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Modest gains ahead for economy

UCLA Today Staff

Economists from the UCLA Anderson Forecast are predicting that the U.S. economy will pick up modestly by mid-2002. But they warn that unemployment will continue to rise nationwide as companies that were initially skittish to lay off employees may now do so.

Historically, recovery periods after recessions have typically produced a 4%-5% expansion in the gross domestic product. But at a daylong conference held Dec. 5, which celebrated the forecast's 50th anniversary, Edward Leamer, forecast director, said this recovery will be significantly less, marked by a 2%-3% annual growth.

"The recovery will be slow because we're not putting into place the drivers that usually pull out the economy," Leamer said. There is, for example, no Internet rush, which helped propel the economy out of its last recession in the early '90s.

That 1996-99 boom created three fundamental imbalances that brought on the recession, he explained: Businesses invested as if profits weren't the goal; consumers spent as if scarcity were a thing of the past; and portfolio managers put all their eggs in the U.S. basket. The rate and speed of the market correction will be determined by how quickly these imbalances are corrected, Leamer said.

Global recession will also affect the U.S. economy, the analysts said. In California alone, exports -- which include a large number of high-tech products -- have declined 19.5% in the past year, far steeper than the national decline of 11.2%.

"We can no longer be forecasters without being sensitive to the role that the global economy is playing in the United States and in California," Leamer said. "We are all in this spaceship Earth together -- there is a close economic connection between every country in the globe."

While the forecast's analysis is more pessimistic than most, economy watchers are paying close attention -- the Anderson economists are credited with being the first to predict the nation's current recession back in December 2000.

During the conference, economists also predicted that the Sept. 11 terrorist attacks would have minimal effects on the U.S. economy.

"Some have claimed that this event actually pushed the United States into a recession, and point to massive layoffs in the airline and hospitality industries and the overall decline in consumer confidence as evidence," said Christopher Thornberg, a senior economist with the forecast. "Yet, while such talk creates good headlines, the direct evidence points to something different."

Disasters tend to cause a short, steep descent, followed by a quick upturn in the next quarter and even a possible short-term boost to levels above what would normally be expected, due in part to rebuilding, Thornberg said. In fact, he said he expects that the New York and New Jersey areas will experience a swift economic rebound.

One segment where sales boomed after Sept. 11 is the car industry, energized by interest-free financing offered by the major auto makers, said keynote speaker Yoshi Inaba, president and CEO of Toyota Motor Sales USA. Inc.

Despite the weak economy, car and truck sales may exceed 17 million in 2001, Inaba said, resulting in the second-best sales year ever. For 2002, car companies expect vehicle sales to hit 15.8 million -- still a good year, he said.

"Nevertheless, we will continue to see shakeups and reorganizations within the auto industry as costs are brought in line with the deflationary economic environment," Inaba said. "Many people are asking: Is there life after 0% financing?"

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