UCLA Anderson Forecast Warns of Possible Recession in 2005 or 2006 for the U.S. Economy

California Growth Continues Despite Looming State Budget Issues

Sep 08, 2004, 01:00 ET from UCLA Anderson School of Management

    LOS ANGELES, Sept. 8 /PRNewswire/ -- In a series of reports released
 today, the UCLA Anderson Forecast slightly alters its short-term forecast and
 warns of a potential national recession within two years.  In California, the
 growth pattern holds steadier with slow growth seen for the rest of this year,
 followed by faster growth in 2005 and 2006.  For the state, the key issue
 remains the budget deficit and the forecast assumes some resolution involving
 debt reduction.  Any significant delays or postponements in bringing the
 budget under control will negatively impact the state in both the short and
 long-term.  Job quality is the issue in Los Angeles as the creation of
 "informal" jobs, which contribute less to the overall economy than do other
 jobs outpaces more traditional employment.
     The National Forecast
     In a report titled, "U.S. Economy: Prelude to a Recession," UCLA Anderson
 Forecast Senior Economist Michael Bazdarich breaks with a current Wall Street
 consensus that believes the national economy is early in a growth period that
 will only get stronger, and instead asserts that the underlying data reveal a
 recovery that may be close to the end.  "In chronological terms, the expansion
 is still young," Bazdarich said, "and that supposed youth is what drives many
 to think that strong growth will resume.  However, in most relevant respects,
 this expansion is very old, with the consumer, housing and even investment
 sectors displaying all the vulnerabilities they would normally have only after
 a long expansion."
     Bazdarich, along with UCLA Anderson Forecast Director Edward Leamer, have
 been warning for several years now that the recession-recovery cycle currently
 being experienced in the national economy is unique among similar post-war
 cycles.  Historically, consumer spending dropped during such periods and
 powerful recoveries were fueled by the return of strong consumer activity.  In
 the current scenario, consumer spending on housing, cars and other goods has
 been maintained throughout and there is no boost in consumer spending to spur
 the economy into high-growth mode.  Along with an essentially maxed-out
 consumer base, Bazdarich says that current stock-flow dynamics and investment
 and inventory levels also mirror that of an "old" recovery.
     In a best-case scenario, the current slow patch in the recovery holds for
 two years or so, when more robust capital spending should reduce recession
 risk.  In the meantime, a consumer-led pull back could induce a recession
 within the next two years.
     The California Forecast
     The state budget is the big issue in California, as the essential
 structural imbalance -- spending more than revenue income -- remains.  In his
 overview of the state's economy, UCLA Anderson Forecast Senior Economist
 Joseph Hurd notes that the imbalance is being "funded" by state borrowing of
 $15 billion (based on Proposition 57) from cities and counties across
     "The economic implications of the budget mess are not good," Hurd said.
 "In the short run, cities and counties will shed employment due to the 'loans'
 they are being forced to give the state.  We expect total job losses of about
 45,000 at the state and local level in 2004 and 2005."
     Hurd's report, titled "California: Growing and Growing ... But a Few Fixes
 are Needed," assumes that Sacramento "solves" the budget problems by the next
 fiscal year.  He speculates that it will be a combination of taxes, user fees
 and spending cuts, while "California becomes the gambling capital of the
 nation (and partly lives off casino income)."
     Not solving the budget issue has a big impact on the annual long-term
 forecast, as the postponement of building maintenance and other infrastructure
 projects will be put off indefinitely.
     The Los Angeles Forecast
     In Los Angeles, Senior Economist Christopher Thornberg focuses on job
 creation and the quality of jobs being created in Los Angeles County.  In a
 report titled, "The Los Angeles Report: Good Jobs, Bad Jobs," Thornberg says
 that Los Angeles has added 24,000 jobs since the start of the year.  These
 jobs are mostly in retail trade, finance and insurance, professional and
 technical services, administrative support, transportation and warehousing,
 and leisure and hospitality industries.  Key sectors such as manufacturing,
 information and government have performed poorly, while construction and
 healthcare are flat.
     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.  Most recently, the Forecast is
 credited as the first major U.S. economic forecasting group to declare the
 recession of 2001.  Visit UCLA Anderson Forecast on the Web at

SOURCE UCLA Anderson School of Management