June 28, 2001

LOS ANGELES — Economists with the UCLA Anderson Forecast predict an 80 percent chance that a recession will hit the U.S. economy by the first quarter of 2002 — a slight improvement over last quarter's forecast due to the recent and unexpected aggressive rate cuts by the Federal Reserve.

In a report titled "It Takes a Locomotive," Dr. Edward E. Leamer, director of the UCLA Anderson Forecast and economics professor at UCLA Anderson, explains that business investment is the locomotive that pulls the GDP forward. In the Internet Rush from 1996 to 2000, the locomotive was pulling at an unprecedented rate, but it ran out of fuel in the fourth quarter of 2000.

"We still expect sluggish growth through the rest of the year and two quarters of negative growth beginning no later than the first quarter of 2002," Leamer said. "Although the interest and tax-rate cuts may help the train move faster, there is no light at the end of the tunnel."

The national economic forecast, along with reports on the California economy and the energy crisis, will be presented during the UCLA Anderson Forecast conference on Thursday, June 28. The program, which runs from 1 p.m. to 7:30 p.m. includes a keynote address by former California Gov. Pete Wilson.

In terms of the national economy, Leamer expects the locomotive to start pulling again in 2002 — not with the vigor of the Internet Rush, but at "a more thoughtful, considered pace." Meanwhile, the UCLA economist expects sluggish growth including a strong possibility of a technology-sector recession with two consecutive quarters of slightly negative growth.

The June quarter prediction puts the decidedly independent and historically accurate UCLA Anderson Forecast at odds with a host of other forecasting entities and much of the national media, many of whom cite continued consumer spending as a reason the economy will avoid recession. During its annual conference last December, the forecast had predicted a 60 percent chance of recession, which was increased to 90 percent at the April quarterly forecast.

"Consumers cannot be expected to pull the economy very long or very fast, particularly given their negative savings rates and high debt loads," Leamer argues. UCLA Anderson Forecast is the only major forecast service to correctly forecast the recent slowdown in GDP, the direction — though not the speed — of recent rate cuts and the recent rise in unemployment.

Slowdown Seen in California

California can expect a serious slowdown, according to Tom Lieser, senior economist with the UCLA Anderson Forecast and author of the California report. Lieser said the state's impending slowdown will "come very close to negative territory" in growth of real personal income and gross state product for the remainder of 2001.

The state's economy is entering its "most troublesome period since the early 1990s," Lieser said.

The UCLA Anderson economist notes that California had the second-highest income growth among the states in 2000, based on a wealth effect which is now rapidly receding. He predicts that the gain in California taxable sales this year will be the weakest since 1993.

Lieser said the major downturn in information technology and an electric power crisis is particularly troublesome. He predicts a much weaker growth in jobs through 2002, including a substantial slowdown in the service sector of the California economy and a rising unemployment rate.

Energy Crisis Could "Short-Circuit" State Economy

Confronted with the harsh reality of energy demand that has exceeded generating capacity, California faces the short-term problem of how to ration the available supply, and the long term problem of how to assure that there is an appropriate level of generating capacity, according to a report released Thursday as part of the UCLA Anderson Forecast.

The report, entitled "Will the California Energy Crisis Derail the State's Economy," co-authored by the UCLA Anderson Forecast and Cambridge Energy Research Associates (CERA), offers an alternative view of the future of the state's economy as a result of the energy crisis.

The study considers the implications for the California economy of two different solutions to the state's energy woes. In a "market-based scenario," retail rates are immediately increased to cover electricity wholesale costs. Alternatively, in a "state-takes-charge scenario," electricity users are insulated temporarily from the problem by low retail rates, but end up paying for today's electricity with higher rates in the future.

According to the lead authors, Christopher Thornberg of the UCLA Anderson Forecast and Michael Zenker of CERA, the choice is between paying now (the market-based scenario) or paying much more later (state-takes-charge scenario). If the state takes over, the energy crisis lowers the California rate of growth in 2001 by .7 percent, compared to 1.5 percent under market-based electricity prices.

"In 2002 and beyond, the state-takes-charge scenario has much higher retail electricity prices because of the debt that is passed to future ratepayers, and because capacity formation is weakened by a cloudy investment climate," the authors say. "These higher rates create a -1 percent drag on the California economy over the next three years, compared to a full restoration of normal growth under the market-based solution. In addition, by reducing current demand the market-based scenario lowers the predicted power interruptions in this summer from 112 hours to 12 hours."

The UCLA Anderson Forecast is the most widely followed and often-cited forecast for the state of California, and was unique in predicting both the seriousness of the early-1990s downturn in California and Southern California, and the strength of the state economy's rebound since 1993.

CERA is a leading advisor to major international companies, financial institutions and organizations, delivering strategic knowledge and independent analysis on energy markets, geopolitics, industry trends and strategy. CERA is headquartered in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Houston, Mexico City, Moscow, Oakland, Oslo, Paris, Sao Paolo, Seoul and Washington, D.C. The report is included in the UCLA Anderson Forecast book and will be presented Thursday during the Forecast conference.

The UCLA Anderson Forecast conference is sponsored by Cambridge Energy Research Associates (CERA) and Payden & Rygel. Additional sponsors include: Sempra Energy, Spencer Stuart, Northrop Grumman and Sanwa Bank California (merging July 2 with Tokai Bank of California to form United California Bank).

For further information on the UCLA Anderson Forecast, please visit forecast.anderson.ucla.edu

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