Copyright© 2006 by School Services of California, Inc.

                                      Volume 19                   For Publication Date: December 15, 2006             No. 26

UCLA Forecasters Predict Slowdown, But No Recession

On December 6, 2006, economists with the UCLA Anderson Forecast issued their quarterly report on the state and national economies and concluded that, while there has been a “downshift” in economic activity, there will not be a recession. The UCLA group anticipates overall economic growth of 1.5% to 2.0%. 

Over the past year, UCLA has emphasized the state’s vulnerability to a housing downturn,  which is now in full swing. The report concludes that real estate employment has gone from an engine of growth to a drag on growth. However, significant declines in home prices statewide are not predicted. Rather, prices are expected to remain flat until residents’ incomes grow sufficiently to fuel greater demand for housing. Home prices five years from now are expected to be roughly the same as they are today, implying a drop of 15% to 20% after adjusting for inflation. Good news for home buyers, but bad for sellers. 

UCLA economists expect the Federal Reserve to cut the federal funds rate to 4.5% in response to a sluggish national economy. The Forecast predicts that the national Gross Domestic Product (GDP) will rise from a 1.8% rate for the first three quarters of 2006 to a 3% to 4% rate of increase by 2008. In contrast, the Legislative Analyst’s Office sees a somewhat weaker national picture, predicting GDP to reach 3.3% growth in 2008, with lower rates of growth through 2012. 

The outlook for California is generally positive, with the slowdown largely confined to the real estate sector. An analysis of past recessions found that at least two major sectors of the economy experience major job losses during a recession, such as the losses in construction and manufacturing suffered in the recession of the early 1990s. The UCLA forecasters did not predict widespread job losses in any major sector outside of real estate. They also examined the pattern of consumer spending in England following a significant decline in home prices and found that retail growth, while slowing slightly, continued on the same basic growth path prior to the housing slump. The forecasters predict an average 4.8% increase in the gross state product from 2007 through 2009. 

—Robert Miyashiro