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UCLA Anderson Forecast: Economy Healing But Not Out of Hospital Yet

California Budget Crisis Will Impact State's Ability to Recover From Recession
 
 
LOS ANGELES, June 16, 2009 - In its second quarterly report of 2009, the UCLA Anderson Forecast upgrades the condition of the national economy, moving it out of "intensive care" while noting that it is still "very sick."

The Forecast sees the gross domestic product improving from negative growth in the second quarter of this year to nearly perceptible growth in the final quarter while acknowledging that this tepid growth will be accompanied by an unemployment rate that will continue to rise well into 2010 and into double digits.

In California, the worst of the recession is beginning to ease, but any optimism must be tempered by the specter of a state government poised to contract at the worst possible time.

The National Forecast

"What we are perhaps most concerned about is not the timing of the recession's end, but rather the shape of the recovery to come," writes UCLA Anderson Forecast senior economist David Shulman in an essay titled "Out of Intensive Care."

"We are forecasting the weakest economic recovery of the postwar era with real growth on the order of 23%," Shulman noted.

The Forecast predicts that recovery will be slow due to recession-scarred consumers who will focus on their savings, and the dramatic adjustment in financial services, the automotive industry and the retail sector. The recovery will also be inhibited by the financial excesses of 200307 in the form of millions of foreclosed homes and a plague of "upside-down" mortgages.

The Forecast also predicts that, after declining by an estimated 2.9 percent in the current quarter, real GDP growth will be zero in the third quarter of 2009 and 0.6 percent in the year's final three months. Unemployment is predicted to peak at 10.4 percent in 2010 and could still be close to 10 percent by the end of 2011.

The California Forecast

According to UCLA Anderson Forecast senior economist Jerry Nickelsburg, there is nothing happening in California that will help pull the state out of recession in advance of the nation.

"California," Nickelsburg writes, "is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow."

The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.

In his essay, Nickelsburg notes that Gov. Arnold Schwarzenegger is attempting to close the state's $24 billion budget gap with a combination of fee increases, forced borrowing from local government, the sale of state assets and, primarily, budget cuts.

Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.

Overall, the forecast for California is for a very weak first two quarters of 2009, to be followed by very little growth in the last six months of the year. The economy will begin to pick up in 2010 and return to more normal levels of growth in 2011.

The expectation is that total employment will contract by 3.5 percent in 2009 and will not grow in 2010. Once growth returns in 2011, it will rise at 1.8 percent.

 
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