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UCLA Anderson Forecast Notes Potential Drops in Housing Prices and Productivity;
Foresees Rising Interest Rates and Weakness in Housing Market
California State Budget Crisis is an Ongoing Concern
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December 8, 2004
UCLA Anderson Forecast
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LOS ANGELES — In a series of reports released today, the UCLA Anderson Forecast foresees
slightly less-than-normal GDP growth in the second half of 2005, specifically 2.8% instead
of the normal 3.0% and 2.6% growth for all of 2006. In California, “solid, but not spectacular”
are the watchwords for 2005, with personal income growth slowing to 5.2% from this year’s 5.6%
and taxable sales dropping under 5% from 2004’s 6%. The growth path looks to be decelerating
again in 2006, with some dangers in the economy (trade deficit, low national saving rate) looming
on the forecast horizon.
The National Forecast
In his national report, UCLA Anderson Forecast Director Edward Leamer expresses doubt about
the sustainability of both the current record spending on homes and the extraordinary, post-1998
rate of growth of productivity. In a rising interest rate environment, current levels of home
prices and home building are dependent on powerful income growth that will allow consumers to
handle growing debt service. But a return to normal in productivity growth would yield
disappointing income growth in the next decade and pull the last prop from under the housing
bubble.
Dr. Leamer is predicting a return to the normal rate of productivity growth equal to 1.7% instead
of the 3.4% we have had since 1998. (On December 6, 2004, three days after the release of the
UCLA Anderson Forecast’s embargoed quarterly reports to the media, the BLS reported the revised
third quarter productivity at 1.8%.)
Dr. Leamer concludes that 2005 will see rising interest rates, some weakness in housing and
consumer durables and a bit-off-normal GDP growth of 2.8% in the latter part of the year.
The concerns are greater in 2006, when a plunge in consumer spending on homes and durables
could lead to more serious results.
The California and Local Forecast
According to UCLA Anderson Senior Economist Christopher Thornberg in his discussion of the
California economy, “what recovery there was to take place, has taken place, and issues on
the consumer side of the balance sheet will likely begin to have an impact on overall economic
growth.” Dr. Thornberg expects 2005 to be a solid one for the state, noting that payroll
employment growth, which typically lags the economy, will be at 1.6% in 2005 after ultimately
tallying 0.8% in 2004. In 2006, state and local economies will be impacted by national trends
and an overall downturn in the US economy could derail the state’s current solid but
unspectacular growth.
Dr. Thornberg also notes that one of the long-run issues California faces is how well the
economy is doing, given that much of the growth occurring is among the types of jobs that
do not show up on payroll statistics — the so called informal employment. He sees this trend
as one of the true reflections of the expensive process of employing workers in California,
and he suggests that little is understood about the impact of moving so many jobs into the
uncovered sector.
California State Budget Crisis
In his California and Local report, Dr. Thornberg also suggests that the state budget situation
is still out of control. UCLA Anderson Forecast Economist Michael Bazdarich confirms this and
provides a detailed analysis of the California state budget crisis over the last 15 months. In
his report titled, “The Circus is Back in Town: More on the State’s Budget Crisis,” Dr. Bazdarich
notes that because the state’s current budget woes cannot be attributed to the normal ups and
downs of the business cycle, economic recovery alone cannot be counted on to remove the budget
crisis this time.
Dr. Bazdarich notes — as he has in the past — “that the state budget woes had their genesis in
abrupt surges and declines in income tax revenues and in the failure of outlays to fall with
revenues, even after they rose with them.” He concludes that the only effective reform against
a recurring budget crisis is “some measure that prevents expenditures from moving in response to
very sharp, short-term swings in volatile revenue sources.”
About UCLA Anderson Forecast
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. Most recently, the Forecast is credited as the first
major U.S. economic forecasting group to declare the recession of 2001.
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