December 11, 2006

LOS ANGELES - In its fourth quarterly report of 2006, the UCLA Anderson Forecast refuses to join the growing chorus of experts predicting a recession. The Forecast notes in particular that, “manufacturing is not poised to contribute much to job loss,” and, “real interest rates are very low and there is no evident credit crunch, not on the horizon.” The report concludes that in light of these conditions, the problems in the housing sector are less severe than they would be otherwise. In short, the decline in the housing sector will be isolated and, while a drag on the national economy, is not enough to cause a recession during the forecast period. The forecast for California is much the same with a declining housing market slowing the economy but, without a secondary source of economic distress, it’s not enough to cause a recession.

The National Forecast
In his national report, UCLA Forecast director Edward Leamer states that a recession is not on the immediate horizon for the U.S. economy. Leamer admits that some economic models that emphasize historical data are producing recession forecasts, but he believes that conditions today are significantly different than those that led up to past recessions and thus concludes that a national recession is not imminent.

The report, titled “Models or Minds,” makes the following argument: A recession is a period of declining jobs and the job losses during such times occur in the manufacturing and construction sectors. Today, the decline in the housing sector is contributing to job loss in the construction sector, but there are no significant losses to be found on the manufacturing horizon.  Without the accompanying decline in manufacturing jobs, the losses in construction will not be enough to cause a recession. “If you are a builder or a broker, it will feel like a deep depression,” Leamer writes. “But the rest of us will hardly notice.”

In an accompanying national report titled, “The Outlook for the Financial Markets: A Goldilocks-like Economy Will Keep the Bears Away,” UCLA Forecast senior economist David Shulman, who coined the term “goldilocks economy,” in 1992, forecasts three rate cuts by the Federal Reserve that will, “bring the Fed Funds rate to 4.5% by year-end.” In addition, the 10-year Treasury bond will trade in a narrow 4 1/4 %–5% range, ending the year at the higher end. The S&P 500 will trade in the 1525–1325 range, again ending the year in the higher range.

The California Forecast
In the California report, UCLA Anderson Forecast economist Ryan Ratcliff echoes reports released earlier in 2006, writing that “slowing housing markets will create a significant slowdown in the California economy, but will not create a recession without a secondary source of weakness.” The central message of the forecast remains unchanged. The construction sector will continue to weaken, with total residential permit activity and construction employment hitting bottom in late 2007. The report also looks closely at two potential sources for that additional weakness — a negative wealth effect and/or a state budget crisis — but concludes that neither will be severe enough, “to create a recession.”

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

About UCLA Anderson School of Management
UCLA Anderson School of Management is ranked among the top-tier business schools in the world.  Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.

The mission of UCLA Anderson School of Management is to be a global leader in management education, research and service. Established in 1935, UCLA Anderson provides management education to more than 1,400 students enrolled in MBA and doctoral programs, and some 2,000 executives and managers enrolled annually in executive education programs. UCLA Anderson alumni number more than 35,000 graduates around the world dedicated to continued networking, professional development and educational activities.

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