When California sneezes the rest of the country, and sometimes the world, feels it. A State with over 30+ million people rivals in population to some G8 countries like Canada. (Actually California has about 3 million more people.)

When the Californian economy is in trouble the rest of the nation takes notice. It’s not a far cry to suggest that the state of America’s economic recovery will hinge on the ability for California to pull themselves out of their current crisis.

For the sake of this article we’ll take a look at two metrics on opposite ends of the spectrum in an attempt to get an overview of the state of the economy. Housing sales generally is an indication of the progress moving forward. Higher home sales implies a stronger market where people are both employed and have confidence in their employment to take on a mortgage. Bankruptcy data is an indication of the other side of the spectrum where people continue to struggle to cope with their debt loads. These numbers provide an indication how big the most vulnerable and burdened segment is.

Let’s start with the good news. The latest 2011 data suggest that slowly but surely housing sales are creeping up, a welcome sign from the previous periods. If we look at the data for total housing sales in California over the past 5 years the numbers fluctuate, but overall there is a downward trend since 2008.

There are months when housing sales increased over previous month’s, particularly around Spring, but the increases were never sustained. There is tepid optimism that 2011 may have more consecutive months of housing sale increases. This Spring and Summer should be an indication whether consumers are making big purchases or not. If we can observe an increasing trend that continues for consecutive months it would be a strong indicator that the economy is on the rebound.

Now for the bad news, which, when we observe the data, turns out to be more positive than bleak.

The following bankruptcy data sets combine Chapter 7 and Chapter 13 filings for the state of California. That means the number for consumers who are no longer able to handle their debt loads (this is not an article on financial planning, some have reason to declare bankruptcy, others just want too much ‘stuff’). An increasing bankruptcy filling number, recorded each quarter, would indicate that the worse is not over and that recovery remains just out of reach.

The first graph to the left depicts an increase in bankruptcy filings in every quarter since 2007 for the state. The increases between quarters went as high as 20% for a single quarter in 2009. Since legislation changed in 2005 reforming bankruptcy claim rules, new all-time highs post-2008 have been observed in every subsequent quarter.

Certainly not a sign of strength. But is there hope just around the corner?

If we actually chart the percentage change between each quarter we see a declining trend. Just observing the 2010 data we see that there’s a nicely shaped downward sloping line. If you know nothing about graphs then here’s how to interpret this one. All the numbers above the horizontal line are above zero, so despite the observable decline bankruptcy fillings have steadily increased compared to their previous quarter.

However, the downward trend suggests that by Q1 2011 (the data is usually six months late) the number of Chapter 7 and Chapter 13 bankruptcy filings will in fact DROP. The number of people who file are still dangerously high, but that decline, regardless of how big, is a sign that the worse is over.

Some cities such as San Francisco and San Diego, have already seen a decrease in filings in one form or another.

This isn’t to diminish the very real threat of Chapter 9 declarations–that is municipalities who are still fighting to stay afloat. But when it comes to consumers, it’s quite possible that the worse is over and recover is in starting to take over. How long that recovery will take is anybody’s guess, but we can expect that the entire state of California will see higher housing sales, and also declining bankruptcy filings by the end of 2011.

Maybe another 2-3 years after that to return to pre-2008 levels of employment and income, but the good news is that if we look at the data in our two examples, California, and perhaps the rest of the USA, is coming out of the recessionary trough and towards higher production/consumption.