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UCLA Anderson Forecast Affirms No Recession

But a Very Subprime Outlook
LOS ANGELES, June 18, 2008 - In its second quarterly report of 2008, the UCLA Anderson Forecast cautiously affirms the “no recession” prognostication it has been advocating over the past several quarters, while acknowledging that the most recent employment data – an increase in the unemployment rate from 5.0% to 5.5% – falls within “recession range.” Recession or not, the Forecast acknowledges that Gross Domestic Product (GDP) could dip into the negative range in the over the next six to nine months, as the housing bust continues to wreak havoc on the national economy.

In California, the question is whether or not hard times in the real estate (and ancillary) sector(s) have had significant impact on other areas of the state’s economy. As in the Forecast’s first quarterly report of the year (released in March), the conclusion is that, “What happened in housing, stayed in housing.” The California report states, “There is no generalized spread of contraction to the rest of the economy, then when the [housing, construction and finance] sectors do hit bottom, California will be posed to take off once again.”

The National forecast

In the first of a pair of essays on the national economy, UCLA Anderson Senior Economist David Shulman says, “Although the economy will likely avoid falling into a formal recession, the economic outlook through the end of 2009 is decidedly subprime.” The UCLA Anderson Forecast asserts that real GDP growth from the third quarter of 2007 through the end of 2009 will average “a very tepid” 1.2%, adding that “we expect that the current quarter real GDP growth will come in at a minus 0.7% and the first quarter of 2009 could be negative as well.” Additionally, unemployment will reach 6% by the end of 2009, with a caveat that states if the May 5.5% unemployment rate is duplicated in June, a 6.0% unemployment rate would come much sooner.

The Forecast report also says that the Federal Reserve Bank is beginning to shift its attention from the financial system, which has been negatively impacted by the housing bust, to its more traditional concern about inflation. As a result, the Forecast does not believe that tepid economic growth will prevent the Fed from raising interest rates in the middle of 2009.

In an accompanying essay, UCLA Anderson Forecast Director Edward Leamer addresses the most recent unemployment data and reveals his economic bottom line: “I am holding to what is now a shaky view: no recession this year.” Among Leamer’s arguments is that the rising unemployment rate is more of a “hiring freeze” than the massive layoffs associated with an actual recession. This one month’s unemployment figure stands alone and, therefore, does not indicate a negative trend.

The California forecast

In California, UCLA Anderson Forecast Economist Jerry Nickelsburg concludes that California’s service sectors, the state’s traditional economic engines of growth, are still sidestepping the turbulence in the financial, construction and real estate sectors, keeping California’s employment growth positive. He also notes that exports and agriculture, which had not shown much growth recently, are now providing enough additional positive data to also offset the sharp declines in home construction and real estate.

The Forecast predicts a very weak California economy throughout 2008. The strength in exports of both goods and services in the Bay Area and Los Angeles, along with the strength of agriculture in the Central and Salinas Valleys will keep California employment flat the first half of the year, with the unemployment rate topping out at about 6.1% by year end. Two principal negatives in the state economy will persist into 2009. Residential construction will remain at a very low level throughout next year, while the now permanent job losses in the finance sector must be offset by growth in other areas. As for talk of a recession in the state, Nickelsburg writes, “It does not appear that California will exhibit the kind of loss that typically goes with a national recession … for California, this is primarily a housing related adjustment to an overheated speculative market. The carnage is palpable, but contained as California benefits from some very traditional industries and its position in the sun on the edge of the Pacific Rim.”

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