Fear of imminent economic recession may be a self-fulfilling prophecy, according to the latest Anderson Forecast report by University of California, Los Angeles forecasters.

While the report by Edward Leamer, director for the forecast, clings to earlier predictions that the U.S. economy will avoid a recession in the short term, it also details the dangers that are stressing consumers and challenging the economy.

Leamer referred to the "financial shadow" that can sometimes loom disproportionately large in consumers’ minds and negatively impact spending. This shadow, he stated in his report, has the potential to cause "recession depression," or fears of a recession.

And if that fear is great enough, and consumers "spend time in their beds instead of in the malls," then it could become "recession reality," he said in the report.

"The no-recession view hinges very critically on consumer spending and the negative wealth effect from declining home prices," Leamer states in the report. "If there is a quick halt to consumer spending, we will for sure have a recession in 2008."

Despite the hard-hit housing market, with falling home prices, rising foreclosures, a subprime mortgage market meltdown and a credit crunch, Leamer’s forecast for avoiding an economic recession is based upon a disconnect between housing and the overall labor market and a disconnect between the manufacturing and construction employment cycles.

"The complete collapse of housing has come without a similar problem in the job market. This time people are walking away from their homes not because they lost their jobs, got divorced or had health problems, but only because declining home prices have turned their net worth in the house negative, a financial burden to carry into the future or turn over to the lender, whichever they desire. Many have chosen to walk away,’" Leamer stated.

"Never before have we had this kind of collapse in housing that was not accompanied by recession." Even so, Leamer maintains in his report that this time around is different.

If this is a recession, Leamer said he would expect to see another 1.5 million workers unemployed by the end of the year, with more job cuts to come.

It’s not a surprise to see that joblessness did rise at the close of 2007, with the loss in construction industry jobs, though manufacturing jobs have not rebounded much from heir losses in the 2001 recession. And absent a peak and a subsequent steep drop in manufacturing jobs, "we are going to have sluggish growth but not a recession," Leamer stated. Industrial production, likewise, has not dived.

He concluded, "The data don’t yet add up to a recession, and there is nothing here to challenge the basic story of sluggishness that we have had for two years. Don’t worry be happy. You have to avoid recession depression."

A separate report by David Shulman, senior economist for the UCLA Anderson Forecast, refers to a "credit recession" in the nation’s financial markets but distinguishes this from a full-blown economic recession.

"Where lenders were once fearful of not making a loan, they are now fearful of making loans as credit losses multiply," Shulman states.

And this credit recession, he states, is far from over. "The giant government-sponsored mortgage lenders, Fannie Mae and Freddie Mac just reported multi-billion-dollar losses stemming from the weak housing market. Sitting just below the iceberg is the precarious position of the two major mortgage insurers, MGIC and PMI."

Trouble in the debt markets dragged down the stock market about 17 percent from its recent peak, Shulman noted, adding that the Wall Street hit has mostly been concentrated to the financial sector, and there is a risk that an economic recession could generate a "double-barreled hit to wealth coming from both the stock and housing markets."

Housing is likely to be "in a rut for quite some time," Shulman also stated, as there is "no magic wand available for the Fed or fiscal policy to solve the crisis in the housing market" and the hangover from the credit boom could be long-lived.

Recent federal moves to expand the conforming loan limit from $417,000 to $729,750 in high-cost areas and to allow Fannie and Freddie to expand their balance sheets may help the situation, but will not be that material, he concludes in the report.

Shulman said "it will not take much to put the U.S. economy into recession," adding that there is a "perfect storm consisting of the worst credit crunch in decades, falling house prices, and $100 oil."

It’s not too surprising to hear that a foreclosure counseling Web site called "YouWalkAway.com" is gaining traffic, and he expects the term "willful default" to catch on among lenders as homeowners choose to abandon their homes.

Ryan Ratcliff and Jerry Nickelsburg, who are also economists for the UCLA Anderson Forecast, said in a separate forecast focused on California, not that "there has never been a California recession outside of a national recession," though, "the current economy is hard to place on this map — we’re in uncharted territories."

Unemployment is spiking in the state, according to the report, with job losses in the construction and mortgage industries, though these job losses are "an order of magnitude smaller than the shifts in manufacturing that drove the last two recessions.

They conclude that the state’s "very lackluster economy" is not in a recession. "Both statistically and conceptually, today’s economy is something new — stinky, but new." Real estate weakness is expected to remain a drag on the state’s economy, "leaving us treading water in 2008 — but not slipping under the waves into recession."

A regional forecast report states that the growth areas of the state may have slowed down in growth, "but they are not running out of gas," and the mortgage finance and services sector in Southern California should hit bottom this year and begin to grow again.


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