September 08, 2004

UCLA Anderson Forecast Reveals California Growth Continues Despite Looming State Budget Issues

LOS ANGELES, Sept. 8, 2004  — In a series of reports released today, the UCLA Anderson Forecast slightly alters its short-term forecast and discusses the current “soft patch” in the national economy.  In California, the growth pattern holds steadier with slow growth seen for the rest of this year, followed by faster growth in 2005 and 2006.  For the state, the key issue remains the budget deficit and the forecast assumes some resolution involving debt reduction. Any significant delays or postponements in bringing the budget under control will negatively impact the state in both the short and long-term.  Job quality is the issue in Los Angeles as the creation of “informal” jobs, which contribute less to the overall economy than do other jobs outpaces more traditional employment.

The National Forecast
In his report, UCLA Anderson Forecast Senior Economist Michael Bazdarich breaks with a current Wall Street consensus that believes the national economy is early in a growth period that will only get stronger, and instead asserts that the underlying data reveal a recovery that may be close to the end.  “In chronological terms, the expansion is still young,” Bazdarich said, “and that supposed youth is what drives many to think that strong growth will resume.  However, in most relevant respects, this expansion is very old, with the consumer, housing and even investment sectors displaying all the vulnerabilities they would normally have only after a long expansion.”

Bazdarich, along with UCLA Anderson Forecast Director Edward Leamer, have been warning for several years now that the recession-recovery cycle currently being experienced in the national economy is unique among similar post-war cycles. Historically, consumer spending dropped during such periods and powerful recoveries were fueled by the return of strong consumer activity.  In the current scenario, consumer spending on housing, cars and other goods has been maintained throughout and there is no boost in consumer spending to spur the economy into high-growth mode.  Along with an essentially maxed-out consumer base, Bazdarich says that current stock-flow dynamics and investment and inventory levels also mirror that of an “old” recovery.

In a best-case scenario, the current slow patch in the recovery holds for two years or so, when more robust capital spending should reduce recession risk.  In the meantime, a consumer-led pull back could induce a recession within the next two years.

The California Forecast
The state budget is the big issue in California, as the essential structural imbalance – spending more than revenue income – remains.  In his overview of the state’s economy, UCLA Anderson Forecast Senior Economist Joseph Hurd notes that the imbalance is being “funded” by state borrowing of $15 billion (based on Proposition 57) from cities and counties across California.

“The economic implications of the budget mess are not good,” Hurd said. “In the short run, cities and counties will shed employment due to the ‘loans’ they are being forced to give the state. We expect total job losses of about 45,000 at the state and local level in 2004 and 2005.”

Hurd’s report, titled “California: Growing and Growing … But a Few Fixes are Needed,” assumes that Sacramento “solves” the budget problems by the next fiscal year.  He speculates that it will be a combination of taxes, user fees and spending cuts, while “California becomes the gambling capital of the nation (and partly lives off casino income).”

Not solving the budget issue has a big impact on the annual long-term forecast, as the postponement of building maintenance and other infrastructure projects will be put off indefinitely.

The Los Angeles Forecast
In Los Angeles, Senior Economist Christopher Thornberg focuses on job creation and the quality of jobs being created in Los Angeles County.  In a report titled, “The Los Angeles Report: Good Jobs, Bad Jobs,” Thornberg says that Los Angeles has added 24,000 jobs since the start of the year.  These jobs are mostly in retail trade, finance and insurance, professional and technical services, administrative support, transportation and warehousing, and leisure and hospitality industries.  Key sectors such as manufacturing, information and government have performed poorly, while construction and healthcare are flat.

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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