Job losses, tight lending standards and miserly consumer spending aren’t the "new normal" and the U.S. isn’t headed for a "lost decade," economists with the UCLA Anderson Forecast said in a report released today.
But the economy will grow slowly next year and unemployment will remain high, despite promising signs that housing is "finally on the road to recovery," the report said.
Foreclosures continue to rise, and the report estimates that 23 percent of homes with a mortgage are underwater — meaning their owners owe more than their homes are worth. But low mortgage rates and pent-up demand are expected to boost housing starts by 48 percent next year, to 850,000 units.
"If we looked only at housing, we might be thinking a powerful recovery is just around the corner," said Edward Leamer, director of the UCLA Anderson Forecast, in an essay accompanying the fourth-quarter report,"The Shape of Recoveries Past and the Shape of Recoveries Present."
The housing boom built up an excessive stock of housing, but under-building since 2007 seems to have created enough pent-up demand "to fuel a powerful recovery," Leamer said.
The picture is complicated by the fact that housing constitutes only one segment of the economy, and consumer spending — which traditionally drives recoveries — will remain hobbled by unemployment and household debt.
Economists with the UCLA Anderson Forecast project consumer spending will grow at an annual rate of 2 percent, well below the more historical 3 percent to 3.5 percent rate. Unemployment in the U.S. should peak at 10.5 percent in the first quarter of 2010, and remain above 10 percent for the rest of the year.
The U.S. economy is in transition, from one based largely on the consumption of cheap imported goods and a low savings rate, to a system with a greater emphasis on exports and increased household saving, said David Shulman, senior economist with the UCLA Anderson Forecast, in an essay, "Lost and Found."
The Obama administration is encouraging this transition by keeping the dollar weak, which encourages exports and discourages the consumption of imports, Shulman said.
Record federal deficits and the Federal Reserve’s zero-interest-rate policy have created a "highly medicated economy," which consumers and businesses are taking advantage of to refinance high-cost debt. …CONTINUED
That makes it hard to determine whether signs of recovery are an indication that the economy is on a path to self-sustaining growth, or whether they are a temporary effect.
If a lack of construction and development financing limits housing starts to 600,000 to 700,000 next year, as forecast by Ivy Zelman of Zelman & Associates, "our 2010 view for the economy as a whole would necessarily be marked down," Shulman said.
The fourth-quarter UCLA Anderson Forecast projects that after growing at 2.8 percent in the second half of 2009, real growth in U.S. gross domestic product (GDP) will retreat to 2 percent for much of 2010 before rebounding to 3 percent in 2011. In the aftermath of seven previous downturns, GDP has grown at 6 percent a year when a recovery is in full swing.
While there’s been some speculation that the Federal Reserve will soon be forced to start raising interest rates to head off inflation, that’s not an immediate concern, the report said. The forecast does not anticipate that the Fed will tighten policy until late in 2010.
With "so much excess capacity in labor and product markets, we believe that inflation will not manifest itself within the 2011 forecast horizon," Shulman wrote. "Indeed, we are forecasting consumer price inflation to average a modest 2 percent over the next two years."
Although consumers are burdened under mountains of debt — the ratio of mortgage debt to disposable income has skyrocketed from 60 percent in 1998 to 100 percent in 2008 — low interest rates have cushioned the blow, Leamer said.
With interest rates down by about 25 percent, households can handle 25 percent more debt without having to make increased monthly payments.
But the savings rate needs to increase and stabilize in the 5 percent to 7 percent range before consumption can again drive economic growth, Shulman said.
While it’s "hard to be optimistic about consumers leading us out of this recession," Leamer said, "it’s best to recognize that the problem with household balance sheets is mostly about mortgages and home prices."
The threat of as many as 5 million additional foreclosures and further deterioration in home prices would only worsen household balance sheets, he said. …CONTINUED
Home prices "do show some signs of life, and if we could get some appreciation again, it would bring buyers out of the woodwork and clear out the inventory of unsold homes," Leamer said. "That is not a likely scenario, and the conventional forecast, like our own, calls for a troubled recovery."
Shulman sees state and local governments "enduring their worst fiscal crises since the Great Depression," with many of the impacts yet to come.
While the private sector cut back employment by 4.6 percent in the year ending October, state and local employment pared jobs by only 0.8 percent, even as state tax receipts dived 10.7 percent, he said.
"Public employment is being sustained by massive infusions of federal cash, but that cash will run out at the end of 2010," Shulman said. "Perhaps there will be another stimulus package, but the inevitable restructuring of state and local government lies ahead of us."
In a detailed and gloomy outlook for California, UCLA Anderson Forecast Senior Economist Jerry Nickelsburg said California lawmakers, faced with a $40 billion shortfall, simply did a "budget head fake" and "lobbed (the shortfall) into the next budget year. By postponing the inevitable, California will end up having to cut spending more sharply, he said.
"At a state level there do not appear to be any data on fiscal crises the magnitude of those currently being experienced in California and several other states since the former Confederate states during Reconstruction," Nickelsburg said.
In the grand scheme of things, the "procrastination" by California lawmakers isn’t all bad, Nickelsburg said, since it will push back many reductions in state employment and services to 2011.
"When the state has to cut back on spending and services, it adds to the number of people unemployed and deepens the effect of the recession on the state’s economy," Nickelsburg said. "When it spends less in an expansion, it will retard the expansion, but those who are unemployed as a consequence enter an expanding, not contracting labor market."
The forecast anticipates that California’s jobs situation will only get worse, with the unemployment rate growing to a high of 12.7 percent in the fourth quarter of 2009 and an 11.7 percent average for the year.
Though the state’s economy is expected to begin growing again in 2011, it will not be able to generate enough jobs to drive the unemployment rate below 10 percent until 2012, the report said.
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