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No Recession Forecast for the Otherwise Stalled National Economy

California Slowdown Will Continue Until U.S. Economy Begins to Recover
LOS ANGELES, September 24, 2008 - In its third quarterly report of 2008, the UCLA Anderson Forecast continues to advocate that the national economy is not technically in a recession, noting in particular that the (revised) second quarter 2008 Gross Domestic Product (GDP) rate was a surprisingly strong 3.3%. The Forecast readily acknowledges all of the current problems facing the economy and, recession or not, asserts that the national economy is “stalled.”

The California Forecast predicts an even weaker California economy with California's fiscal crisis, and the weakness in housing and finance creating a continuing drag on California's economic growth. The California housing market is predicted to continue its decline, along with the associated employment in real estate-related sectors. The good news, according to the report, is that there is evidence that even with all the negatives in the state’s economy, there is just enough inertia to keep it “above water.”

The National Forecast

Despite a spate of bad economic news, the UCLA Anderson Forecast does not forecast a recession in its September report nor do its economists believe the economy has already met the requirements for a recession as defined by the National Bureau of Economic Research (NBER). But aside from the “are we or are we not in a recession” question, the Anderson Forecast expects “real GDP growth to be about 1% in the current quarter and essentially zero in both the fourth quarter of this year and the first quarter of 2009.” According to UCLA Anderson Forecast Senior Economist David Shulman, who authored the September forecast, “What we are describing is an economy operating at its ‘stall speed’ where any modest shock can trigger a full-blown recession.”

According to Shulman, the economy is in for a period of well below trend growth over the next several quarters and below trend growth thereafter. Housing starts and housing prices have yet to hit bottom, while the impact of the real estate crises continues to reverberate throughout the financial sectors, while consumers adjust to the concept that home ownership is not a path to instant wealth. Weakness in housing has spilled into the auto sector, which has already seen high gas prices cripple the light truck segment. Shulman says, “the major risk facing the economy is whether or not the consumer will buckle under the weight of falling house prices, high energy prices and tepid wage growth.” Shuman also writes, “With luck…. the worst of the inflation risks have passed, but the economy remains wobbly and political risks associated with trade, tax and environmental policies are wobbling.”

With respect to the ongoing banking crisis, Shulman noted, “The Fed is in up to its eyeballs with the major Wall Street investment banks and it will be quite awhile before monetary policy will no longer be haunted by the risk of a systemic failure.”

In his accompanying essay, UCLA Anderson Forecast Director Edward Leamer attempts to quantify the formula that the NBER uses to measure the economy and declare a recession. Leamer performs an in-depth analysis of the conditions associated with prior recessions, while taking into consideration prior literature on the topic and his newest research resulting in an algorithm that successfully identifies all prior recessions. Notably, the algorithm does not identify current economic conditions as a recession.

As does Shulman, Leamer states that, “at any moment we could fall into the recession abyss,” and he admits that a future revision in the existing data could reveal that a recession as occurred. Most importantly, Leamer writes, “We need to recognize that if this doesn’t qualify as a recession, it surely isn’t normal growth.”

The California Forecast

In the California report, Forecast Economist Jerry Nickelsburg’s analysis is for the California economy to be weaker than the U.S. economy, as he foresees very sluggish conditions for the state until real estate and its associated sectors bottom out and begin to recover.

Nickelsburg’s report is particularly concerned with California’s employment situation, forecasting that unemployment will stay in the mid 7% range next year with only modest declines the following year. The California economy is not producing the jobs required for new entrants to the labor force to prevent elevated levels of unemployment. “Our near term quarterly forecast has things getting worse before better,” Nickelsburg writes. “(The Forecast is) projecting a decline in personal income (after adjusting for inflation) in the third quarter and a -0.9% in the 4th quarter before beginning to recover in the first quarter of 2009.”

The report says that the California economy as a whole will muddle along the balance of this year and next and the turning point for the slowdown will depends critically on when the bottom will be reached in construction and finance and the ultimate end of the budget gridlock in Sacramento.

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