December 05, 2001

More than 250 attendees, comprised of academics, top business executives and local and international government representatives filled UCLA Anderson's Korn Convocation Hall for the UCLA Anderson Forecast's 50th anniversary celebration on Wednesday, December 5, 2001. The year-end conference, titled "California in the Global Marketplace," featured distinguished speakers from across the world brought together to examine how the forces of globalization impact California and the nation.

Following a welcome by Edward Leamer, director of the UCLA Anderson Forecast, Dean Bruce G. Willison introduced the morning keynote speaker, Yoshi Inaba, CEO and president of Toyota Motor Sales USA, Inc. Inaba addressed the conference on "California as a Home for International Business."

"Our aim has been to be a major economic contributor here, and a first-tier U.S. automaker," Inaba said. "We have always had a special focus on the Golden state and Toyota's desire for future growth in California remains steady. In addition, the expertise of our finance people here is increasingly being tapped to launch Global Toyota's finance operations in Europe and South America."

After introductions, attendees chose between three parallel tracks focusing on major U.S. trading partners, Europe, East Asia and the Americas. Each track highlighted the business opportunities and economic challenges in their respective regions, and how they affect California's economy.

Laura Cha, deputy chairman of the Securities Regulatory Commission in China provided the afternoon keynote address, in which she discussed the status of China's financial markets after its entry to the World Trade Organization (WTO). Cha characterized the future of Chinese financial markets as "promising and sound" and said their entry into the WTO is one of the driving forces behind their market's growth. "We believe we will endure the increased competition and bring our capital markets to a new level of excellence," Cha said.

The national economic forecast, along with reports on California and the economic effects of the September 11 terrorist attacks were presented during the afternoon session.

In their quarterly reports, economists with the UCLA Anderson Forecast affirmed that the U.S. economy is currently in a recession that they expect to be short and mild — turning around by mid-2002. The Forecasters, however, maintain that unemployment will continue to rise throughout the nation.

In his report titled "Not Long, Not Deep but Not Much of a Recovery Either," Dr. Edward E. Leamer, director of the UCLA Anderson Forecast and business economics professor at UCLA Anderson, writes that when all the data are in, the first "official" quarter of the recession will likely be the second quarter of 2001. Since this writing, the National Bureau of Economic Research (NBER) has indeed named April 2001 the first month of "official" recession.

The UCLA Anderson Forecasters first raised eyebrows with a recession forecast one year ago (December 2000), at a time when such a pessimistic view was deemed at best, premature and at worse, wrong, by other national forecasters. With his year-old forecast now confirmed as accurate, Leamer turns his attention to the future to determine what type of expansion the nation can expect after the short, mild recession.

Leamer's report includes a detailed analysis of the economic imbalances, which he believes caused the recession. "The Internet Rush from 1996 to 1999 created three fundamental imbalances. (1) Businesses invested without profits. (2) Consumers spent as if scarcity was a problem of the past. (3) Portfolio managers put most of their eggs in the U.S. basket. The course of the economy in the years ahead is being determined by the speed at which these imbalances are corrected."

"We are in recession today because of rapid adjustment to the first imbalance," Leamer said. Businesses have cut capital spending dramatically in response to very disappointing profits. Although business investment will surely bottom out, investment is not likely to return rapidly to its Internet Rush levels unless someone can figure out where on the Internet that the profits are hidden. Furthermore, absent very rapid GDP growth during the recovery, there will be a continuing excess capacity problem in tech and telecom and autos and airlines and hotels - virtually every capacity dependent sector."

In terms of the inevitable correction, Leamer said, "The bottom line: Expect a recovery by mid-year 2002, but a recovery with relatively modest GDP growth, 2-3 percent, not the 4-5 percent that was characteristic of earlier recoveries." Despite the mid-year turnaround, the Forecast expects unemployment to rise throughout the year.

In a companion report titled "California: The High Tech Downturn Gathers (Negative) Momentum," Senior Economist Tom Lieser says that it appears that California is also in a recession, while acknowledging that the same level of data missing for the national economy is not yet in for California. And while Lieser suspects that the downturn in the state began later than March, he is unequivocal about the cause: an acute downturn in the state's high-tech sector, which is more severe in the San Francisco Bay area than in Southern California.

"California's main problem … remains the downturn in high- tech, mainly information technology business which has cost the state a significant part of its most highly compensated workers (who were also, disproportionately, owners) in the IT business." In addition to its impact on California's employment situation, the importance of high- tech goods has also had a significant negative impact on California's exports, which have declined 19.5 percent in the past year, a rate far higher than the 11.2 percent decline in the national export area.

The Forecast suggests that the future standing of the state's economy will depend on the health of the national economy as the rest of the country remains California's best customer. If the national forecast for recovery holds, then a recovery will take place in California as well. Naturally, an important factor in the recovery for California will be resumption of growth in the IT sector, which will require growth in both domestic and international sales.

A special report analyzing the effects on the economy of the September 11 terrorist attacks was released the day of the conference. Authored by Christopher Thornberg, senior economist with the UCLA Anderson Forecast, it concludes that neither the national nor California outlook is materially affected.

"Some have claimed that this event actually pushed the U.S. into a recession, and point to massive layoffs in the airline and hospitality industries and the overall decline in consumer confidence as evidence. Yet while such talk creates good headlines, the direct evidence points to something different, " said Thornberg.

The evening keynote was provided by David Shulman, managing director and senior REIT analyst of Lehman Brothers, who addressed "The New World of Real Estate."

The UCLA Anderson Forecast is the most widely followed and often-cited forecast for the state of California, and was unique in predicting both the seriousness of the early-1990s downturn in California and Southern California, and the strength of the state economy's rebound since 1993.

For further information on the UCLA Anderson Forecast, please visit

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