S. California Foreseen Escaping U.S. Recession
A long-term economic shift that has begun spurring more saving and fewer big-ticket purchases is almost certain to tip the national economy into recession soon, but Southern California largely will be spared, UCLA forecasters said Wednesday.
Economists with the UCLA Anderson Business Forecast, in their closely watched quarterly report, foresee a 90% chance of a brief, mild U.S. recession later this year or early next year. They predicted the Bay Area also will succumb to recession, but said the state overall, mostly because of Southern California’s relative stability, probably will suffer only a slowdown.
The UCLA forecast group recently has been one of the gloomiest prognosticators of the U.S. and California economies. Even though this year started off better in some respects than UCLA analysts forecast in their last official report in December, their updated outlook for the rest of 2001 and 2002 is slightly more downbeat than before.
What’s more, there is a significant new theme in the latest forecast: an assessment that the national economy is shifting into a long-term pattern of slower growth.
Edward E. Leamer, director of the UCLA forecast group, said he recently has come to regard the current U.S. slowdown as an episode in a profound economic transition. He said the new pattern will be characterized by lower corporate spending on information technology and software, along with less capital from overseas investors.
Leamer said the technology spending boom from 1996 through last year was driven by an “Internet rush” mentality, highlighted by companies scrambling to establish corporate Web sites. Now that the Internet blitz is over, he said, businesses will invest in new technology more conservatively.
Likewise, consumers will start spending less on cars and other costly consumer goods and instead will devote more money to savings, Leamer predicted. He said that a weak stock market will probably spur consumers to put aside more money for their retirement instead of counting on rising share prices to do the work.
The current national slowdown and anticipated recession, Leamer said, “isn’t just a time-out period. . . . We’re in the midst of a transition in our economic lifestyles.”
All told, the UCLA forecasters predict the nation’s key gauge of economic growth--gross domestic product--will be up only 0.7% this year and 1.3% next year. During the four previous years, GDP growth, after discounting the effect of inflation, averaged 4.5%. Leamer predicted that after the economy completes its current transition in a few years, growth rates will pick up only moderately, hovering around 3% to 4%.
UCLA forecasters said the pattern of slower growth and weaker technology spending will hit the Bay Area hard, largely because of the region’s heavy concentration of computer and software companies. In addition, the area’s torrid residential and commercial real estate markets are seen as cooling off, producing damaging ripple effects through the region’s economy.
The UCLA forecasters predict Southern California will slow down too, particularly if Hollywood is shut down by strikes this year. Even so, the slowdown in Southern California is expected to be much less dramatic than in the Bay Area, helping the state economy continue expanding, albeit slowly.
UCLA’s forecast calls for California’s nonfarm job total, probably the most widely watched measure of the state’s economic performance, to grow 2.4% this year and 1.6% next year. That is down from a growth pace of 3.8% in 2000, the highest percentage increase in 12 years.
California’s unemployment rate, which averaged 4.9% last year, is projected to rise to 5% this year and to move up to 5.7% in 2002. Still, UCLA is forecasting that 2002 will be the first year in more than a decade that the state’s jobless rate is lower than the nation’s. The school’s analysts are calling for the U.S. unemployment rate to climb from 4% last year to 4.8% this year and to rise to 6.1% in 2002.
The UCLA analysts said there would be a silver lining to the state’s emerging slowdown: It will curb demand for electricity, helping the state get through a power crunch expected to last at least the next couple of years. Over the longer term, the forecast downplayed the effect of the power squeeze, saying it would reduce the state’s economic output by less than 3% annually--provided solutions eventually are found to the energy crisis.
“California has always been an expensive place to do business, yet businesses still come,” wrote Christopher F. Thornberg, one of the authors of the forecast. State officials’ clumsy handling of the situation, he said, “will do more damage to the economy in the long run than the high energy prices and rolling blackouts, as businesses wary of California’s government may choose to invest elsewhere.”
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Job Growth Outlook
California is expected to fare better than the rest of the nation this year, but the news is not as good for the northern part of the state. Projected nonfarm employment growth for California and the U.S.:
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California in 2001 (estimated): 2.4%
U.S. in 2001 (estimated): 0.3%
Source: UCLA Anderson Business Forecast
