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Stock market drops as a new report by the U.S. Labor Department reported a loss of 4,000 jobs in August. This is the first monthly decline in four years. "I think we're very near recession, and California is on the leading edge of the downturn," said chief economist Mark Zandi of Moody's Economy.com. "The housing market is the economy's most significant problem, and California's housing market is among the worst in the country."

California lost 8,600 jobs in July as unemployment rose to 5.3 percent. Sacramento-area unemployment is up to 5.4 percent, as the region lost 5,200 jobs in July. State and local job numbers for August will be released Sept. 21. On the national level, 22,000 construction jobs disappeared in August, as did 46,000 factory jobs and 6,000 in the lending industry. In addition, the government revised downward its estimates of job creation in June and July, from a combined 218,000 jobs to 137,000.

Many economist believe that the housing slump has bleed into other industies. "I think we're very near recession, and California is on the leading edge of the downturn," said chief economist Mark Zandi of Moody's Economy.com. "The housing market is the economy's most significant problem, and California's housing market is among the worst in the country." 

As an example Countywide Financial Corp's just announced a layoff of 20% of it's work. Of the 12,000 layoffs, many are centered in California. "There will be news that isn't always good news. But I feel quite strongly that we have a resilient economy," Treasury Secretary Henry Paulson told Bloomberg television.

Analysts believe some of the losses in manufacturing are tied to housing as anxious consumers, no longer tapping their home equity for cash, cut back on spending. Auto industry officials, for instance, say most of the downturn in U.S. auto sales is in California and Florida, where the housing market is the weakest. Car sales in California fell 7.7 percent in the first half of the year. "The problems in housing and mortgage markets are now affecting confidence, and thus activity, in other parts of the economy," said Zandi of Moody's Economy.com.

Chris Thornberg, head of Beacon Economics consulting in Los Angeles, said California has other "fundamental strengths" that could limit the carnage, including the rebound in the Bay Area's tech economy. "We aren't talking about a place like Detroit, where the auto industry has imploded," he said. California will feel the effects of a recession worse than most states because it was such a hotbed of subprime mortgage lending. "We will bear the brunt of this primarily because of the mortgage issue," Thornberg said.

David Lyons of the state Employment Development Department said Despite an increasingly difficult job market, personal income growth in California has remained strong. In fact, state government has been hiring lately, adding 4,600 jobs in Sacramento in the past year. Outside of the construction industry, the region's job market is "holding up pretty well," he said.

As for the housing market, most experts believe relief is a year away, if not longer. Building permits in California dropped 22 percent in July, according to the California Building Industry Association.

Zandi and other analysts said the Fed is sure to cut interest rates later this month. The only mystery is whether the central bank will drop rates a quarter-point, as many assume, or make a more dramatic move and go for a half-point cut, Zandi said.