December 11, 2003

Los Angeles — In a series of reports released today, the UCLA Anderson Forecast predicts California's economy will experience increased job growth in 2004 and 2005. However, this growth will be limited and unevenly distributed throughout the state's various regions. Additionally, forecasters heed caution for the nation's 8.2 % GDP figure for third quarter 2003.

The California Forecast

In an overview of California's economy, Senior Economist Tom Lieser states, "With stimulus coming from the improving national and world economies through 2004 and 2005, (nonfarm) employment is forecasted to increase 0.9% in 2004 and 2.1% in 2005." This limited expansion in California's forecast will bring the state's unemployment rate down to 6.5% in 2005. Put in perspective, the rate was 4.9% as recently as 2000.

California's job gains will be concentrated in the services sector, particularly newly recombined Education and Health services sector, which, with more than a decade of steady growth, has experienced uninterrupted expansion longer than any other sector. Information services declined for ten consecutive quarters but began adding jobs in the third quarter of 2003 and is expected to continue to do so, albeit at a pace well-below the 11.2% seen in 2000. Growth has resumed in professional and business services as well.

In contrast to the services sector, the manufacturing sector remains problematic for California. The steep decline in manufacturing in the state has slowed, but no new hiring is yet apparent. Most of the jobs lost in manufacturing will not return, particularly production jobs. By 2005, the UCLA Anderson Forecast expects to see modest new hiring in this area, but total employment in manufacturing will be lower than it is today.

Taxable sales in California are the best proxy for consumer spending in the state and 2003 should ultimately be a positive surprise when all data are in. With improved growth in employment and earnings in 2004, look for an increase in sales growth of 5.0% in 2004 and 4.9% in 2005. Real estate prices should continue to rise in California, assuming mortgage rates remain "reasonable;" single digit rates are most likely over the next two years.

The National Forecast

Despite an unexpected 8.2% GDP figure for third quarter 2003, the UCLA Anderson Forecast stays the course with its national report and predicts acceptable growth rates in employment, but not at a rate that drives down unemployment significantly.

In a report titled, "The Twilight Zone Economy," authors Edward Leamer, director of UCLA Anderson Forecast, and Michael Bazdarich take a close look at the 8.2% figure, but find no evidence in the rest of the economic data to support it.

They warn the 8.2% growth creates greater uncertainty for next year's outlook and suggests, "For inventory decisions, the greater uncertainty calls for higher stocking levels to limit the chance of a stock outage." They also advise, "lower revenue forecasts to limit the chance that spending commitments are made that cannot be lived up to."

California Regional Forecasts

Supplementing the California (and national) report(s), the UCLA Anderson forecast is simultaneously releasing three regional reports for California.

Los Angeles Forecast

The Los Angeles economy failed to show any significant signs of improvement since the slump experienced in fourth quarter 2002 and first quarter 2003. Unemployment remains at 6.9% and payroll employment is stuck at just over 4 million jobs. Worker earnings in manufacturing and construction in the county remain flat.

Senior Economist Christopher Thornberg believes that the Los Angeles County economy is in "better shape" than recent data indicates. "While LA had continued to lose jobs recently, its neighboring economies have begun to add them again, particularly in the Inland Empire and Orange County. Strong growth around Los Angeles will lead to increased demand for services produced here," said Thornberg.

The outlook for Los Angeles County has not changed substantially since the group's last report in September 2003. Payroll employment is still expected to increase by 40,000 jobs in 2004 and 80,000 in 2005. Manufacturing and trade will be areas of weakness, while state and government hiring will rise despite budget problems.

Thornberg's analysis includes an examination of local current events, including the wildfires of last fall and the MTA/Grocery strikes. While he acknowledges the difficulty experienced by those directly impacted by the fires, the overall impact to the regions economy was mild. The cost of the fires - $1.5 to 2 billion dollars - was only a fraction of the impact of the 1994 Northridge Earthquake and the quake had little impact on the overall economy. The wildfires may lead to some short-term declines in current hiring.

The MTA strike lasted little over a month and other than the inconvenience experienced by users of mass transit, will have little other impact, other than to discourage people from relying on public transit at a time when the County is attempting to increase ridership to reduce freeway traffic. The grocery strikes are more significant from a numerical standpoint than the MTA strikes. Up to 30,000 workers are on picket lines, representing one half or one percent of the total workforce, decreasing the buying power of impacted families. With no end in sight, the final impact is yet to be felt.

Inland Empire and Bay Area

Reports on the Inland Empire and Bay Area, written respectively by Michael Bazdarich, director, UC Riverside Forecasting Center, and Joseph Hurd, senior economist, UCLA Anderson Forecast, present a tale of two regions representing the best of times and the worst of times. In the Inland Empire (San Bernardino and Riverside Counties) job growth continued on a steady pace throughout the recession and modest recovery and a stronger national economy will only spur stronger growth in the coming years.

The Bay Area (including San Francisco, Oakland and San Jose) reveals the opposite. Since the end of 2001, the Bay Area has lost 337,000 jobs. However, California has had a net increase of 51,000 jobs as a whole during that same period, netting a statewide loss of 286,000 jobs overall. According to Hurd, these figures, "make it as plain as possible that the recession was a Bay Area event." Hurd says that a rapid recovery for this region is unlikely, due to weakness in the housing market, the state's budget problems and irreversible losses in manufacturing.

About UCLA Anderson Forecast

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. economic forecasting group to declare the recession of 2001. Click here to visit the UCLA Anderson Forecast Web site.

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