March 26, 2002

Los Angeles — With no obvious driver to power an economic recovery, economists with the UCLA Anderson Forecast predict that the national economy is looking at a “very sluggish period ahead,” with considerable risk of another recessionary dip.

In his report titled “This is Our First Business Cycle,” Edward E. Leamer, director of the UCLA Anderson Forecast, and economics professor at UCLA Anderson, notes that past recoveries have been fueled by consumer spending on goods and real estate - essentially “consumer cycles” driving the economy. But since these key sectors have remained steady throughout the recent recession and mild turnaround, the current climate will grow hotter only if powered by an increase in business investment.

But Leamer has his doubts about increased business investments in the near future. “Business investment in pursuit of technological innovations has long waves that last a decade or more — a peak in 1980 and another in 2000. It is highly unlikely that there will be a sharp recovery of business investment in the next year or two,” he notes.

The report also takes an up-close look at the Internet Rush and its lasting effects on the current economy. Leamer notes that the Rush increased productivity (output per hour), but not corporate profits, and sustainable economic growth requires both. “The two Ps (productivity and profitability) went their separate ways in 1998. The mad dash to have the coolest Web site was supported by a surge in investment in equipment and software, but profits completely stalled and the ratio of profits to investment took a nosedive,” Leamer writes.

Leamer speculates that the Internet is actually killing profits while new communications technology is exacerbating the problem — two areas believed by many to be inherently positive factors for the economy.

“The Internet has fundamentally changed retail competition, affecting especially the capacity — dependent sectors including hotels, airlines, autos, PCs, wireless and so on,” Leamer said. “The ability of customers to shop without cost greatly increases the intensity of competition.”

He notes that the Internet Rush created three imbalances in the economy. Businesses invested as if profit were not the goal, consumers spent as if scarcity were a problem of the past, and portfolio managers put most of their eggs in the U.S. basket. How well and how fast these imbalances are corrected will determine the course of the economy in the next several years.

“Correction of the business investment imbalance created the recession of 2001, but correction of the other two imbalances is still ahead of us,” Leamer said. “A rapid shift from a spending mode to a savings mode by consumers or a rapid shift out of U.S. dollar assets by global portfolio managers would cause another recession.”

California quarterly outlook
In the quarterly California report titled “California: How Strong an Expansion?” Senior Economist Tom Lieser reports that economic decline in California has been deeper than in the rest of the nation — whether or not one is willing to call the dip a “recession.”

“By our rationale, using personal income as a barometer, there is little doubt that, recession or not, California fell further than the national economy during the last three quarters of 2001,” Lieser writes.

According to data detailed in the report, California personal income declined during the second, third and fourth quarters of last year, even before adjustment for inflation. As one would expect, wages took a particularly hard hit in the San Francisco Bay area where the technology bust hit hardest.

However, one positive outlook this quarter is that the big job losses are likely behind us, according to Lieser.

Lieser asserts that the critical question now facing California is the strength of the impending recovery. Lieser forecasts that when the data is in for the early parts of 2002, we will see moderately positive employment growth. The rest of the year has signs of strength as well.

“By the second half of this year, areas of current strength should be augmented by a turn in the technology sector. A pickup in computer services and personnel services will bring about a resumption of growth in business services. High tech employment in electronics will add jobs at a modest pace.” By 2003, sectors including aerospace and motion pictures will rebound and contribute to a growing California economy.

The 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. group to declare the recession that began in the second quarter of 2001.

Media: Please contact Kimberly Lisella at (310) 206-7707, if you would like copies of the March economic quarterly reports.

For further information on the UCLA Anderson Forecast, please visit

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