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UCLA Anderson Forecast Predicts Soft but Turbulent Landing for National Economy
California Real Estate Sector to Continue Decline Leading to Economic Slowdown
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LOS ANGELES - In its third quarterly report of 2006, the UCLA Anderson Forecast says
that while, “the U.S. economy appears to have seamlessly downshifted to a soft landing
(and) we are not forecasting a recession … the economy is about to get bumpy as the
housing market continues to deteriorate.” The Forecast calls for a sustained period
of 1.5-2.0% growth. In California, the housing market continues to soften and real
estate employment has gone from an “engine of growth” to “a drag on growth in 2006.”
In the absence of a recession, however, statewide home prices are unlikely to experience
significant declines.
The National Forecast
UCLA Anderson Forecast Senior Economist David Shulman says that the national economy
is about to enter a period of several quarters of sluggish growth with, “inflation above
the comfort level.” In response, the Federal Reserve will cut the funds rate to 4.5% and
unemployment will rise, while economic sectors related to real estate will decline.
Strength in business investment and trade, coupled with a bottoming of the housing market
will eventually strengthen the economy, which will bounce back to a 3-4% growth rate by 2008.
The Forecast calls for real GDP growth averaging 1.8% in the three quarters beginning with the
third quarter of 2006.
The report titled, “Soft Landing with Turbulence Ahead,” notes that home sales are off 12%
and housing starts off 26% from their respective peaks, making it clear that the housing
market is in a major cyclical decline. “It is only a matter of time,” Shulman writes,
“before nominal home prices are down on a year-over-year basis.”
The California Forecast
The California Forecast, authored by Economist Ryan Ratcliff, says that the State’s real
estate sectors will continue their 2006 decline – without major declines in other sectors.
This distinction is significant, since it implies a slowdown instead of a recession.
Historically, recessions in California have had major job loss in at least two sectors,
such as construction and manufacturing. Without recession-sized job losses, a significant
decline in statewide home prices is unlikely. However, a few regions where new construction
is significant share of overall sales may see some price declines, since builders historically
have been more willing to lower prices than owners
According to Ratcliff, building permits will continue to decline, bottoming out in 2008 as
activity returns to levels seen in 2000. The drop in building activity will continue to weaken
the construction sector, which will lose around 100,000 jobs through the life of the forecast
(which runs until fourth quarter 2008). The Financial Activities sector will suffer a slowdown
overall, due to real estate-related declines. Nominal home prices in the State will stay flat
through 2008, though real prices will fall.
In a California companion piece titled, “2005: The Year the Tortoise Won the Race, Whither
California Home Prices,” Forecast Director Edward Leamer again makes the case that the real
estate sector is a volume cycle, and not a price cycle. As a result, the real declines in
this area will be in total volume and not real estate prices. He argues that volume produces
the activity which contributes to GDP (and GSP) and declines in volume often lead to layoffs
of construction workers and lowered brokers commissions.
Leamer expects home prices five years from now to be about the same as they are today, though
lower in real terms by 15-20%. Meanwhile, housing’s contributions to GDP will be very weak,
with building, finance and real estate commissions suffering significant declines.
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About UCLA Anderson Forecast
The UCLA Anderson Forecast, one of the most widely watched and often-cited economic
outlooks for California and the nation, is no stranger to accurate forecasts.
The forecasting team is credited as the first major U.S. economic forecasting group
to declare the recession of 2001. The team was also unique in predicting both the
seriousness of the early-1990s downturn in California, and the strength of the state’s
rebound since 1993.
Founded in 1952, the UCLA Anderson Forecast is one of the most widely watched and
often-cited economic outlooks for California and the nation. Award-winning for its
accuracy, the UCLA Anderson Forecast often breaks with consensus in its quarterly
forecast reports, which feature projections for major economic indicators, including
inflation, interest rates, job growth and gross domestic product growth.
About UCLA Anderson School of Management
UCLA Anderson School of Management is perennially ranked among the top-tier business
schools in the world. Award-winning faculty renowned for their research and teaching,
highly selective admissions, successful alumni and world-class facilities combine to
provide an extraordinary learning environment. UCLA Anderson students are part of a
culture that values individual vision, intellectual discipline and a sense of teamwork
and collegiality.
Established in 1935, UCLA Anderson School of Management provides management education
to more than 1,400 students enrolled in MBA and doctoral programs, and some 2,000
executives and managers enrolled annually in executive education programs. Recognizing
that the school offers unparalleled expertise in management education, the world's
business community turns to UCLA Anderson School of Management as a center of influence
for the ideas, innovations, strategies and talent that will shape the future.
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