purchases such as buying a house," said Eyler, who authored the SSU forecast.

Of course, people's gloomy economic perspectives might be more realistic than pessimistic.

Another forecast, released by the county Economic Development Board earlier this month, predicted housing prices will likely fall a total of 38 percent before stabilizing. It concluded Sonoma County was in a mild recession and a recovery wasn't likely until mid-2009.

The SSU forecast dates the beginning of the recession in Sonoma County to April 2007, using an index that tracks changes in building permits, default notices, unemployment claims, help-wanted ads, farm prices and the U.S. leading economic index. It stops short of predicting a recovery date, but forecasts the local economy will remain sluggish at least into early 2009.

Questionable future

The SSU report laid out a series of possibilities for the economy, depending on how events unfold with the real estate market, gas prices and inflation.

The recession could end by spring 2009 if the real estate market hits bottom this fall. But that would mean foreclosures stop growing, the number of new homes on the market begins to slow, and more buyers step forward, Eyler said.

"We're going to need six or seven months of seeing that trend before we can make the claim we're out of recession," Eyler said. "If that happens, the end of 2009 and 2010 would look really good."

Unfortunately, that scenario seems unlikely, Eyler said.

The worst case scenario is that the housing market continues its tumble, gas climbs to $7 a gallon, and inflation continues to raise the price of everything from a stapler to a pot roast.

"If that happens, we will be talking about this like it were another great depression," Eyler said.

That worst case scenario is also unlikely, he said.

Sonoma County's future likely falls somewhere between those two extremes, and the SSU reports predicts a mild recession that should end next year.

Unlike the recessions of 1990 and 2001, the economy is not expected to contract sharply or shed a significant number of jobs.

The 1991 recession sliced 900 jobs from the county's total employment, although the economy continued to grow slightly.

In 2001 it was much worse. The county shed 7,600 jobs and its economic output contracted by 12 percent.

During the current recession, the county's economy is predicted to grow 0.3 percent this year and 1.3 percent in 2009, after contracting by 0.2 percent in 2007.

The county will likely avoid widespread job losses. In fact, the report estimates an additional 1,500 jobs will be created during 2008 and 2009. However, unemployment will rise about 0.4 percent as job creation won't keep pace with the number of people entering the labor market.

Another positive indicator is that the price of gasoline is expected to level off, according to the federal government. That will help keep the recession mild.

The U.S. Energy Information Administration forecasts the price of oil will stabilize at about $125 a barrel through 2008 and 2009. At that price, gas would remain at slightly above $4 a gallon.

The economic details

The academic jargon "supply-side boom" means growth will come from innovation by manufacturers, such as happened in the late 1990s with advances in the Internet, telecommunications and computers. It stands in sharp contrast to the boom experienced from 2004 to 2006.

That recent expansion was driven by low interest rates and cheap money. Consumers went on a spending spree as inexpensive loans raised home prices and made people feel wealthier. Eyler called that a "demand-side boom," and the economy is now experiencing a hangover from those raucous, free-wheeling days.

Americans boosted their spending 7 percent in 2005 by borrowing against their homes, the U.S. Federal Reserve estimated. Now people must base their spending on wages.

Unfortunately, average wages are 3.5 percent lower than seven years ago, after removing the impact of inflation.

Wages are expected to continue to decline in real terms through 2010 as higher costs for groceries, gas and other goods result in paychecks falling shorter. In two years, people will be making an average 6.7 percent less than at the beginning of the decade, according to the SSU forecast.

As people are left with less spending money, they lower their consumption.

The forecast predicts retail sales will drop 1.3 percent over the next two years, after removing the impact of inflation. It dropped 1.2 percent in 2007. That could mean retailers will lay off or not hire staff in the coming months.

Wine, tourism stay strong

Still, Sonoma County will weather the slowdown in economic activity better than the rest of the country and state.

"I don't think all businesses are in a recession. Some sectors are hurting more than others," said Ben Stone, executive director of the county's Economic Development Board.

The wine industry remains strong and has been boosted by exports that have increased due to the weak dollar.

The local tourism industry is also expected to weather the recession well. High gas prices are keeping Bay Area residents closer to home, and that means vacationing in nearby places such as Sonoma County.

And then there is the housing market, now a source of pain. At some point, prices will fall to a level sustained by local wages and by outsiders who want a home in Wine Country. When that happens, the broad cuts to employment in the real estate and construction sector will begin to rebound along with home prices.

"We are going to need to get to that point before we can have a turnaround," Eyler said. "In the meantime, we are better positioned than most."You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@pressdemo

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