September 12, 2001
UCLA Anderson Forecasters Diagnose the US Economy as "on the Verge of Recession;" California Faces Major Slowdown
LOS ANGELES — Economists with the UCLA Anderson Forecast say the national economy is probably at the beginning of a recession that is likely to be brief and mild, but could be sharper and prolonged because of very disappointing corporate profits and the collapse of business spending on equipment and software.
Despite the tragedies that occurred in Washington and New York Tuesday, September 11, Edward E. Leamer, director of the UCLA Anderson Forecast and economics professor at UCLA Anderson, believes that the crisis is not the catalyst for the imminent recession and will not have any long-term consequences.
"It's easy at this moment of distress to overestimate the economic impact," Leamer said. "But such disasters rarely have extreme economic consequences."
In his September report, Leamer poses the title question: "If It Isn't a Recession, What is IT?" His answer is: "It's a recession."
Leamer argues that two quarters of negative growth is a symptom, not the definition of recession. The definition of recession is a substantial, sustained period of unwanted idleness of capital and labor. The recent rise in the unemployment rate and the fall in capacity utilization in manufacturing are decisive symptoms of this increased idleness. Given this increase in idleness, it doesn't matter whether the second quarter growth rate is 0.7 percent or 0.2 percent or is revised again to a negative number.
Leamer also addresses what he considers a second commonly reported fallacy — that consumers are keeping the economy going. Instead, Leamer offers a detailed statistical breakdown that demonstrates that the economy is actually being kept afloat by spending increases by state and local government.
"All the hype about the consumer keeping the economy afloat ignores the fact that the growth in consumer nondurable expenditure is off $22 billion and the growth in consumer durables is off $3.2 billion and services are off $8.6 billion," Leamer said.
Leamer further states that without the "$18.8 billion increase in state and local government expenditure, the second quarter GDP growth number would have come in negative."
The Long-Term National Forecast
Leamer's report also includes the UCLA Anderson Forecast project's annual long-term forecast. Long term projections of GDP growth depend on separate projections of population growth, labor force and productivity. According to the reports, the real question mark is the projection of productivity.
"We think that the high productivity [of the last half of the 1990s] came from high pace and is not sustainable into the future. We call for productivity growth to revert partly to the disappointing numbers of the 1970s and 1980s, giving us numbers like 1.8 percent instead of the 2.5 percent that we had in the Internet Rush," the report states.
Slowdown Seen in California
In the quarterly California report, Senior Economist Tom Lieser significantly revised the forecast presented in June, which primarily focused on an impending power crisis in the state. In contrast, the current report elevates the significance of the weakness in the national economy and the global slump, with less emphasis on the electricity situation.
"The [power crisis] is in the process of being converted from a short-term crisis into a longer-term vexation which will nag us with a combination of higher energy prices, shakier public credit, bankrupt public utilities and fewer choices in how state revenues will be expended," Lieser said.
The national economic forecast, along with reports on the California economy, was presented during the UCLA Anderson Forecast Conference on Wednesday, September 12 at UCLA Anderson. The program featured three panel sessions focusing on the tech booms and busts of the past, and experts from the biotech, nanotechnology and communications industries.
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 forecast.anderson.ucla.edu.