UCLA Forecast Says Rate Hikes Hurting Recovery : Economy: Lower-than-expected benefits from earthquake rebuilding are also blamed for sluggishness.

In a report scheduled to be released today, UCLA forecasters confirm that California’s recovery has begun but say it is being weakened by rising interest rates, a loss of income due to the January earthquake and continuing losses of jobs in the aerospace industry.

“Although it is a relief to stop forecasting continuing recession, the celebration should be a sober one,” UCLA economists Larry J. Kimbell and Tom K. Lieser wrote in the most recent report by the widely watched UCLA Business Forecasting Project. “The recovery will not erase many of the long-term structural problems faced in California.”

Nationally, the UCLA project concluded that “1994 will be a very good year,” adding that inflation should remain in check. Real gross domestic product should grow 3.9% in 1994 and 2.3% by 1996, the report predicts.

The California report is the second by UCLA saying that the state’s long-awaited economic recovery has begun. In March, the business forecasting project issued its first positive forecast in several years.

But the recovery has been sluggish for a couple of reasons, Kimbell said in an interview: less benefit from earthquake-related reconstruction than expected and depressed residential building in the first quarter of 1994, due mainly to rising long-term interest rates.

The latter appears to bolster arguments that the Federal Reserve Board’s recent moves to head off national inflation by raising interest rates could have the unintended effect of slowing recovery in California.

Wednesday’s report adds that personal income took a $19-billion hit in the first quarter of 1994 due to the Northridge earthquake.

Still, by 1995, the California recovery should be apparent in employment, personal income and retail spending, the report says. By 1996, the state’s unemployment rate should fall below 7% from 8.3% in May.

The industries that will account for the state’s job growth in that period will be construction, trade and services, including finances, the report predicts.

Manufacturing job losses, mainly in aerospace, will continue but at a slower pace: 1%, or 20,000 jobs a year, in 1995 and 1996. On Monday, Hughes Aircraft said it may cut 3,400 jobs in the next two years.

The only bit of good news on the real estate front: Los Angeles-area home prices showed a significant month-to-month increase in April, one of the few in the last four years.

Other findings:

* Total non-farm employment growth since January has been 30,400 jobs, an annual rate of only 0.6%. Manufacturing lost more than 9,000 jobs, due mainly to the loss of defense jobs. In the service sector, 26,500 new jobs were created in non-financial services, while retail trade picked up 7,000 jobs and government 5,700.

* California’s unemployment rate, 8.3% in May, remains two percentage points above the national rate.

* The average annual growth of real personal income and taxable sales will average only about 2% for the three years ending 1996.