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UCLA Anderson Forecast: Worst National Recession in Seven Years Likely Ended this Quarter, but Remains Impactful for the Rest of the Decade

California will Join the Nation in Recovery, Despite a Contracting Public Sector
LOS ANGELES, September 16, 2009 - 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 then states that the negative impact of the downturn will last well into the next decade. Simply put, the Forecast believes that the roots of the recession originated in consumer over-indebtedness and that consumer spending, necessary for a robust recovery, will be tempered both by the unwillingness of financial institutions to lend and for consumers unwillingness to borrow. In California, the UCLA Anderson Forecast tentatively asserts that the state will join the nation in its economic recovery, but the incipient contraction of state and local government will damper the impact of the national resurgence for at least the near future.

The National Forecast

In a report titled, “The Long Goodbye,” UCLA 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% well into next year. Shulman adds that the majority of short-term growth will come from a dramatic reversal in inventories, where 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 on rocketing home prices fueled by easy credit, has ended. Consumers, rather than relying on rising asset prices, will be saving as they did in the past, by a reduction in current consumption. Simply stated, “Credit impaired lower income consumers can’t spend the way they used to and wealth impaired affluent consumers won’t,” Shulman writes.

The California Forecast

In California, there exists good news – all of it emanating from outside of Sacramento. In a report titled, “Will California Watch the Take-Off from the Tarmac Once Again?” UCLA Anderson Forecast Senior Economist Jerry Nickelsburg states that the in 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, there is new evidence that demand for California-produced goods is increasing. 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 to come. “More rapid growth than can be expected over the next twelve months would be required to bring the unemployment rate down,” Nickelsburg 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% in 2009 and will barely grow at a 0.2% rate in 2010. The unemployment rate will grow to a high of 12.2% for 4th quarter 2009 and will average 11.6% 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.

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