UCLA Anderson Forecast: dark days


Wall Street may be seeing glimmers of a recovery, but UCLA economists are coming out with a new forecast today that offers a grim picture of the year ahead.

Nationwide, the unemployment rate will worsen -- peaking late next year at 10.5%. And in California, which has been battered by tumbling housing, retail and manufacturing sectors, the jobless rate will soar to 11.9% by mid-2010, the latest UCLA Anderson Forecast says.

“The national economic outlook remains bleak,” wrote David Shulman, a senior economist for UCLA.


“As a result of the prolonged contraction, the economy will likely lose 7.5 million jobs peak to trough and unemployment will soar.”

In releasing their report, however, UCLA economists noted the challenge they faced in trying to forecast the future in the current volatile environment.

With dramatic changes in federal policy occurring almost on a weekly basis and few historical parallels with which to compare the current recession, forecasts are being delivered in the most uncertain of times for economists.

“The variables we’re observing are very unusual,” said Edward Leamer, director of the quarterly UCLA Anderson Forecast. “There’s nothing like it in the historical records. The bottom line is we’re not having a forecast, we’re having hunches.”

Early last year, UCLA said the nation would suffer from tough economic conditions but would ultimately avert a recession. Leamer said that at the time, he did not believe consumer spending could tank the way it did in the latter part of 2008.

This time, the closely watched UCLA report does not hold back.

The researchers cite the unprecedented losses to U.S. balance sheets -- $9 trillion in stocks and $5.5 trillion in home values.


The financial crisis, they say, has swelled into such a global problem that national policy may be ineffectual. The United States needs its international trading partners to reverse their slowdowns and reignite the exchange of imports and exports.

Nationally, the UCLA forecasters say the economy will begin to grow slowly by the fourth quarter of this year. That’s when residential construction should also begin to turn around, but exports will continue to slide downward until the beginning of 2010.

Consumer prices should snap out of a downward trend the second half of this year, but disposable income rates will not match the high levels of 2004 until 2011.

In California, the economy may stop shrinking by the fourth quarter, but it will remain flat and probably will not grow until the beginning of 2010. Normal growth won’t return until the middle of 2010, and high unemployment will remain until 2012 or longer, the forecasters said.

Hikes in the state’s sales and income taxes will also erase some of the gains families and individuals would receive from the federal stimulus package.

Manufacturing, construction and financial services will keep shedding jobs until 2011. Education and health sectors are expected to add workers this year, but slow down the pace in 2010.


The numbers were derived by using what forecasters call econometrics -- a combination of historical statistics and economic theory to predict the direction of the economy.

For example, UCLA forecasters looked at how few new homes were being built in California in relation to the state’s population growth. The assumption was that returning demand would double the number of housing permits pulled by 2011 and add jobs to the construction industry.

What it often can’t account for are conditions that have never before occurred, like the federally backed program enticing private investors to snap up toxic mortgage-backed securities announced Monday by Treasury Secretary Timothy F. Geithner.

Although stocks tumbled Tuesday, the Dow Jones index has gained more than 1,100 points since March 9 in response to that and other moves -- amid hopes that the government’s efforts to revive the economy could bear fruit sooner than expected.

To help the housing market, the Federal Reserve announced plans last week to spend $1 trillion -- an expenditure aimed largely at bringing down interest rates on home mortgages, and on Tuesday a key lending industry association predicted that Americans would take out an additional $800 billion in new mortgages.

“It’s hard to keep up with how fast the financial markets” keep changing, Shulman said.

Diane Swonk, chief economist for Mesirow Financial, said the flaw of forecasting is that it’s often conducted for the short term to satisfy corporate or governmental clients, and it’s too scientific to effectively measure human behavior.


Swonk and other economists said experts in the field disagree widely on the direction that the economy will take over the next few months and years.

“There’s a lack of certainty,” said Esmael Adibi, co-author of the Chapman University forecast.

Adibi is unafraid to tout his group’s work, but he said forecasting today was markedly more difficult because of core changes in the nation’s economic engines such as financial lending and the role of the Treasury.

Chapman had predicted in December that the nation’s unemployment rate would average 7.8% this year, a rate already exceeded by 0.3 percentage points today.

“Obviously we were wrong,” Adibi said.

Forecasting, Adibi said, was not about being precise. Anyone who nails GDP growth to the exact decimal point has simply guessed correctly, he said.

“If you capture things within a reasonable margin of error then you’re doing a good job,” he said.