UCLA Anderson Forecast: Recession likely ended this quarter, impact remains

California will join national recovery despite contracting public sector

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In its third quarterly report of 2009, the UCLA Anderson Forecast concludes that the worst recession in seven decades likely ended in the current quarter but says the negative impact of the downturn will last well into the next decade.
 
According to the Forecast, the roots of the recession originated in consumer over-indebtedness, and consumer spending, necessary for a robust recovery, will be tempered both by the unwillingness of financial institutions to lend and by consumers' unwillingness to borrow.
 
The Forecast tentatively asserts that California will join the nation in its economic recovery but that the incipient contraction of state and local government will dampen the impact of the national resurgence for at least the near future.
 
The National Forecast
In a report titled "The Long Goodbye," Anderson Forecast senior economist David Shulman states, "after four quarters of decline, economic growth is resuming. We forecast that real GDP will increase at 2.1% in the current quarter and 2.3% in the fourth quarter. For all of 2010, we forecast quarterly growth to average 2% with noticeable improvement at the end of the year."
 
Sluggish overall growth is predicted, as the unemployment rate will be above 10 percent well into next year. Shulman says that the majority of short-term growth will come from a dramatic reversal in inventories; after plunging at a revised annual rate of $159 billion in the second quarter, real inventories are expected to increase by $12 billion in the fourth quarter of this year. Two other important swing factors will be the recovery in exports and the long-awaited rebound in residential construction.
 
Shulman's cautious view regarding growth rests on the belief that after a two-decade spending spree — first rooted in rising stock prices and later in rocketing home prices fueled by easy credit — consumers, rather than relying on rising asset prices, will be saving as they did in the past, by a reduction in current consumption.
 
"Credit-impaired lower-income consumers can't spend the way they used to, and wealth-impaired affluent consumers won't," Shulman says.
 
The California Forecast
In California, there is good news — all of it emanating from outside Sacramento. In a report titled "Will California Watch the Take-Off From the Tarmac Once Again?", Anderson Forecast senior economist Jerry Nickelsburg states that in the housing markets, where prices have adjusted to levels that make existing homes more affordable, sales are increasing and conditions are ripe for new residential construction.

In trade and manufacturing, he says, there is new evidence that demand for California-produced goods is increasing. And even in the very weak consumer sector, there are indications that the collapse of hospitality, retail, wholesale and transportation employment may be coming to an end.
 
But the downside is unemployment, which, Nickelsburg says, is "ugly" and will remain so for some time.
 
"More rapid growth than can be expected over the next twelve months would be required to bring the unemployment rate down," he  writes, asserting that the still-contracting state and local government sector only compounds the unemployment problems.
 
Overall, the forecast for California remains much as it did in June, the only change being a slightly more optimistic national forecast driven by increased consumer confidence and an increased demand for California-produced goods. But no dramatic events have occurred to change the general nature of the forecast.
 
On an annual basis, employment is forecast to contract -3.7 percent in 2009 and will barely grow, at a 0.2 percent rate, in 2010. The unemployment rate will reach a high of 12.2 percent for the fourth quarter of 2009, Nickelsburg says, and will average 11.6 percent for the year. Though the state economy will be growing by 2011, it will not produce enough jobs to get the unemployment rate below double digits until the end of that year.
 
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 Anderson Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001.

The UCLA Anderson School of Management, established in 1935, is regarded among the leading business schools in the world. UCLA Anderson faculty are renowned for their teaching excellence and research in advancing management thinking. Each year, UCLA Anderson provides management education to more than 1,800 students enrolled in M.B.A., fully-employed M.B.A., executive M.B.A., UCLA-NUS Global executive M.B.A., master of financial engineering 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 develops global leaders.
 
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