UCLA analysts back forecast of ‘soft landing’
Despite the housing downturn, the California and U.S. economies are headed for a “soft landing” because trouble in one sector alone is not enough to trigger a recession, UCLA economists said in a quarterly forecast to be released today.
California could have a soft landing -- slowing growth but without recession -- as long as its economic woes are limited to the housing sector, economist Ryan Ratcliff said in the UCLA Anderson Forecast outlook.
“The question for how bad this thing is going to get over the next two years is whether or not something else comes along and becomes the double whammy,” he said.
UCLA’s widely watched forecast was one of the first to predict the 2001 recession.
In his California forecast, Ratcliff expressed concern about two aspects of the economy: consumer spending and the state budget. If problems develop in either area in conjunction with the housing slump, then the state could slide into recession, he said. But Ratcliffe concluded that neither of those scenarios was likely.
The economy owed much of its strength during the housing boom to the so-called “wealth effect” -- an increase in spending by consumers who feel richer when their homes rise in value.
Although consumer spending has slackened a bit, Ratcliff said it was unlikely to fall enough to trigger a recession.
Consumer spending in Great Britain, he noted, has not declined catastrophically even though that country’s housing market has been slumping longer than California’s.
The second concern, Ratcliff said, was the state budget.
State tax revenues have declined in the wake of the housing slowdown, prompting a state analyst to project an impending cash crunch.
But Ratcliff said the state could avoid making recession-inducing job and spending cuts by putting off some planned -- but optional -- early debt payments.
Without a second source of weakness in addition to housing, the state’s growth is likely to slow through 2007 but avoid recession, Ratcliff said. Beyond that, he said, “2008 is going to be when things start to look a little better.”
Another projection, from the University of the Pacific’s Business Forecasting Center, was more definitive.
“Economic growth will slow significantly, but a recession is not in the cards,” said Chuck Williams, dean of the university’s Eberhardt School of Business.
A national recession is also unlikely, UCLA Anderson Forecast director Edward Leamer said.
“If you are a builder or a broker, it will feel like a deep depression,” he said. “But the rest of us will hardly notice.”
Leamer’s national forecast devotes 14 pages to explaining why several economic models foresee recession.
Then, in the final page and a half, the forecast says such models are wrong because “they can’t seem to be taught that something is very different this time.”
In recessions, Leamer said, the manufacturing sector declines, along with construction, and the combined job and productivity losses cause recession.
What’s different this time, he said, is that construction is poised for a downturn, but manufacturing is “still on its knees in a deep trough.”
Outside manufacturing and construction, job losses in past recessions have been minimal.
And, without a substantial decline in manufacturing jobs, Leamer said, “there cannot be enough job loss to qualify as real recession.”
His conclusion: “The models say ‘recession’; the mind says ‘no way.’ I’m going with the mind.”