September 12, 2007

LOS ANGELES, September 12, 2007 - In its third quarterly report of 2007, the UCLA Anderson Forecast remains consistent in its assertion that the national economy is not technically in a recession, though the group’s economists are calling current conditions “a near recession experience.” A recession is defined as a two consecutive quarter decline in real Gross Domestic Product (GDP) and the UCLA Anderson Forecast is calling for real GDP growth to be just above 1% for the fourth quarter of 2007 and the first quarter of 2008. While acknowledging that an economy slowed to a 1% growth rate could slip further, the Forecast notes rather ironically that their near recession forecast “can be viewed somewhat optimistically.”

In California, the second quarter of 2007 has run true to form as depicted in prior reports, demonstrating substantial job loss in the real estate-related sectors and sluggish growth throughout the State’s economy, with unemployment and mortgage defaults on the rise. Similar to the national forecast, the dismal data is not expected to result in a recession, as there are some entries on the positive side of the ledger; for example, despite losses in real estate, overall job growth was strong through the first quarter of 2007.

The National Forecast
In his national report, UCLA Anderson Forecast Senior Economist David Shulman asserts that the ongoing pessimism in the overall Forecast comes from the continuing deterioration of the housing market. The Forecast has lowered its expectations for housing activity as the tightening of credit standards, combined with an ebbing of the builders’ practice of building new houses to get out of the underlying land takes its toll. Previously, the Forecast called for housing starts to bottom out around 1.2 million; currently the forecast is for 1.0-1.1 million units. More importantly, Shulman and the project’s economists now believe “that the recovery will be far more tepid with starts barely recovering to 1.4 million by the end of 2009.”

Shulman’s report titled, “A Near Recession Experience,” offers evidence that, despite the negative aspects of the Forecast, a classic recession will be avoided. The evidence includes strong activity in the trade sector, where a solid global economy is strengthening exports, while sluggish domestic conditions reduce imports.

The report states that the decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters beginning in the last quarter of 2007.  As Shulman states, “When the economy slows to a 1% pace, it runs the risk of falling into an actual recession, just as when an airplane’s velocity dips down to its ‘stall speed’ and falls out of the sky.”
Down the line, growth will remain lukewarm until the economy returns to a 3% trend in 2009. The expectation is that the Federal Reserve will cut the Fed Funds rate from 5.25% to 4.5% by year-end. The economy will avoid recession on the strength of net exports and business investment in equipment and software. It’s expected that it will take years for the housing market to recover to “normal,” a situation likely to be exacerbated in the short-run by changes in the legislation affecting the mortgage industry. 

The California Forecast
In the California report, economist Ryan Ratcliff states that, “California is in for at least another year of economic doldrums, with rising unemployment, weak job growth and a slowdown in all broad indicators.” But, continuing a theme in prior reports, Ratcliff asserts that without the emergence of a second source of weakness in the economy - or a significant worsening of the real estate sector beyond what’s already being forecasted - California will not sink into a recession.

Noting that the state’s unemployment rate was 5.3% in July, Ratcliff says the Forecast does not consider this to be a simple “up tick,” as both the size and speed of the increase in the unemployment rate are on par with what was seen at the beginning of 2001. But unlike early 2001 (the state’s last recession began in April 2001), the Forecast maintains that we will not see a full-blown recession over the life of this forecast (which runs through fourth quarter 2009), though the increase in unemployment introduces some doubt into the equation.

Ratcliff devotes a significant portion of this quarter's report to examining national and local foreclosure trends.  In particular, he takes issue with the idea that, “foreclosures are mostly impacting real estate investors...even in the worst cases, the majority of foreclosures are occurring in owner-occupied housing."  He points out that in California, foreclosure rates are highest in counties with the combination of lower home prices and high usage of adjustable rate mortgages - a sign of working families overstretching to buy a home.

The Forecast says that the end of 2007 will mark the peak of subprime, adjustable rate mortgage resets, and expects to see mortgage defaults peaking sometime in the first half of 2008.  The real estate markets will continue to be a drag on California growth for at least a year to come.  With no other sectors picking up the slack, the Forecast expects to see overall job growth of less than 1% through this time next year, with unemployment reaching a peak of 5.9% at the end of next year, with corresponding weakness in personal income and gross state product.  A pickup in building permits and a moderation in mortgage problems in late 2008/early 2009 marks the end of significant drag from real estate, with the California economy returning to relatively normal levels of growth by the end of the Forecast.

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, established in 1935, is regarded among the very best business schools in the world.  UCLA Anderson faculty are ranked #1 in "intellectual capital" by BusinessWeek and are renowned for their teaching excellence and research in advancing management thinking.  Each year, UCLA Anderson provides management education to more than 1,600 students enrolled in MBA, Executive MBA, Fully-Employed MBA 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 35,000 alumni, UCLA Anderson develops and prepares global leaders.

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