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National Economic Recovery Will Be a Long Slow Climb

California Recovery Will Be Weaker than the Nation’s, While Los Angeles Is Expected to Recover Faster Than the Rest of the State
LOS ANGELES, CA - June 15, 2010 - In its second quarterly report of 2010, the UCLA Anderson Forecast makes the case for a tepid recovery from the national recession, with unemployment levels slowly declining. The California economy is expected to grow a bit slower than the nation’s for 2010, and slightly faster thereafter. This slow growth through the forecast period will result in only modest inroads to the state’s high unemployment rate. In a report focused on Los Angeles, UCLA Anderson forecast suggests that the region’s economy will fare better than the rest of California.

The National Forecast

In a report titled, “A Homeless Recovery,” UCLA Anderson Forecast Director Edward Leamer notes that while expansive, free-spending consumers fueled past economic recoveries, today’s “frugal consumers” cannot be counted on to power a strong recovery for the foreseeable future. “If the next year is going to bring exceptional growth,” Leamer writes, “consumers will need to express their optimism in the way that really counts – buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts – by not hiring workers.”

The result is an economic Catch-22. Leamer explains that significant reductions in the unemployment rate require real Gross Domestic Product (GDP) growth in the 5.0% - 6.0% range. Normal GDP growth is 3.0%, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend and businesses concerned about growth are reluctant to hire.

UCLA Anderson’s forecast for GDP growth this year is 3.4%, followed by 2.4% in 2011 and 2.8% in 2012, well below the 5.0% growth of previous recoveries and even a bit below the 3.0% long-term normal growth. With this weak economic growth comes a weak labor market and unemployment slowly declines to 8.6% by 2012. Tepid growth leaves plenty of excess capacity, subdued pricing power and very little inflation. This will allow the Federal Reserve to postpone interest rate increases that the forecast expects to come late this year or early next, as the sustainability of a modest recovery becomes clear and as the need for preemptive action against future inflation begins to dominate monetary policy decisions.

In a companion piece regarding the current status and future for commercial real estate, UCLA Anderson Senior Economist David Shulman says there will be a recovery in this sector, but it will be “rocky”. “There is just too much debt that has to be worked through,” Shulman writes.

The California Forecast

Writing about California, UCLA Anderson Senior Economist Jerry Nickelsburg says the state “will grow slower than the U.S. and a slow recovery in jobs will leave unemployment at 12.1% for the year. The latter part of our forecast (through 2012) calls for health care, professional and business services, exports, construction and technology-related manufacturing sectors to generate a bit more robust growth in California.” However, Nickelsburg notes, though the state will grow more rapidly in the following two years, job creation will not be fast enough to push the unemployment rate below double digits until 2012. “Unlike other deep recessions, the rapidity of the recovery, at least on the unemployment front, will be muted,” Nickelsburg writes.

The forecast for the next three years is slightly weaker than suggested in the March report. Slow growth in 2010 is expected as government and construction continue to restructure and a reticent consumer nationwide does not boost imports to levels that would ignite the logistics industry. Specific to the construction sector, Nickelsburg describes a divided state, as coastal California recovers while inland California, devastated by the collapse of the real estate market continues to languish.

The Los Angeles Forecast

In a report titled “Emerging from Quicksand,” UCLA Anderson Economist Julia Thornton Snider writes, “With its natural deep-water harbor, large-scale logistics industry and export-oriented manufacturing, L.A. is well positioned to benefit from an export-driven expansion and we expect (Los Angeles) to recover more rapidly than California as a whole.” Between L.A.’s air- and seaports and its housing market, the evidence is building that a recovery is underway. Exports turned the tide first and provide the most natural engine for recovery, with housing now showing signs of a recovery as well. Job growth is the necessary next step and the Forecast says that it will start to revive this year, although unemployment will remain painfully high through 2012. The city’s finances remain in distress and the coming layoffs will put a drag on job growth coming from exports, logistics and manufacturing.

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