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UCLA Anderson Forecast: U.S. Economy “A Near Recession Experience”
California Will Avoid Recession but Doldrums to Last Another Year
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LOS ANGELES, September 12, 2007 - In its third quarterly report of 2007, the
UCLA Anderson Forecast remains consistent in its assertion that the national
economy is not technically in a recession, though the group’s economists are
calling current conditions “a near recession experience.” A recession is defined
as a two consecutive quarter decline in real Gross Domestic Product (GDP) and
the UCLA Anderson Forecast is calling for real GDP growth to be just above 1%
for the fourth quarter of 2007 and the first quarter of 2008. While acknowledging
that an economy slowed to a 1% growth rate could slip further, the Forecast notes
rather ironically that their near recession forecast “can be viewed somewhat
optimistically.”
In California, the second quarter of 2007 has run true to form as depicted in
prior reports, demonstrating substantial job loss in the real estate-related
sectors and sluggish growth throughout the State’s economy, with unemployment
and mortgage defaults on the rise. Similar to the national forecast, the dismal
data is not expected to result in a recession, as there are some entries on the
positive side of the ledger; for example, despite losses in real estate, overall
job growth was strong through the first quarter of 2007.
The National Forecast
In his national report, UCLA Anderson Forecast Senior Economist David Shulman
asserts that the ongoing pessimism in the overall Forecast comes from the continuing
deterioration of the housing market. The Forecast has lowered its expectations for
housing activity as the tightening of credit standards, combined with an ebbing of
the builders’ practice of building new houses to get out of the underlying land takes
its toll. Previously, the Forecast called for housing starts to bottom out around 1.2
million; currently the forecast is for 1.0-1.1 million units. More importantly, Shulman
and the project’s economists now believe “that the recovery will be far more tepid with
starts barely recovering to 1.4 million by the end of 2009.”
Shulman’s report titled, “A Near Recession Experience,” offers evidence that, despite
the negative aspects of the Forecast, a classic recession will be avoided. The evidence
includes strong activity in the trade sector, where a solid global economy is strengthening
exports, while sluggish domestic conditions reduce imports.
The report states that the decline in housing starts and consumer durables will drive
the economy down to near-recession levels of 1% growth for two consecutive quarters
beginning in the last quarter of 2007. As Shulman states, “When the economy slows to
a 1% pace, it runs the risk of falling into an actual recession, just as when an airplane’s
velocity dips down to its ‘stall speed’ and falls out of the sky.”
Down the line, growth will remain lukewarm until the economy returns to a 3% trend in
2009. The expectation is that the Federal Reserve will cut the Fed Funds rate from 5 ¼%
to 4 ½% by year-end. The economy will avoid recession on the strength of net exports and
business investment in equipment and software. It’s expected that it will take years for
the housing market to recover to “normal,” a situation likely to be exacerbated in the
short-run by changes in the legislation affecting the mortgage industry.
The California Forecast
In the California report, economist Ryan Ratcliff states that, “California is in for at
least another year of economic doldrums, with rising unemployment, weak job growth and
a slowdown in all broad indicators.” But, continuing a theme in prior reports, Ratcliff
asserts that without the emergence of a second source of weakness in the economy – or a
significant worsening of the real estate sector beyond what’s already being forecasted –
California will not sink into a recession.
Noting that the state’s unemployment rate was 5.3% in July, Ratcliff says the Forecast
does not consider this to be a simple “up tick,” as both the size and speed of the increase
in the unemployment rate are on par with what was seen at the beginning of 2001. But unlike
early 2001 (the state’s last recession began in April 2001), the Forecast maintains that we
will not see a full-blown recession over the life of this forecast (which runs through fourth
quarter 2009), though the increase in unemployment introduces some doubt into the equation.
Ratcliff devotes a significant portion of this quarter's report to examining national and
local foreclosure trends. In particular, he takes issue with the idea that, “foreclosures
are mostly impacting real estate investors...even in the worst cases, the majority of
foreclosures are occurring in owner-occupied housing." He points out that in California,
foreclosure rates are highest in counties with the combination of lower home prices and high
usage of adjustable rate mortgages - a sign of working families overstretching to buy a home.
The Forecast says that the end of 2007 will mark the peak of subprime, adjustable rate
mortgage resets, and expects to see mortgage defaults peaking sometime in the first half
of 2008. The real estate markets will continue to be a drag on California growth for at
least a year to come. With no other sectors picking up the slack, the Forecast expects
to see overall job growth of less than 1% through this time next year, with unemployment
reaching a peak of 5.9% at the end of next year, with corresponding weakness in personal
income and gross state product. A pickup in building permits and a moderation in mortgage
problems in late 2008/early 2009 marks the end of significant drag from real estate, with
the California economy returning to relatively normal levels of growth by the end of the
Forecast.
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