UCLA Says U.S. and California Avoid Recession
Sticking with their previous forecast, economists at the University of California Los Angeles (UCLA) continue to believe that the state and the nation will avoid a recession, but will limp along for at least another year. At the quarterly conference held on September 24, 2008, the UCLA Anderson Forecast released a report that projects that the U.S. Gross Domestic Product will increase 3.9% in 2008 and 3.3% in 2009. As recently as 2004, the GDP growth rate was 6.6%. The UCLA group continues to focus on the general strength of the labor market, even after taking into consideration the collapse of the housing market and the developing credit crisis. Their analysis concludes that steep employment losses, especially in manufacturing, will not occur and therefore a recession will be avoided.
For California, the forecast is for a weakening economy through 2009, with personal income growth at 3.3%, about half of what was just two years ago. This weakness stems from the same factors that have impaired the national economy—the subprime housing collapse, the failure of major financial institutions, and weakening of consumer spending.
A considerable portion of the conference was devoted to the recent developments on Wall Street and the federal government’s efforts to avoid a further collapse of major financial institutions. The UCLA economists and invited guests generally did not support Treasury Secretary Paulson’s plan to provide $700 billion in taxpayer funds to buy “toxic” mortgage-backed securities. The secretary’s plan provides almost unlimited authority for the Treasury and Fed to buy up these securities with no Congressional or court review. Some questioned the necessity of acting immediately to stop the spread of institutional failures, while others offered that “sometimes the sky really is falling.”
Not surprisingly, there was no consensus among the economists as to the correct path of action. Some wanted greater controls placed on the Treasury, while others argued that there was not sufficient time to negotiate all of the controls that would be desirable. As evidence of the need for immediate action, they pointed to the vulnerability of money market mutual funds, a savings instrument that had been considered very safe until last week.
In the end, most seemed to agree that greater regulation of the financial industry was warranted and would be forthcoming. The era of “letting the magic of the market solve our problems” is over.
--Robert Miyashiro