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UCLA Anderson Forecast: U.S. Economy Not In A Recession, “But It Is Certainly Close.”
In California, Slumping Housing Market Will Finally Impact Job Growth
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LOS ANGELES, June 19, 2007 - In its second quarterly report of 2007, the UCLA Anderson
Forecast continues to believe that the national economy is not in a recession, though
the group’s economists now say the economy is “certainly close” to recessionary conditions.
The Forecast asserts that real growth in 2007 will be 1.8%, “roughly on par with the
near-recessionary environment of 2002,” when real GDP advanced at 1.6%.
However, by mid-2008, growth will return to around 3% as the contractionary forces coming
from housing abate and improvement in net exports and investment propel the economy forward.
The Forecast calls for “ … the housing induced sluggishness in the U.S. economy to last
into early 2008. For 2007, real GDP growth is expected to be less than 2%.” In California,
weakness in the real estate sector will finally spill over into the job market as the
combination of job losses in construction and real estate finance pull overall payroll job
growth in California to less than 1% for the next five quarters. Unemployment will rise to
5.5% and broad measures of real output (Gross State Product and Personal Income) will grow
at a less-than-average rate of just-below 3%.
The National Forecast
In his national report, UCLA Anderson Forecast Senior Economist David Shulman notes that
if the current (and continuing) forecast is close to the mark, then the period from second
quarter 2006 through first quarter 2008 will mark an historically anomalous long period of
below trend growth. But he remains consistent with the story the Forecast has been telling
for some time, that a recession is not imminent for the U.S. economy.
Shulman’s report titled simply, “Turbulence,” speculates on potential, economy-spurring
actions by the Federal Reserve, concluding that there will be no monetary policy help in
the form of rate cuts until the fourth quarter of 2007, as continues to follow an informal
policy of inflation targeting that dates back to the mid-90s. He believes that recovery in
the housing market will resemble an “L” as opposed to a “V,” with the imploded sub-prime
mortgage market representing a “second leg down in housing activity.” The Forecast believes
that weakness in the housing sector will finally spill into consumption spending, noting that
retail sales stalled in April and that auto sales have been weak.
With housing and consumption both “down,” the strength of the national economy lies in the
rest of the world. “The global economy is booming,” Shulman writes. “Indeed, it is the strength
of the global economy that is powering the stock market to new highs (and) it is no accident
that the Wall Street rally is being led by the giant global corporations who are benefiting
most from the worldwide expansion.”
The California Forecast
In the California report, UCLA Anderson Forecast Economist Ryan Ratcliff concedes that 2007
has been a bit of a conundrum for those tracking the state’s economy. Falling sales, weak
prices and rising foreclosures have ruled the housing market while both national and state
measures of construction activity suggest that real estate has been a drag on growth for close
to a year. But the wider California economy is mostly unfazed: job growth has only slowed
slightly, for example and there has been only a slight up tick in unemployment.
The question, simply put, is this: If the job growth of the early part of the decade was fueled
by real estate (read: construction and the mortgage industry), why hasn’t the decline in the
real estate sector translated into slower job growth and greater unemployment? Ratcliff
believes that the answer lies in the timing and that it is in final two quarters of 2007 and
the beginning of 2008, that the job losses will manifest. He writes that mid-2008 will look
better than the intervening period and that job growth will return to normal levels later that
year.
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