California remains mired in a recession, but the economy will start to recover by the end of the year, according to a widely followed economic report released Thursday.

"There are pluses and minuses in this economy, and the bad news is starting to recede," said Tom Lieser, a senior economist at UCLA, which produces the Anderson Forecast.

The report predicts a slight increase in jobs by the end of the year and a broader U.S. recovery that will help lift California out of its stubborn downturn. Among the bright spots are strong job growth in central and southern parts of the state and a still vigorous real estate market, fueled by low interest rates.

"The momentum begins to swing, and I think that turning point is near," Lieser said.

The report's economists anticipate an end to the state's economic downturn in the third quarter of 2003 and a resumption of employment growth. Job growth slipped into negative territory in 2002.

"The downturn will end in the second half of 2003 because it is time for it to end," Lieser wrote in the report.

However, Lieser qualified that optimistic outlook with caveats about the impact of wary executives looking to cut costs and the uncertain resolution of the state's worst budget deficit ever.

The economic downturn, now past the two-year mark, has been "deeper and broader" than most people expected, Lieser said. The recession hit California in the first quarter of 2001, when businesses slashed spending on tech equipment and software, prompting high-tech companies to initiate a series of mass layoffs that continue today.

The Bay Area, weighed down by the tech millstone, continues to show weak economic indicators. The report noted that Silicon Valley is still losing jobs and that San Jose's 8.3 percent unemployment rate in April was the highest of any metro area in the state. The commercial space vacancy rates are equally dismal, with San Jose at 21.4 percent and San Francisco at 20.9 percent in the first quarter, compared to a nationwide average of 16.4 percent.

Local economists say any statewide expansion anticipated by the Anderson Forecast would take longer to benefit Sonoma County, where telecom dominates the local information technology market. Of the various tech sectors, telecom is in the worst shape because it was so overbuilt during the boom, and it takes longer for the ripple effect of initial technology spending orders to reach those companies, economists said.

"Telecom -- that's going to be the last one to come around. I'm afraid we're going to lag a bit," said Healdsburg economist and author Paul Erdman, who is scheduled to give a presentation today on the Anderson Forecast. Early signs of a tech recovery will be an increase in capital expenditures on tech equipment and software.

A recent regional economic forecast by Steve Cochrane, chief regional economist at Economy.com, was more optimistic, suggesting the beginning of an economic turnaround in about six months.

Erdman also noted that Sonoma County has benefited from a diverse economic base and a robust real estate market.

"If you take the unemployment numbers (in Sonoma County,) it's a heck of a lot better than Silicon Valley," said Erdman.

Unemployment in Sonoma County was 4.9 percent in April, according to a state report.

Cochran predicted that unemployment in Sonoma County will rise in 2003 for the third straight year, averaging 4.9 percent, then slowly begin to recede, dropping to 4.7 percent in 2004 and 4.3 percent in 2005.

Statewide unemployment is expected to get slightly worse -- increasing to 6.8 percent in the second quarter from 6.7 in the first quarter -- then decline slightly by the end of the year, to 6.6 percent. It should stay there through 2004, the report said.

The report concluded that there has been an increase in former job-seekers who are dropping out of the labor force after being out of work for longer than 26 weeks. And a slight decline in the state's population growth indicates some of those workers may be leaving California.

"The dynamics are interesting. Over the last year we've seen some evidence that discouraged workers have moved on," Lieser said. "Moving on doesn't mean they find equivalent jobs. ... People are kind of giving up and packing their bags."

Businesses, too, are making decisions that reflect the drawn-out nature of the recession. Executives, Lieser said, have had "enough time" to cut out marginal operations and outsource some jobs overseas.

"There are a lot of jobs that were lost that won't be back anytime soon, if ever. That will tend to limit the growth," Lieser said.

Dampening the situation further is the state's uncertain budget situation, which was a negative factor in last year's Anderson report, too. The state is currently trying to close what could grow to be a $38 billion gap in the state's $100 billion budget.

"In addition to cost issues, the state government's large deficit position and its uncertain resolution are also obstacles to the predicted expansion," the report said.

This year's predictions of job growth late in the year mirrors last year's Anderson Forecast, which has been closely watched after being the first major economic group to predict the national recession that began in March 2001. According to the report, jobs declined 0.9 percent in 2001, then increased 0.4 percent so far in 2003. The forecast expects growth of 1.8 percent in jobs in 2004.

At a national level, various economic reports have noted an increase in business and consumer confidence have surged following the end of the war in Iraq. The Dow closed Wednesday above 9,000 for the first time in almost a year and energy prices have deflated from their prewar spike.

Since March, the Dow has risen 20.1 percent and the Nasdaq has gained 28.6 percent.

But UCLA economist Edward Leamer, who did the forecast for the national outlook portion of the Anderson Forecast, remained pessimistic about the upcoming year.

"With neither overspent consumers nor cautious businesses acting as a locomotive, and with the brakes being applied by out-of-cash state and local governments, the year ahead is looking very weak," he wrote. "Exactly when and how we get out of the mud is unclear."

For now, continued low interest rates are the answer for many consumers, according to Erdman and Lieser. A tidal wave of refinancing has allowed many cash-strapped consumers to leverage the values of their homes and ride out the bumpiest parts of the recession -- and spend money at local businesses.

"The consumer, where's he getting his money from? He's refinancing and refinancing and refinancing," Erdman said. "Interest rates are going to remain low for a while yet, and that's the strongest pillar we have."

But Lieser noted that could change as the stock market improves. People looking for a safe haven for their money chose to invest in real estate when stocks were bad, but an improving stock market could chip away at the real estate market.

"Now that the stock market is doing better, maybe prospects of 10 to 15 percent growth are pretty limited. The end may not be here, but it's in sight," he said.

At least tech stocks are picking up, Erdman said: "That should be telling us something, perhaps that we are at the moment of truth."

Among the other highlights of the California forecast:

Personal income will increase 2.5 percent this year, before inflation, and rise to 4.3 percent in 2004.

Taxable sales will grow 2.1 percent this year, excluding the impact of inflation, and increase 5 percent in 2004.