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The National Economy is Stalled, but No Recession in the Forecast

In California, slow growth predicted through 2013
Los Angeles, CA - In its third quarterly report of 2011, the UCLA Anderson Forecast's outlook for the nation is "far worse" than it was just three months ago. Considering the weak, revised data for the first half of the year, the forecast calls for average Gross Domestic Product growth of just 0.9% on average for the next five quarters and ending in the first quarter of 2012. However, the Forecast economists remain steadfast in their assertion that the United States is not currently in a recession, nor is there a recession in the forecast through 2013. In California, the UCLA Anderson Forecast sees a tale of two states, as Coastal California enjoys a recovery rooted in exports, innovation and knowledge communities, while Inland California continues to suffer from a glut of housing and a contraction in government spending.

The National Forecast

In his September 2011 report, UCLA Anderson Forecast Senior Economist David Shulman revisits the concept of "stall speed" as it relates to the U.S. economy, a view he first examined in the September 2007 report and again in September 2008, when his essay had "Stalled" as a title, just as the current report does. The concept of "stall speed" involves an economy growing so slowly that any modest shock can trigger a full-blown recession. But there is no recession in the forecast.

"Simply put, the three sectors that would normally put the economy into recession are already depressed; housing, consumer durables and inventories," Shulman writes. "Even if housing starts drop to new lows, this sector of the economy has shriveled so much that it would only have a modest impact on economic activity ... it is one thing for housing starts to decline from an annual pace of two million units to one million and quite another for starts to decline from 600,000 units to 300,000 units. If we are to have a new recession it would have to come from a collapse in exports, a generalized decline in consumer spending with a resultant decline in business investment. All plausible, but we are not forecasting that eventuality."

The September 2011 forecast calls for economic growth to gradually rebound in mid-2012 with the economy advancing at a modest 2.5% - 3% rate. Modest gains in exports, consumption and equipment and software investment will drive the growth. Employment growth will become more meaningful with gains averaging about 150 thousand jobs per month and the unemployment rate falling to (a still high) 8.6% by the end of 2013.

On the employment front, Shulman writes, "Recession or not, the employment situation remains horrible. Job growth has stalled and we forecast that the unemployment rate will soon rise to 9.5%. Thus, even by the end of 2013 we will not be back to the unemployment levels of late 2007."

In a companion piece to the U.S. forecast, UCLA Anderson Forecast Director Ed Leamer delves more deeply into the concept of "stall speed" as it relates to the national economy, which has been getting some traction in the national media. In the essay, titled "No Recession Alarm, But Not Much Hope for the Unemployed," Leamer reveals that the U.S. has experienced "stall" conditions in the wake of prior recessions, but that such conditions do not necessarily foretell a subsequent recession. Leamer's focus remains on the job market, where 46% of the 11.522 million lost jobs came in manufacturing and construction (the other two significant sectors for job loss are retail trade [11% of the total] and business services [14%]). Leamer concludes, "Given the evidence to date, the chance of a recession with declining GDP and declining employment levels remains low. Don't worry about that. Do worry about the complete absence of anything to offset the U.S. frugal consumer, and the consequent sluggish growth, which is likely to fall short of even the normal level of 3% per year. Include Europe in your prayers, and hope for robust final demand to come from somewhere outside the United States and give us healthy U.S. exports."

The California Forecast

In the California report, Senior Economist Jerry Nickelsburg examines what he refers to as a "bifurcated" state, one in which the coastal regions continue to grow out of the depths of the recession, while the inland regions suffer from economic "doldrums." It had been hoped that the recovery in the U.S. and proximate fortunes of Coastal California would pull Inland California into a belated recovery. But now, in a report titled "California: Bifurcated and Buffeted," Nickelsburg writes, "Now that the U.S. economy has stalled, the differential between Coastal California and Inland California has begun to widen and the specter of long-term economic stagnation in Inland California has reared a not very pretty head."

Taken as a whole, the current forecast for California calls for slow growth until the end of 2012. Nickelsburg says the most likely scenario for the state will be a slow build over the next 12 months followed by an incipient recovery period. The California forecast sees virtually no growth in employment, with employment growth of 0.7% and 2.1% expected in 2012 and '13 respectively. Payrolls will grow more rapidly at 1.1%, .6% and 2.0% for the forecast years through 2013 and the unemployment rate will hover around 12% for the rest of this year and will average 11% through 2013.

About UCLA Anderson Forecast

UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001.

About UCLA Anderson School of Management

UCLA Anderson School of Management, established in 1935, is regarded among the very best business schools in the world. UCLA Anderson faculty are ranked #1 in "intellectual capital" by BusinessWeek and are renowned for their teaching excellence and research in advancing management thinking. Each year, UCLA Anderson provides management education to more than 1,600 students enrolled in MBA, Executive MBA, Fully-Employed MBA and doctoral programs, and to more than 2,000 professional managers through executive education programs. Combining highly selective admissions, varied and innovative learning programs, and a world-wide network of 35,000 alumni, UCLA Anderson develops and prepares global leaders.

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