Economic Recovery?

Economists Stress Despite Positive Signs, a Slow Rebound

April 27, 2010

By Pamela McLaren

“Think where we were one year ago,” said Anil Puri, dean of Mihaylo College of Business and Economics, as he began his annual Midyear Economic Forecast April 20. “Things look very different a year later but we're still not out of the woods.”

Despite definite positive movements in housing, consumer confidence, gross domestic product, the economy will continue to rebound but slowly, Puri said. The future, he stressed, will involve consolidation and rebuilding.

And there could be risks, noted Mira Farka, assistant professor of economics, as she shared the podium with Puri. Danger areas, she pointed out was the federal budget deficit and the ‘toxic’ solutions of tax hikes and cuts to entitlement programs; possibility of inflation; and the possible downtrend in the dollar.

The following is the 2010 midyear economic forecast report:

The outlook for the U.S. economy in the last six months has developed in line with our October 2009 forecasts. After a sharp and deep fall, the U.S. economy is finally on a long and arduous path to recovery. The recovery will be moderate and gradual but sustainable, stretching over eight-10 quarters with below-trend growth and high unemployment rate. Though our baseline scenario calls for moderate growth, there is a possibility for an upside surprise.

• Forces supporting the recovery: fiscal and monetary policies, strong global growth (particularly emerging economies), and a turnaround in the inventory cycle. These forces are inherently non-fundamental and temporary.

• Forces dragging the recovery: labor markets, consumption spending, commercial real estate. These forces are fundamental and it is necessary for them to turn around for a continued recovery.

• The non-fundamental forces are needed to extend the window of opportunity for the labor market to sufficiently recover and for consumer confidence to gain a stronger footing.

• Over the near-term, however, the economic recovery is likely to be restrained by fundamental forces.

• Longer term, the recent crisis will likely be seen as an inflection point for the U.S. economy, with permanently higher unemployment rates (at least for the foreseeable future) and lower standards of living.

U.S. Gross Domestic Product growth is expected to pick up more strongly in the second half of this year. Consumption spending will continue to stabilize at a moderate pace, but lagging behind the overall recovery cycle. For the recovery to be self-sustained consumer spending needs to be vigorous and we project that this is likely to become so (albeit below historical levels) in mid-to-late 2011 after the labor market has stabilized and consumer balance sheets look healthier.

Labor markets are improving and labor demand is becoming firmer. Leading indicators (such as temporary help and average workweek hours) have picked up considerably indicating that firms have increased demand for existing labor which should eventually translate into new hiring. Nonetheless, the unemployment rate will continue to remain uncomfortably high as the labor force expands to include new labor supply as well as discouraged workers rejoining the job market.

• U.S. GDP growth forecasts: 3.1 percent in 2010 and 2.8 percent in 2011.

• Unemployment rate forecast: 9.6 percent in 2010 and 9 percent in 2011.

• Payroll growth forecast: 0.9 percent in 2010, and 1.5 percent in 2011.

The outlook for housing is mixed. We anticipate the stabilization in house prices to continue during this year. Sales should also improve modestly but not enough to eliminate the inventory overhang. The number of foreclosures is expected to increase as delinquency rates mount. The picture for commercial real estate sector is even bleaker; it is likely to get worse before it improves.

Inflation should remain contained over the next eight quarters as the massive liquidity provided by the Fed will continue to be offset by slack capacity. We expect headline inflation to rise by 1.8 percent in 2010 and by 2.6 percent in 2011. In the long run whether an escalation in prices is ultimately avoided will depend on the ability of the Federal Reserve to reduce excess liquidity and on the fiscal policy.

The Fed is expected to start raising the federal funds rate in the second half of 2010 from its current record-low rate of 0-0.25 percent, but the pace of the tightening should be slow and gradual. The fiscal thrust of the government stimulus program will wane in the second half of 2010.

The global economy is expected to continue to recover with emerging market economies bouncing back faster than developed nations and providing the bulk of global growth. Despite the lift from emerging economies, the volatile recovery of developed nations will restrain the global economy over the next couple of years, causing world economic growth to settle at around 4 percent, below the pace of the boom years.

Southern California and Orange County economies suffered heavily in this recession due to greater reliance on the housing sector. In its benchmark revision in March 2010, California Employment Development Department revised sharply downward its estimates, increasing the 2009 payroll job losses from 64,000 to 110,000 for Orange County and from 306,000 to 461,000 for Southern California. As a result, we expect only a small increase in payroll jobs of approximately 0.5 percent on an annualized basis for 2010 for Orange County and 0.3 percent for the six-county Southern California region. Employment growth will pick up in 2010. The unemployment levels in Southern California will also improve somewhat but remain higher than the long-term levels following the national trends discussed above.

Orange County median housing price has increased 14 percent in the last 12 months after losing 43 percent from its highest value. The January 2010 median price (based on California Association of Realtors data) of $481,000 is still 35 percent below its peak of $743,000 reached in April 2007. We expect only moderate price increases over the next 18 months. Further increases will have to wait for a robust general recovery of the economy which we expect will happen in 2012 and beyond.