December 2008 Archives

December 12, 2008

Dismal forecast for California’s economy

The UCLA Anderson Forecast, an economic think tank, has issues a bleak forecast for the California economy. The only consolation, the Anderson Forecast is often wrong, but if they are right this time there could be some very difficult times ahead – as the forecast says: “There are no bright spots on the horizon”. As reported in the San Francisco Chronicle:

The recession that has already devastated the Central Valley has started to hurt the Bay Area, causing job losses that will continue through 2009 when the economy should begin a slow and weak recovery, according to a bleak forecast issued today.

“There is no suggestion in the data that we are near that bottom,” was the somber message of the UCLA Anderson Forecast, a quarterly look at the state economy conducted by the university’s business school.

It was with some humility that UCLA economists issued this report, predicting high unemployment through 2010 as the state gradually recovers from the housing bubble. In recent quarterly forecasts they had suggested the state might dodge the recession. But forecast Director Edward Leamer said the financial crisis that erupted in September and October had “unleashed a tidal wave of fear” that caused spending and investment to collapse, confounding all the forecast’s expectations.

“When you do forecasting you look at historical trends and try to project how they might play out,” Leamer said. “But nothing such as this has ever happened. Everybody is relying on hunches.” Now the forecast projects that California will continue in recession until the third quarter of 2009 when economic growth is expected to slowly resume and pick up steam throughout 2010.

The forecast projects that the statewide unemployment rate, currently 8.2 percent, could approach 9 percent next year and stay near that level for some time. Even after output and sales begin to recover late in 2009, the forecast does not anticipate the job market to rebound quickly. Unfortunately, 2009 will be a year of job losses and in 2010 payrolls will be flat,” said UCLA Anderson economist Jerry Nickelsburg.

As Nickelsburg explained, employers now use temporary and contract labor to handle the uptick in sales that signals the end of a recession. This has given rise to what is called a jobless recovery and California should expect that pattern with this downturn.

Nickelsburg said the recession has struck different parts of the state with varying severity. “The inland areas have been hardest hit by the housing downturn and are being hardest hit by the pullback of the retail and the wholesale sectors,” he said. “Here you’re talking about areas of the East Bay and the Central Valley.”

The trade, tech and tourism economies of Los Angeles, Silicon Valley and San Francisco have been less affected so far but will be dragged down by what is now recognized as a global recession. “Imports flowing through U.S. ports will continue to decline, and recessions in Europe and Japan mean the export demand for California manufacturing will be muted,” the forecast says.

Tourism, so important to San Francisco, is also being undercut by the global recession. “Foreign tourism to California will diminish in the 4th quarter and is not expected to come back before next summer,” says the forecast, predicting job losses in the hospitality sector “to continue into 2010.”

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