April 04, 2001

UCLA Forecasters See National Recession as Inevitable in 2001; California Will Not Be Immune, With Bay Area Very Susceptible

LOS ANGELES — Economists with the UCLA Anderson Business Forecast see even more clear indicators of a recession for the nation in 2001 and project a 90 percent chance that the nation's longest economic expansion will come to an end no later than the first quarter of 2002.

"The year 2001 is a transition year that will take the U.S. economy from the Internet Rush of 1996-2000 to a lower level of sustainable economic growth in 2002," said Edward Leamer, UCLA Anderson Business Forecast director and UCLA Anderson professor. However, getting from here to there will involve some painful adjustments, he warns, and "monetary medicine" from the Fed won't stop the pain this time.

According to the econometric model used by UCLA's forecasters, the probability of a 2001 recession has increased nearly 30 percent since December 2000. Just three months ago, Dr. Leamer's forewarning of a recession was the most pessimistic — and, as it turns out, the most accurate forecast made that quarter.

"The expansion of 1999-2000 was driven by 'New Economy' investment opportunities. Firms rushed pell-mell to be the first kid on the block to have a cool website. Fear was a big motivator. Internet firms feared losing first-mover advantage. Bricks-and-mortar firms feared they would lose out to pure Internet business models. Almost every enterprise in the U.S. invested heavily in IT equipment and software, and hired the associated personnel," said Dr. Leamer. "Things are different now."

The national recession and slowdown in investment in information technology and software has different implications for the principal regions of California. A recession is quite likely for the Bay Area, while Southern California will experience many economic stresses though skirting an outright recession.

Dr. Tom Lieser, author of the California Forecast, expects to see a "high-tech" recession in California that will have a disproportionate impact on the San Francisco Bay Area. "We will most likely see not only a slowing of demand for electronics, communications equipment and related products, but also a weeding out of the less well-capitalized firms in these industries," said Dr. Lieser.

The UCLA economist also expects a weak expansion in employment through 2002, with a corresponding rise in unemployment rates. A substantial slowdown in the California service sector — a mainstay of the state's economic growth — is also quite likely.

"The strong increase in residential building permits seen during the November-January period will likely be short-lived," said Dr. Lieser. "We expect to see declining home prices in the Bay Area this year. Southern California will also experience slower home sales and a lower rate of price increases."

Higher energy prices, the economists argue, may pose a greater problem for other states than for California, because of the state's lower per capita consumption. On a per capita basis, California ranked 49th out of 50 in electricity consumption and 26th in natural gas consumption, both in 1999. Even with the state's notorious dependence on the automobile, it still ranks only 15th out of the 47 reporting states in per capita gasoline consumption. And while the recent brownouts and blackouts may not perceptibly affect California incomes and employment in the short term, a prolonged electricity crisis could discourage business expansion significantly in the longer run.

The UCLA Anderson Business 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.

The Forecast was presented at an all-day conference at Korn Convocation Hall at UCLA Anderson. In addition to providing the outlook for the state and national economy, the conference examined the economic impact of California's energy crisis through a series of panels led by some of the nation's most prominent authorities. Speakers included Loretta Lynch, president of the California Public Utilities Commission, Mark Bernstein, senior policy analyst at RAND Corporation, Barry Sedlik, manager, economic and business development, Southern California Edison, and Joseph M. Otting, executive vice president, Union Bank of California.

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