Ed Leamer and David Shulman

December 09, 2009

LOS ANGELES -- In its fourth quarterly report of 2009, the UCLA Anderson Forecast continues its theme from September that the national economy is on a "modest growth path that will be accompanied by extraordinarily high rates of unemployment." This slow growth outlook reflects the lagged effects of the implosion of consumer balance sheets and, according to the Forecast, is a result of the economy in transition from being an import-oriented/low-savings rate one to a more export and higher-savings oriented one. Fueling this transition is the administration's "weak dollar policy" which encourages exports and discourages the consumption of imports and the combined effect will cause real consumer spending to grow at a modest 2% rate - far below the historical 3 to 3.5% rate.

In California, the UCLA Anderson Forecast suggests that the recession is playing out much as was predicted. The state's unemployment rate continues to increase and local government employment continues to decline. Larger than expected reductions in government spending lowers the California forecast slightly when compared to the previous report.

The National Forecast
In a report titled "Lost and Found," UCLA Anderson Forecast Senior Economist David Shulman grimly notes that there are a half million fewer people on nonfarm payroll than there were ten years ago. Furthermore, he observes that the recent recession established postwar records for declines in stock prices, home prices and employment and that over the last decade the unemployment rate has more than doubled, and that real wages rose by a very modest 6.5%.

The damage mostly done, Shulman foresees slow growth for the U.S. economy. Specifically, the UCLA Anderson forecasts that after growing at a 2.8% rate in the most recent and current quarter, real GDP will settle into a 2.0% rate for 2010, before rising to about 3.0% in 2011. The unemployment rate will likely peak at 10.5% in the first quarter of 2010, then settle at or above 10.0% for the rest of the year. "We hypothesize that one reason for the high rate of unemployment," Shulman writes, "is that business firms who hitherto viewed office overhead costs as fixed, now view them as variable ... where in prior recessions much of the marketing, finance, research and administrative employees were generally immune from lay-offs, the new management regimes have made those functions vulnerable to severe cutbacks." In his report, Shulman also notes that government policy makers are "highly medicating" the economy with record federal deficits and a zero interest rate policy coming from the Federal Reserve. While necessary to avoid an economic free fall, Shulman asserts that these policies are not sustainable in the long run.

In a companion piece to the national forecast, UCLA Anderson Forecast Director Ed Leamer examines both the make-up of past economic recoveries and also attempts to forecast how the current recovery will play out. In summary, Leamer believes that unlike in the past, consumers - who have "already spent income we are never going to earn" and who are now more focused on savings cannot be counted on to spend the economy into recovery. Leamer believes that U.S. exports are the potential driver of a successful economic recovery and metaphorically suggests that, "we will need to turn our shopping malls into factories."

The California Forecast
Writing about California, UCLA Anderson Senior Economist Jerry Nickelsburg prognosticates that the outlook for the rest of the year is little or no growth for the state. He writes, "The economy will begin to pick up slightly in the beginning of 2011, and by the middle of 2011, will begin to grow at more normal levels." Nickelsburg believes that the keys to the California recovery are exports of manufactured and agricultural goods; a recovery in U.S.; increased public works construction and increased investment in business equipment and software.

The expectation of the UCLA Anderson Forecast is that total employment will contract by -4.3% in 2009 and will not be generating new jobs in 2010. Once growth returns in 2011, employment will begin to grow faster than the labor force at a 1.7% rate and the unemployment rate will begin to fall. Real personal income growth will be -2.7% in 2009 before returning to positive growth + 0.4% in 2010, 2.8% in 2011. Finally, unemployment is only going to get worse and is expected to rise to 12.7% in the fourth quarter of 2009. Though the economy will be growing in 2011, it will not be generating enough jobs to drive the unemployment rate below double digits until 2012.

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. More recently, the Forecast was 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.

About UCLA Anderson School of Management
UCLA Anderson School of Management, established in 1935, is regarded among the leading business schools in the world. UCLA Anderson faculty members are renowned for their teaching excellence and research in advancing management thinking. Each year, UCLA Anderson provides management education to more than 1,800 students enrolled in MBA, Fully-Employed MBA, Executive MBA, UCLA-NUS Global Executive MBA, Master of Financial Engineering, and doctoral programs, and to more than 2,000 professional managers through executive education programs. Combining highly selective admissions, varied and innovative learning programs, and a world-wide network of 36,000 alumni, UCLA Anderson develops and prepares global leaders.

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