Economic Forecast for California and US

While not all that optimistic this forecast shows a slowing down rather than any disastrous slump in the US economy.


UCLA Anderson Forecast: U.S. Economy Not In A Recession, "But It Is
Certainly Close"; In California, Slumping Housing Market Will Finally
Impact Job Growth

LOS ANGELES--(BUSINESS WIRE)--In its second quarterly report of 2007,
the UCLA Anderson Forecast continues to believe that the national
economy is not in a recession, though the group's economists now say
the economy is "certainly close" to recessionary conditions. The
Forecast asserts that real growth in 2007 will be 1.8%, "roughly on
par with the near-recessionary environment of 2002," when real GDP
advanced at 1.6%.

[it seems like a "growth recession," in which the growth rate of the
economy -- but not the economy itself -- falls. This can cause an
actual recession if it causes a sudden slump in business fixed
investment spending (via the accelerator effect) or in consumption
spending (as debt service payments rise relative to income).]

However, by mid-2008, growth will return to around 3% as the
contractionary forces coming from housing abate and improvement in net
exports and investment propel the economy forward. The Forecast calls
for " … the housing induced sluggishness in the U.S. economy to last
into early 2008. For 2007, real GDP growth is expected to be less than
2%." In California, weakness in the real estate sector will finally
spill over into the job market as the combination of job losses in
construction and real estate finance pull overall payroll job growth
in California to less than 1% for the next five quarters. Unemployment
will rise to 5.5% and broad measures of real output (Gross State
Product and Personal Income) will grow at a less-than-average rate of
just-below 3%.

The National Forecast

In his national report, UCLA Anderson Forecast Senior Economist David
Shulman notes that if the current (and continuing) forecast is close
to the mark, then the period from second quarter 2006 through first
quarter 2008 will mark an historically anomalous long period of below
trend growth. But he remains consistent with the story the Forecast
has been telling for some time, that a recession is not imminent for
the U.S. economy.

Shulman's report titled simply, "Turbulence," speculates on potential,
economy-spurring actions by the Federal Reserve, concluding that there
will be no monetary policy help in the form of rate cuts until the
fourth quarter of 2007, as it continues to follow an informal policy
of inflation targeting that dates back to the mid-90s. He believes
that recovery in the housing market will resemble an "L" as opposed to
a "V," with the imploded sub-prime mortgage market representing a
"second leg down in housing activity." The Forecast believes that
weakness in the housing sector will finally spill into consumption
spending, noting that retail sales stalled in April and that auto
sales have been weak.

With housing and consumption both "down," the strength of the national
economy lies in the rest of the world. "The global economy is
booming," Shulman writes. "Indeed, it is the strength of the global
economy that is powering the stock market to new highs (and) it is no
accident that the Wall Street rally is being led by the giant global
corporations who are benefiting most from the worldwide expansion."

The California Forecast

In the California report, UCLA Anderson Forecast Economist Ryan
Ratcliff concedes that 2007 has been a bit of a conundrum for those
tracking the state's economy. Falling sales, weak prices and rising
foreclosures have ruled the housing market while both national and
state measures of construction activity suggest that real estate has
been a drag on growth for close to a year. But the wider California
economy is mostly unfazed: job growth has only slowed slightly, for
example, and there has been only a slight up tick in unemployment.

The question, simply put, is this: If the job growth of the early part
of the decade was fueled by real estate (read: construction and the
mortgage industry), why hasn't the decline in the real estate sector
translated into slower job growth and greater unemployment? Ratcliff
believes that the answer lies in the timing and that it is in the
final two quarters of 2007 and the beginning of 2008, that the job
losses will manifest. He writes that mid-2008 will look better than
the intervening period and that job growth will return to normal
levels later that year.

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 http://uclaforecast.com.

Contacts
UCLA Anderson School of Management
Hilary Rehder, (818) 689-5551