Growth for National Economy

UCLA Anderson Forecast

“Soft Landing” Expected for Both California and Los Angeles

LOS ANGELES — In its third quarterly report of the year, the UCLA Anderson Forecast stays the course and continues to forecast that the US economy will experience slow growth through 2006. However, the slowdown is now considered to be more gradual than predicted in June as the projected reduction in housing construction is still in the future. In California, there are hopes for a “soft landing” as the economy weakens over the next two years. Locally, the Los Angeles forecast mirrors that of California, as a number or risk factors including payroll employment and residential real estate pose a threat to the moderate growth currently being experienced.

The National Forecast
In the latest forecast report, UCLA Anderson Forecast Senior Economist Michael Bazdarich modifies slightly the stance the group took in June. Three months ago, the group forecasted “substantial declines in U.S. housing construction starting in late-2005” and that they “expected these declines to drive a noticeable deceleration in U.S. economic growth in the last half of 2005 and after.” Consumer, business and government spending were also expected to decline.

Dr. Bazdarich now notes that there has been no decline in housing construction yet evidenced in the data; rather they have been flat. Still, the forecast expects these declines are still on the horizon and while the drop-off in housing construction has yet to occur, declines in consumer and business spending is happening at a faster rate than was expected three months ago. On the plus side, U.S. foreign trade trends are showing signs of turning for the better.

The overall forecast has been slightly upgraded from June. Dr. Bazdarich writes, “ … the bottom line is that an improving trade deficit will work to mitigate the economic drag coming from slowing spending growth and, next year, declining housing activity. Our June forecast looked for U.S. growth to fall into the 1% - 2% range next year. With slowing consumer and business spending growth hitting import sectors hardest, even a 20% decline in housing starts over the next two years will work to push economic growth only to the mid-2% range.” He does caution, however, that an abrupt plunge in housing starts and housing prices – a bursting of the housing bubble – could still drive a slump.

The California Forecast
In his California forecast, UCLA Anderson Senior Economist Christopher Thornberg notes that the California economy “seems healthy on the surface” but below the surface there is no encouraging news.

The California economy, like the national economy, is being driven in part by the housing sector and consumer spending (which is being fueled by the wealth home owners are feeling). While these sectors continue to fuel growth, core California sectors like information, manufacturing and professional services continue to languish.

Dr. Thornberg says that, “The forecast for California is mediocre at best, at worst we are liable to dip into another recession.” He admits that the research group has not been able to time the end of the real estate bubble. His current forecast is for a “soft landing,” one in which the economy sees weak growth for the next two years, but no recession.

The Los Angeles Forecast
Mirroring the forecast for the state, the UCLA Anderson Forecast says the Los Angeles area will avoid a crash and experience a “soft landing” similar to the rest of California.

UCLA Anderson Senior Economist Ryan Ratcliff says that, “any trouble in real estate markets is more than six months out, so our forecast is for a slowdown in housing in early 2006, leading to a broader economic slowdown in 2006-2007. At this time, there is not enough evidence from our leading indicators to suggest that this slowdown will become a full-blown recession.”

About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California, and the strength of the state’s rebound since 1993. Most recently, the Forecast is credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast on the Web at http://uclaforecast.com.