Modest Growth Coupled with High Unemployment Seen In National Economy
Little or No Economic Growth In California This Year, Followed by "Slight" Growth in 2010 Before More Normal Growth Rates Return in 2011
LOS ANGELES, December 9, 2009 - In its fourth quarterly report of 2009, the
UCLA Anderson Forecast continues its theme from September that the national economy
is on a “modest growth path that will be accompanied by extraordinarily high rates of
unemployment.” This slow growth outlook reflects the lagged effects of the implosion
of consumer balance sheets and, according to the Forecast, is a result of the economy
in transition from being an import-oriented/low-savings rate one to a more export and
higher-savings oriented one. Fueling this transition is the administration’s “weak
dollar policy” which encourages exports and discourages the consumption of imports and
the combined effect will cause real consumer spending to grow at a modest 2% rate – far
below the historical 3 – 3.5% rate.
In California, the UCLA Anderson Forecast suggests that the recession is playing out
much as was predicted. The state’s unemployment rate continues to increase and local
government employment continues to decline. Larger than expected reductions in government
spending lowers the California forecast slightly when compared to the previous report.
The National Forecast
In a report titled “Lost and Found,” UCLA Anderson Forecast Senior Economist David Shulman
grimly notes that there are a half million fewer people on nonfarm payroll than there were
ten years ago. Furthermore, he observes that the recent recession established postwar records
for declines in stock prices, home prices and employment and that over the last decade the
unemployment rate has more than doubled, and that real wages rose by a very modest 6.5%.
The damage mostly done, Shulman foresees slow growth for the U.S. economy. Specifically,
the UCLA Anderson forecasts that after growing at a 2.8% rate in the most recent and current
quarter, real GDP will settle into a 2.0% rate for 2010, before rising to about 3.0% in 2011.
The unemployment rate will likely peak at 10.5% in the first quarter of 2010, then settle at
or above 10.0% for the rest of the year. “We hypothesize that one reason for the high rate of
unemployment,” Shulman writes, “is that business firms who hitherto viewed office overhead
costs as fixed, now view them as variable … where in prior recessions much of the marketing,
finance, research and administrative employees were generally immune from lay-offs, the new
management regimes have made those functions vulnerable to severe cutbacks.” In his report,
Shulman also notes that government policy makers are “highly medicating” the economy with
record federal deficits and a zero interest rate policy coming from the Federal Reserve. While
necessary to avoid an economic free fall, Shulman asserts that these policies are not sustainable
in the long run.
In a companion piece to the national forecast, UCLA Anderson Forecast Director Ed Leamer examines
both the make-up of past economic recoveries and also attempts to forecast how the current recovery
will play out. In summary, Leamer believes that unlike in the past, consumers – who have “already
spent income we are never going to earn” and who are now more focused on savings cannot be counted
on to spend the economy into recovery. Leamer believes that U.S. exports are the potential driver
of a successful economic recovery and metaphorically suggests that, “we will need to turn our
shopping malls into factories.”
The California Forecast
Writing about California, UCLA Anderson Senior Economist Jerry Nickelsburg prognosticates that the
outlook for the rest of the year is little or no growth for the state. He writes, “The economy will
begin to pick up slightly in the beginning of 2011, and by the middle of 2011, will begin to grow
at more normal levels.” Nickelsburg believes that the keys to the California recovery are exports
of manufactured and agricultural goods; a recovery in U.S.; increased public works construction and
increased investment in business equipment and software.
The expectation of the UCLA Anderson Forecast is that total employment will contract by -4.3% in
2009 and will not be generating new jobs in 2010. Once growth returns in 2011, employment will begin
to grow faster than the labor force at a 1.7% rate and the unemployment rate will begin to fall. Real
personal income growth will be -2.7% in 2009 before returning to positive growth + 0.4% in 2010, 2.8%
in 2011. Finally, unemployment is only going to get worse and is expected to rise to 12.7% in the
fourth quarter of 2009. Though the economy will be growing in 2011, it will not be generating enough
jobs to drive the unemployment rate below double digits until 2012.