California's economy is poised on the brink of something, but what isn't clear, and that makes everyone nervous - especially the state's politicians.

It could be on the brink of one of its periodic explosions of growth, a boom that produces hundreds of thousands, if not millions, of new jobs. There are definite signs that after several years of stagnation, a strong recovery may be under way, such as last week's very positive employment news.

California employers added nearly a quarter-million workers to their payrolls in the last year, which more than outstripped growth in the labor force and thus drove the unemployment rate down to just over 6 percent, with construction and services leading the expansion of jobs.

Or those positive numbers could be a tease, and the economy could slide back into recession. The stock market is jittery over the Iraq war and surging oil prices, and that uneasiness could translate into a loss of consumer and investor confidence, which would reverberate through the national and state economies - especially if interest rates continue to creep upward. Our willingness to borrow and invest, both as individuals and businesses, is central to economic expansion.

The Capitol is closely monitoring the economic data, and the forecasts that grow out of the numbers, because how many Californians are working a year, two years or three years from now, and how their investments in the stock market are faring are critical to the state's chances of getting out of the budget hole.

Personal income taxes have become the primary engine of government, both state and local, accounting for fully half of general fund revenues, and therefore the revenue stream is highly sensitive to even slight changes in the economic picture. Even a modest recovery, especially if the stock market is also rising, can produce a multibillion-dollar torrent of income taxes, but a mild downturn can also send revenues into a tailspin.

Gov. Arnold Schwarzenegger unveiled a more-or-less balanced budget for the 2004-05 fiscal year last week, largely hinging on a series of agreements with major interest groups that hold down or even reduce state outgo for a couple of years, but then expire. The administration is betting that the economy - and employment - will continue to expand and produce a bumper crop of new revenues that will be available when the agreements expire, as employers are buoyed by his business-friendly policies and make job-producing investments. He's also assuming that he'll have devised and implemented a series of structural changes in state and local government that will reduce costs dramatically.

The flip side of that dynamic view of fiscal management - what one might expect from an action-oriented rookie governor - is the more or less static view offered Monday by the Legislature's chief budget analyst, Elizabeth Hill. On Monday, she raised the specter of large deficits reappearing in 2005-06 and beyond in her first examination of the revised Schwarzenegger budget, calling it "a persistent gap that the state will not be able to simply 'grow its way' out of" even with a modestly expanding economy.

Citing the short-term budget deals and other matters, Hill concludes: "These factors have resulted in a worsening of the state's long-term fiscal outlook ... even though the underlying revenue picture has brightened." She sees deficits of $8 billion by 2006 when, it's assumed, Schwarzenegger would be seeking re-election.

It's a prudent warning from an office renowned for its straightforward, nonpolitical approach to fiscal affairs, but it's not the final word. Forecasting both the economy and the revenues that derive from it has become very chancy in California.

Official numbers have tended to understate expansion of revenues during periods of expansion and understate declines during dips in the economy. Nor do Hill's projections assume that Schwarzenegger can make structural revisions that would lower governmental overhead.

If Schwarzenegger is right about both the economy and overhauling government, California's budget would be balanced by 2006, and he'd be hailed as a hero. If he's wrong and the state is still awash in red ink, his governorship would be tagged a failure.