A worsening economic downturn and the state's $15 billion budget deficit are driving unemployment to its worst levels in a decade.

California's unemployment rate inched up a tenth of a percentage point last month to 6.9 percent, state officials said Friday. It was the highest unemployment in California since January 1997, when the state was still dealing with the lingering effects of the recession in the early 1990s.

The numbers released by the Employment Development Department made clear that the economic slowdown is deepening. They also illustrated the impact on the state treasury: Government jobs declined during the month, particularly in Sacramento.

Though the number of state jobs often dips in the summer, the loss of 1,900 state jobs in June helped drive Sacramento-area unemployment to 6.8 percent, an increase of four-tenths of a point. Unemployment in the region that includes Sacramento, Placer, El Dorado and Yolo counties is at its highest since March 1996.

Other sectors continued to struggle in June, but the decline in state jobs was particularly troubling for the capital. For the past year or so, state hiring had been one of Sacramento's most reliable job sources, acting as an economic cushion while the private sector faltered.

"Government was holding us up there," said Howard Roth, chief economist at the state Department of Finance.

The first inkling of problems came last November, when the state canceled a $520 million office project near the Capitol. As the budget situation has deteriorated, experts said the state would play a diminishing role in job growth in the Sacramento area.

An analysis by The Bee last month showed that the state was still hiring through May. It wasn't immediately clear what caused the shrinkage in payroll in June, but it appeared that agencies were moving more slowly to fill vacancies, said Lynelle Jolley, a spokeswoman for the state Department of Personnel Administration. The state has not laid off any full-time workers.

"It could well be the budget," Jolley said. "Departments are doing everything possible to eliminate vacancies." The loss of 1,900 jobs represented a 1.7 percent decline in Sacramento's state payroll.

As for the overall economy, "the numbers say we're in a mild recession," said Stephen Levy, director of Palo Alto's Center for Continuing Study of the California Economy. "We've had job losses in five of the last six months."

Employers across the state reduced payrolls by 12,800 jobs in June and cut 39,900 jobs over the past year, a reduction of 0.3 percent. In the Sacramento area, payrolls shrank by 100 during the month and have dropped 7,100, or 0.8 percent, since last year.

At 6.9 percent, California is tied with Mississippi for the third-highest unemployment in the nation, behind Michigan's 8.5 percent and Rhode Island's 7.5 percent.

Levy said "it's a mild recession as measured by job losses" but probably feels worse to many Californians who are coping with falling home values and stock portfolios, and rising gas and food prices.

"Even if you didn't get laid off, it feels like a recession," Levy said.

Roth said California is experiencing "a decelerating economy, more of what we've been seeing."

Although the housing market is showing signs of life – sales volume in Sacramento has increased three months in a row – the sector is still in deep trouble. Construction payrolls are nearly 10 percent smaller than a year ago. About 86,000 construction jobs have disappeared statewide, 6,700 in Sacramento.

Construction did add 1,000 jobs in Sacramento in June, which should be "taken as a positive," said Diane Patterson, the EDD's labor market consultant.

But that's a relatively weak June by historical standards. On average, June has meant 1,640 new construction jobs in Sacramento over the past five years, Patterson said.

Meanwhile, the fallout from the housing crash continues to haunt the financial sector. On July 1, mortgage lender GMAC closed its Roseville office and eliminated 53 jobs, according to filings with the state. GMAC had announced the closure several months ago, saying it was part of a nationwide consolidation.

It remains unclear what will happen to about 100 jobs in IndyMac Bancorp Inc.'s wholesale mortgage office in Rancho Cordova. The ailing Pasadena bank was taken over by federal regulators a week ago, several days after IndyMac said it would stop making new mortgage loans.

Levy said the worst of the layoffs in housing-related industries is likely over. Now the economic pain is spreading elsewhere. Last month Elk Grove Ford closed, the latest in a series of Sacramento-area car dealerships to fold or scale back. New car sales fell 22 percent in California in March, the latest figures available from the Department of Finance.

"It looks like it's not just housing now, it's other sectors," Roth said.

The retail sector statewide cut about 2,000 jobs last month, according to EDD. Professional and business services – a huge sector of the economy that covers everything from accountants to secretaries – shed more than 4,000 jobs.

The layoffs go beyond the four-county Sacramento area, of course. Computer giant Electronic Data Systems is eliminating 278 jobs in Marysville and Chico next month, according to a filing with the state. EDS spokesman Bob Brand said the jobs – in claims processing and customer support – are being eliminated because a big contract is expiring.

Call The Bee's Dale Kasler, (916) 321-1066.