Anderson Forecast: National economy stalled, but no recession forecast
California slowdown will continue until U.S. economy begins to recover
By Hilary Rehder
September 24, 2008
In its third quarterly report of 2008, the UCLA Anderson Forecast continues to affirm that the national economy is not technically in a recession, noting in particular that the revised second-quarter 2008 gross domestic product rate was a surprisingly strong 3.3 percent. The Forecast readily acknowledges the current problems facing the economy and, recession or no recession, asserts that the national economy is "stalled."
The California Forecast predicts an even weaker California economy, with the state's fiscal crisis and the weakness in housing and finance creating a continuing drag on economic growth. The California housing market is predicted to continue its decline, along with 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
The California Forecast predicts an even weaker California economy, with the state's fiscal crisis and the weakness in housing and finance creating a continuing drag on economic growth. The California housing market is predicted to continue its decline, along with 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 September report does not forecast a recession, and Forecast economists do not believe the economy has met the requirements for a recession at this time, as defined by the National Bureau of Economic Research.
Aside from the question of whether the economy is or is not in a recession, the Forecast expects "real GDP growth to be about 1 percent in the current quarter and essentially zero in both the fourth quarter of this year and the first quarter of 2009."
"What we are describing is an economy operating at its 'stall speed,' where any modest shock can trigger a full-blown recession," says Forecast senior economist David Shulman, who authored the September report.
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 crisis continues to reverberate throughout the financial sectors and consumers adjust to the concept that home ownership is not a path to instant wealth. Weakness in housing has also spilled into the auto sector, which has already seen high gas prices cripple the light-truck segment.
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 crisis continues to reverberate throughout the financial sectors and consumers adjust to the concept that home ownership is not a path to instant wealth. Weakness in housing has also spilled into the auto sector, which has already seen high gas prices cripple the light-truck segment.
"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 says.
"With luck ... the worst of the inflation risks have passed," he writes, "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 says, "The Fed is in up to its eyeballs with the major Wall Street investment banks and it will be quite a while before monetary policy will no longer be haunted by the risk of a systemic failure."
In his accompanying essay, Forecast director Edward Leamer attempts to quantify the formula the National Bureau of Economic Research uses to measure the economy and determine 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.
Leamer, like Shulman, asserts 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 has occurred.
With respect to the ongoing banking crisis, Shulman says, "The Fed is in up to its eyeballs with the major Wall Street investment banks and it will be quite a while before monetary policy will no longer be haunted by the risk of a systemic failure."
In his accompanying essay, Forecast director Edward Leamer attempts to quantify the formula the National Bureau of Economic Research uses to measure the economy and determine 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.
Leamer, like Shulman, asserts 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 has 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 predicts that the California economy will be weaker than the U.S. economy; 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 percent range next year, with only modest declines the following year. The state economy is not producing the jobs required for new entrants to the labor force to prevent elevated levels of unemployment.
In the California report, Forecast economist Jerry Nickelsburg predicts that the California economy will be weaker than the U.S. economy; 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 percent range next year, with only modest declines the following year. The state 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 for the balance of this year and next, and the turning point for the slowdown will depend critically on when the bottom will be reached in construction and finance and on the ultimate end of the budget gridlock in Sacramento.
The 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. For more information, visit www.uclaforecast.com.
The UCLA Anderson School of Management, established in 1935, is regarded among the leading business schools in the world. UCLA Anderson faculty are advancing management thinking through innovative research and teaching. Each year, UCLA Anderson provides management education to more than 1,700 students enrolled in M.B.A., executive M.B.A., fully-employed M.B.A. 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 worldwide network of 36,000 alumni, UCLA Anderson prepares students to become future global leaders.
The report says that the California economy as a whole will muddle along for the balance of this year and next, and the turning point for the slowdown will depend critically on when the bottom will be reached in construction and finance and on the ultimate end of the budget gridlock in Sacramento.
The 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. For more information, visit www.uclaforecast.com.
The UCLA Anderson School of Management, established in 1935, is regarded among the leading business schools in the world. UCLA Anderson faculty are advancing management thinking through innovative research and teaching. Each year, UCLA Anderson provides management education to more than 1,700 students enrolled in M.B.A., executive M.B.A., fully-employed M.B.A. 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 worldwide network of 36,000 alumni, UCLA Anderson prepares students to become future global leaders.