June 22, 2004

UCLA Anderson Forecast Looks for a Return to Normal for U.S. Economy

California Economy Has Turned Around but Growth Will Be Slow; U.S. Growth to Power Los Angeles Area Economy

Los Angeles — In a series of reports released today, the UCLA Anderson Forecast predicts that the national economy will return to “normal” for the duration of a forecast that runs through 2006. Recent evidence suggests that California remains a tale of two economies, as indicators in Northern California begin to flatten out after years of losses and Southern California expands along with the rest of the nation. All told, the California turnaround has begun, but future near-term growth will be slow as long as some regions lag and the state budget issues remain in flux. The Southern California economy - paced by the gaining strength of the national economy - will continue to add jobs and grow.

The National Forecast

In a report titled, “Normal, Again,” UCLA Anderson Forecast Director Edward Leamer asserts that real GDP growth will hover right around 3.1% through 2006, with 3.1% representing the historical normal GDP growth. Leamer contrasts his forecast with the more optimistic views currently in vogue on Wall Street, where some analysts have their forecasts in the high 4-5% range.

Dr. Leamer believes that the data do not yet support predicted growth rates at that level. The last time the US economy grew at such a pace was during the Internet Rush, but no such investment boom is occurring now. Productivity has been stronger in recent quarters - a strength likely fueling some of the optimism - but Leamer believes it is too soon to know if the current spurt in productivity is “something permanent or a temporary aberration.”

Beyond the next few years, Leamer believes the economic picture begins to blur. The economy will continue to grow, while rising interest rates modulate that growth. Also on the horizon - like a not-if-but-when earthquake that inevitably hits - is a consumer downturn, not seen since 1991.

The California Forecast

In an overview of the state’s economy, UCLA Anderson Forecast Senior Economist Joseph Hurd states, “The state’s economy picked up some steam this year, but it has only been over the past couple of months that (Californians) have seen decent job growth … we haven’t had the zoom that will push the jobless rate down from its current 6.1% to the low 5%s or even high 4% areas.”

Dr. Hurd’s comments about the state budget crisis have evolved from caution to concern, noting that “the state’s budget imbalance has not been dealt with directly and it has been a drag and very likely could still put the brakes on the economy later.” In addition, manufacturing has not rebounded and rising interest rates will slow building and home selling. Meanwhile, commuting Californians will feel the effect of rising gas prices.

The forecast is most concerned with job creation in California. Though the nation has experienced solid job growth, California has picked up only half as many jobs as it should have (based on population figures.) The enormous disparity between Northern and Southern California is the culprit here, with Southern California experiencing job growth and Northern California remaining flat. While this is better than job losses, the North-South gap will be felt statewide for years to come.

The Los Angeles Forecast

With a mood that parallels the national forecasts, Senior Economist Christopher Thornberg forecasts that the near-future economic outlook for Los Angeles and Southern California is positive, but cautions that a pair of serious issues still may plague the region.

In a report titled, “The Los Angeles Regional Report,” Dr. Thornberg sees beneficial signs in the strength of the US economy, the increase in imports and exports through area ports and an increase in tourism related sectors. Job growth is again on the rise as the six-county region added 30,000 jobs in April and May.

But Southern California still faces some serious issues. The state budget is still up in the air and reductions in state and local government are nearly a certainty along with a reduction in government services. The other issue is real estate prices. The recent surge in prices have created a clear bubble in prices and eventually there needs to be some return to sustainable price levels - likely when interest rates rise again.

The forecast continues to look for solid employment growth throughout the region, with the Inland Empire leading the way followed by San Diego, Ventura, Orange County and Los Angeles. Specific to Los Angeles, it will be the service sectors that see the most growth.

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 http://uclaforecast.com/.

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