June 18, 2002

UCLA Anderson Forecast Expects Sluggish Growth for the Nation Throughout 2002

In California, A Tale of Two Regions as Recession Ends in North, Expansion Continues in Southland

Los Angeles — Calling the current economic recovery “a completely unique event,” economists at the UCLA Anderson Forecast tentatively and optimistically predict sluggish growth for the national economy throughout 2002, with normal growth expected in 2003-2004.

In a report titled “Bubble Trouble,” Edward E. Leamer, director of the UCLA Anderson Forecast, compares the current recession/recovery to the nine previous recession/recoveries since 1950. Picking up on a theme first introduced in the March report, Leamer asserts that the nation is in the midst of the first “business cycle.” The previous nine cycles have been “consumer cycles” driven by downs and ups of consumer spending, particularly on housing and cars. The recession of 2001 was caused by reductions in business spending. Consumers, however, continue to spend on housing and cars.

“They [consumers] are buying homes and cars and shirts and shoes with a religious intensity suited to a celebration of the genuine arrival of the Nirvana Economy,” Leamer said.

Leamer does wonder if consumer spending can continue to prop up the economy while business continues to recover from the profits-be-damned investing common during the Internet Economy. To that end, the report contains a detailed analysis of the “p/e ratios” of personal real estate investment, invoking a pure business analogy to examine the hot California real estate market. The analysis puts to rest the myth that a California housing shortage means that prices of California homes can only go up.

According to Leamer, the greatest risk for a “double dip” comes from the housing market, but financial conditions continue to be highly favorable for continued housing investment. Absent a housing collapse, the U.S. economy looks good, but not great for 2002 and 2003. Leamer does warn that factors such as rising mortgage rates and weaker home appreciation could cause a significant drop in housing investment and possibly a second dip.

More specific to California, the UCLA Anderson Forecast says that the state’s prospects for recovery hinge on the sparks of recovery now seen in the San Francisco Bay Area. If the recession-battered regional economy begins to heat up, then California as a whole will as well.

In a report titled “California at Midyear: Recession Ending In North, Expansion Proceeding in South,” Senior Economist Tom Lieser in fact sees an end to the recession in the Bay Area and a continuation of the economic expansion of Southern California — which never dipped into recession this time around — and thus an end to the statewide recession.

A number of factors contribute to this conclusion, including relative strength in the world economy (which will slow the bleeding in California’s high tech exports) and an improved high tech sector overall. One dark cloud amidst the silver lining is the state’s budget crisis, the overall impact of which can’t be assessed until the budget gets finalized. The anticipated cuts, according to Lieser, remain a “blot on the economic landscape.” Ironically, increased defense spending by the federal government, along with increased investment in technology to enhance homeland security, actually benefit the state economy.

Like Leamer, Lieser also draws attention to the California real estate market and warns that the principal risk here would be increased interest rates, which lead to a slowdown in this key sector. Overall, the UCLA Anderson Forecast is cautiously optimistic regarding the California economy’s chances of entering a full-blown, across the board recovery.

In a special report titled “Health Care and The Economy: Train or Drain?,” author Christopher Thornberg, senior economist with the UCLA Anderson Forecast, addresses whether the health care industry has served as a “drain,” weakening an already soft economic recovery or whether it is actually the next “train,” leading the world in cutting-edge technological breakthroughs, making life both longer and more pleasant for Americans.

All three reports will be presented at the quarterly UCLA Anderson Forecast Conference on June 19, 2002. The conference titled “What Every Business Needs to Know About the Current Health Care Crisis,” will be held at UCLA Anderson from 10 a.m. to 4:30 p.m. The conference will also feature various leading experts including, doctors, health care executives, management consultants, hospital and health care administrators, and county and state government officials who will address key issues affecting the current health care crisis.

The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California, and the strength of the state’s rebound since 1993. Most recently, the Forecast is credited as the first major U.S. group to declare the recession of 2001.

For more information on the UCLA Anderson Forecast reports or the quarterly conference, please call (310) 206-7707 or visit http://forecast.anderson.ucla.edu. The lead sponsor for the June Forecast conference is Deloitte & Touche, and co-sponsors are HealthNet, K&R Law Group, Tenet Health Systems and WellPoint Health Networks.

Media Relations