Citing disconnects in various economic indicators, the latest UCLA Anderson Forecast sticks with a no-recession theme but notes that the latest unemployment numbers — if they hold — "strongly favor the hypothesis that we are in recession."
Market analysts and economists have a wide range of opinions on the recession question, and former Federal Reserve Chairman Alan Greenspan said this month that the chance of a severe recession is diminishing.
Edward Leamer, director for the quarterly University of California, Los Angeles, forecast, states in his report, titled, "Muddied Waters," that the housing market’s drag on the nation’s gross domestic product may prove to be "the most severe since the Great Depression," though the bright side is that "history suggests this cannot go on much longer."
And while the unemployment rate rose from 5 percent in April to 5.5 percent in May, "One month … does not a trend make," Leamer states, and he holds out hope that this rate will be revised down over the next couple of months.
He states in the report, "In a recession, jobs are easy to lose but hard to find. This time jobs have been hard to find, but not easy to lose."
Leamer states that the forecast is built on a series of disconnects that are present in the economy, including a disconnect between the housing and labor markets and a disconnect between the construction and manufacturing cycles.
Employment growth has not declined in relation to the housing-market decline as it has in past recessions, Leamer noted, and construction jobs have "spiraled downward, even as the rest of the jobs continue to grow." Real estate finance-related jobs have also tumbled.
The current rise in foreclosure rates is of a larger scale than job losses in the latest downturn, according to the report, which reflects that "homeowners are choosing to walk away from their properties, not because they lost their jobs but only because it makes financial sense."
A disclaimer in his forecast: "It is possible that the data will get a lot worse very quickly and the U.S. will tip into a real recession. More likely, we think, we will experience only a mild slowdown. A little more of what we already had. Regardless of what happens this year, the future isn’t what it used to be. There is going to have to be some belt-tightening. That’s a recipe for sluggish growth."
The report also details the rising price of crude oil and the "massive transfer of income from U.S. citizens to both domestic and foreign producers." About 1 percent of U.S. income has been diverted to foreign oil producers, according to the report, and imported petroleum accounts for about 60 percent of the nation’s trade imbalance.
David Schulman, senior economists for the Anderson Forecast, reports that the economic outlook through 2009 "is decidely subprime." Schulman anticipates two consecutives quarters of negative GDP growth, with the unemployment rate perhaps reaching 6 percent by the end of 2009 or sooner.
There are indications that home prices could fall 25 percent to 30 percent from the market’s peak to the bottom of the downturn, and "should house prices decline by 30 percent most of the home equity of people who own homes subject to mortgages could be wiped out."
Housing starts are likely to remain depressed, Shulman states, and could bottom-out at an annual rate of about 830,000 units in the third quarter before recovering to a rate of about 1.2 million units by mid-2010, which is roughly half the rate it reached in 2006.
"Although the 2007-08 credit crisis is far from over, the Federal Reserve appears to be shifting its attention away from rescuing the financial system to dealing with its more traditional concern of inflation," Shulman writes.
"The witch’s brew of the popping of the housing bubble, a wounded financial system, and increasing inflationary pressures coming from rising commodity prices will keep the economy on a subprime growth path for the next several quarters.
"If there is any good news here, it is that the economy thus far has avoided … falling into an outright recession." And with any luck, he adds, that "will be avoided."
A separate Anderson Forecast report focused on California, prepared by economist Jerry Nickelsburg, anticipates a "very weak" state economy this year, with the state’s unemployment rate expected to reach 6.1 percent by the end of the year and then to decline gradually.
"Though you still hear talk of recession these days, it does not appear that California will exhibit the kind of job loss that typically goes with a national recession," Nickelsburg states.
Anderson Forecast economist Ryan Ratcliff stated in a report on "The Three Phases of the California Real Estate Bust" that the first phase of the downturn began in 2004 with "inland regions that had built homes faster than the population had grown choked on a glut of new homes, which forced builders to cut prices dramatically in order to move product."
That gave way to an explosion of foreclosure activity. And this final phase will mark the recovery of the market. Next year, Ratcliff states, "will likely be devoted to picking up the pieces and discovering what houses are really worth in a market that isn’t dominated by foreclosures.
"We still have a long dark road ahead, but at least we can see a flicker of the light at the end of the tunnel."
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