Recession Will Affect State Into Next Decade

LOS ANGELES-The worst recession in seven decades likely ended in the current quarter, but the negative effects of the downturn will last well into the next decade, according to the latest edition of the UCLA Anderson Forercast. The forecast, for the third quarter of this year, says that California will join the nation in recovery despite a contracting public sector, but it says that governmental contraction will hinder the progress of the recovery for at least the near future.

According to the forecast, the roots of the recession originated in consumer over-indebtedness and consumer spending–which is necessary for a robust recovery–will be tempered both by “the unwillingness of financial institutions to lend and for consumers unwillingness to borrow.” Forecast senior economist Jerry Nickelsburg covers the outlook for the state in a report titled “Will California Watch the Take-Off from the Tarmac Once Again?”

Nickelsburg states that in housing markets where prices have adjusted to levels that make existing homes more affordable, sales are increasing and conditions are ripe for new residential construction. In trade and manufacturing, there is new evidence that demand for California-produced goods is increasing, according to his report, and even in the very weak consumer sector there are indications that the collapse of hospitality, retail, wholesale and transportation employment may be coming to an end.

But the downside is unemployment, which Nickelsburg says is “ugly” and will remain so for some time to come. “More rapid growth than can be expected over the next 12 months would be required to bring the unemployment rate down,” Nickelsburg writes. He adds that the still-contracting state and local government sector only compounds the unemployment problems.

Overall, the forecast for California remains much as it did in June, the only change being a slightly more optimistic national forecast driven by increased consumer confidence and an increased demand for California produced goods. But no dramatic events have occurred to change the general nature of the forecast. Though the state economy will be growing by 2011, it will not produce enough jobs to get the unemployment rate below double digits until the end of that year, Nickelsburg forecasts.

The Anderson Forecast covers the national outlook in a report by senior economist David Shulman titled “The Long Goodbye,” which observes that economic growth is resuming after four quarters of decline. The forecast expects that real GDP will increase 2.1% in the current quarter and 2.3% in the fourth quarter. For all of 2010, it forecasts quarterly growth to average 2%, with noticeable improvement at the end of the year. Sluggish overall growth is predicted, as the unemployment rate will be above 10% well into next year.

Shulman’s cautious view regarding growth rests on the belief that a two-decade spending spree has ended after first being rooted in rising stock prices and later on rocketing home prices fueled by easy credit. Consumers, rather than relying on rising asset prices, will be saving as they did in the past, by a reduction in current consumption. Simply stated, “Credit impaired lower income consumers can’t spend the way they used to and wealth impaired affluent consumers won’t,” Shulman writes.