Wednesday, March 12, 2008

Housing Woes to Ease Up

The housing market woes are expected to begin easing up by late 2008 and, despite mounting job losses and fuel and food cost increases, the country will avoid a full recession, according to the UCLA Anderson Forecast report released Tuesday.

"Our no-recession forecast remains nervously intact," said UCLA Anderson Forecast Director Edward Leamer. "We see a lot of problems in the first half of 2008 as housing remains a drag on GDP growth and weakness in personal consumption contributes as well. We expect one quarter of negative GDP growth. The Fed continues to dish out good news for Wall Street with ever lower interest rates. The labor market is sluggish and unemployment elevates to 5.5 percent by the end of 2008. But the housing drag on GDP dissipates in the second half of the year and a normal economy returns in 2009."

The California Forecast
UCLA Anderson Forecast Economists Ryan Ratcliff and Jerry Nickelsburg, look back at the California economy since World War II and make two conclusions. First, the U.S. and California economies move together: there has never been a recession in California without a national recession. Second, the California recessions have twice been amplified and extended by long-lasting structural adjustments -- the Southern California aerospace contraction in 1990 and the Northern California tech bust in 2001. The recession-only downturns have been sharp-but-short contractions driven by temporary job losses in manufacturing and construction. These recessions typically last less than a year, but both the aerospace and the tech adjustments took more than half-a-dozen years to complete.

Today’s economy fits neither of these patterns -- our economy is in "uncharted waters." There are some negative signs, such as job loss in real estate related sectors, but it is unlikely that these sectors can create enough job loss to generate the 2-3 percent declines in non-farm payroll employment that have characterized past recessions.

The forecast is for a very weak California economy in 2008. The "double-whammy" of construction and financial activities job loss will continue to drag at the economy. The economists write, "The current state of the California economy and our forecast fall short of the weakness in previous historical episodes that we’ve chosen to label recessions ... Based on comparing the current economy to past recession episodes, we once again conclude that real estate weakness will remain a significant drag on the economy, leaving us treading water in 2008 -- but not slipping under the waves into recession."

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