Study: U.S. to edge close to recession

Times Staff Writer

The nation’s economy will be so sluggish well into next year that any major hiccup could tip it into recession, UCLA’s latest economic forecast predicts.

The end of easy credit and a further decline in home construction are sending the economy into a “near-recession,” with growth hovering at just above 1% through the first three months of 2008, according to the UCLA Anderson Forecast to be released today.

The forecast presents a gloomier outlook for jobs and the housing market. The nation’s unemployment rate will rise to 5.2% by mid-2008, up from the current 4.6%.

And home values will fall 10% to 15% from their peaks, the forecast says, meaning that sliding prices have yet to hit bottom.


“The small recent minimal declines represent not the end, but rather the beginning of what will be a very painful decline,” David Shulman, author of the forecast, said in the report, referring to home prices.

Still, UCLA’s prognosticators say the economy should narrowly avoid a formal recession -- that is, two consecutive quarters of negative growth. But analysts indicated that with economic currents shifting rapidly, there’s no guarantee of a clean getaway.

“This is very touch-and-go,” Shulman said. “When the economy slows to a very low rate of growth, it doesn’t take much to tip you into recession.”

Even a recessionary near miss, however, would be little consolation for businesses already pinched by the ripple effects of the troubled housing and credit markets.


Automakers have said demand for pickup trucks is weakening. Lumber mills are churning less wood. Mortgage companies are giving workers their walking papers.

Even the sales of office supplies -- viewed by some as an indicator of where the economy is headed -- are off, according to Pasadena-based Avery Dennison Corp.

“Short-term economic conditions are challenging,” Avery’s chief financial officer, Daniel R. O’Bryant, told analysts this week.

“We do see customers behaving skittishly. I talked to one last Friday in Hagerstown who said customers have gone from ordering with optimism to ordering very carefully and not taking any inventory on that they don’t have to. So we do see customers being cautious right now.”

UCLA forecasters said their report took into account the summer’s bountiful crop of grim financial news, including rising mortgage defaults as borrowers with adjustable-rate loans struggle to make escalating payments.

The “August panic” included the near-failure of a German bank, a run on Countrywide Bank and gut-wrenching swings in the stock market.

“We were surprised by the 4% growth” in gross domestic product in the second quarter, Shulman said.

“But everything since then has been much worse than what we thought. Practically every piece of economic data since then is worse than what we expected.”


Gross domestic product, a widely used barometer of the economy’s strength, is the value of all goods and services produced in the country.

It plunged to an annual rate of 0.8% in 2001 before recovering to a high of 3.6% in 2004. In this cycle, the Anderson forecast sees GDP declining to an annual rate of 1.8% in 2008 before rising to 3% for 2009.

The forecast sees real GDP growth, or growth adjusted for inflation, to be just above 1% for the fourth quarter of the year and the first quarter of 2008. That is down from the 2% GDP trough UCLA projected in its last report, issued in mid-June.

Other examples of the economists’ increased pessimism include a prediction of fewer housing starts. The group sees them bottoming out at 1 million units annually, down from the previous forecast of about 1.2 million.

Home construction is seen as “barely recovering” to 1.4 million units annually by the end of 2009. By comparison, housing starts peaked with more than 2 million units annually in 2005.

The nation’s jobless rate also is seen moving higher than the previously predicted 5%, and the recovery in employment is now seen as starting in 2009, rather than late 2008.

A weaker job market usually means a slowdown in business and consumer spending. The Anderson forecast projects a decline in sales of automobiles, as well as other big-ticket consumer items, in 2008.

Shulman said he saw evidence that consumers were tightening their pocketbooks. Among the signs: Apple Inc.'s sharp price cut for its much-hyped iPhone, Harley Davidson Inc.'s downshifting of motorcycle production and the proliferation of buyer incentives among automakers.


“It’s the home mortgage mess hitting the auto industry,” Shulman said.

“It’s harder to refinance houses and sell houses, so there is less money available to buy big-ticket items.”

Nancy Sidhu, a senior economist at the Los Angeles County Economic Development Corp., said she too was tracking “collateral damage” from the housing and lending sectors to see where the economy was heading.

“The damage is spreading,” she said. “We don’t know what else will be affected.”

UCLA forecasters believe the Federal Reserve will respond to the slowing economy by cutting its benchmark interest rate -- now 5.25% -- to 4.5% by year’s end.

The economy “just misses going into recession” because of these anticipated cuts and other factors, including strong demand for U.S. exports and business investment in equipment and software, the study said.

The California forecast -- noting the steady rise in the state’s jobless rate to 5.3% as of July -- also envisions a close call with recession.

“While we still maintain our position that we will not see a full-blown recession . . . this recession-like increase in unemployment obviously introduces more doubt into the equation,” economist Ryan Ratcliff said in the report.