UCLA Forecast: Mild Recession to Affect State

Government efforts to curb inflation will trigger a recession later this year, and--unlike previous economic downturns--California will join the rest of the country in the slowdown, according to a UCLA forecast released Thursday.

Cuts in defense spending, the state’s relatively high cost of living, slow-growth movements and tighter environmental controls will make California vulnerable during the recession, according the UCLA Business Forecasting Project.

“California is expected to suffer along with the rest of the country, lacking any unique stimulus . . . with which to combat the economic slowdown,” the report said.

UCLA economists forecast a “mild” recession that will begin sometime shortly after July and continue through March, 1990. They added, however, that the recession should be followed by another stretch of economic growth lasting through 1992.

Federal Reserve efforts to reduce inflation--such as raising interest rates--will trigger the recession, UCLA says. As a result, the forecasters predict that the nationwide unemployment rate will rise to about 6% (compared to the current 5.1% rate) before falling back by the end of 1991. Corporate profits will also drop during the period.

California’s unemployment picture will be even more bleak. The jobless rate will rise to about 7.2% in 1990, economists predict, compared to the present rate of 5%.

In the past the state’s economic diversity has allowed it to ward off the brunt of the recessions that struck other parts of the nation during the 1980s. During the recession of 1981-82, for example, growth in the state’s aerospace industry offset the slowdown.

This time, the economists said, aerospace companies are struggling with a slowdown in defense spending. They added that no one section of the California economy will be strong enough to keep the state from joining the nationwide downturn.

On a positive note, the recession will be strong enough to curb inflation, the UCLA forecasters said. The inflation rate, as measured by consumer prices, should top out at 5.4% in 1989 before falling to 4.5% in 1990 and 4.1% in 1991, according to the report.

The economists also expect U.S. exports to continue to grow while imports should actually decrease during 1990.

And there will be good news for home buyers: The forecasters said the interest on fixed-rate mortgages should fall to 8%, the lowest level since the 1970s.