December 08, 2004

LOS ANGELES — In a series of reports released today, the UCLA Anderson Forecast foresees slightly less-than-normal GDP growth in the second half of 2005, specifically 2.8% instead of the normal 3.0% and 2.6% growth for all of 2006.  In California, “solid, but not spectacular” are the watchwords for 2005, with personal income growth slowing to 5.2% from this year’s 5.6% and taxable sales dropping under 5% from 2004’s 6%.  The growth path looks to be decelerating again in 2006, with some dangers in the economy (trade deficit, low national saving rate) looming on the forecast horizon.

The National Forecast
In his national report, UCLA Anderson Forecast Director Edward Leamer expresses doubt about the sustainability of both the current record spending on homes and the extraordinary, post-1998 rate of growth of productivity.  In a rising interest rate environment, current levels of home prices and home building are dependent on powerful income growth that will allow consumers to handle growing debt service.   But a return to normal in productivity growth would yield disappointing income growth in the next decade and pull the last prop from under the housing bubble.

Dr. Leamer is predicting a return to the normal rate of productivity growth equal to 1.7% instead of the 3.4% we have had since 1998.  (On December 6, 2004, three days after the release of the UCLA Anderson Forecast’s embargoed quarterly reports to the media, the BLS reported the revised third quarter productivity at 1.8%.)

Dr. Leamer concludes that 2005 will see rising interest rates, some weakness in housing and consumer durables and a bit-off-normal GDP growth of 2.8% in the latter part of the year.  The concerns are greater in 2006, when a plunge in consumer spending on homes and durables could lead to more serious results.

The California and Local Forecast
According to UCLA Anderson Senior Economist Christopher Thornberg in his discussion of the California economy, “what recovery there was to take place, has taken place, and issues on the consumer side of the balance sheet will likely begin to have an impact on overall economic growth.” Dr. Thornberg expects 2005 to be a solid one for the state, noting that payroll employment growth, which typically lags the economy, will be at 1.6% in 2005 after ultimately tallying 0.8% in 2004.  In 2006, state and local economies will be impacted by national trends and an overall downturn in the US economy could derail the state’s current solid but unspectacular growth.

Dr. Thornberg also notes that one of the long-run issues California faces is how well the economy is doing, given that much of the growth occurring is among the types of jobs that do not show up on payroll statistics — the so called informal employment.  He sees this trend as one of the true reflections of the expensive process of employing workers in California, and he suggests that little is understood about the impact of moving so many jobs into the uncovered sector.

California State Budget Crisis
In his California and Local report, Dr. Thornberg also suggests that the state budget situation is still out of control.  UCLA Anderson Forecast Economist Michael Bazdarich confirms this and provides a detailed analysis of the California state budget crisis over the last 15 months.  In his report titled, “The Circus is Back in Town: More on the State’s Budget Crisis,” Dr. Bazdarich notes that because the state’s current budget woes cannot be attributed to the normal ups and downs of the business cycle, economic recovery alone cannot be counted on to remove the budget crisis this time. 

Dr. Bazdarich notes — as he has in the past — “that the state budget woes had their genesis in abrupt surges and declines in income tax revenues and in the failure of outlays to fall with revenues, even after they rose with them.”  He concludes that the only effective reform against a recurring budget crisis is “some measure that prevents expenditures from moving in response to very sharp, short-term swings in volatile revenue sources.”

About UCLA Anderson Forecast
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. Visit UCLA Anderson Forecast on the Web at

About UCLA Anderson School of Management
UCLA Anderson School of Management is perennially ranked among the top-tier business schools in the world.  Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.  UCLA Anderson students are part of a culture that values individual vision, intellectual discipline and a sense of teamwork and collegiality.

Established in 1935, UCLA Anderson School of Management provides management education to more than 1,400 students enrolled in MBA and doctoral programs, and some 2,000 executives and managers enrolled annually in executive education programs.  Recognizing that the school offers unparalleled expertise in management education, the world's business community turns to UCLA Anderson School of Management as a center of influence for the ideas, innovations, strategies and talent that will shape the future.

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