Rejecting the possibility of a "double dip" recession, economists with the University of California, Los Angeles, Anderson Forecast say they expect economic growth to remain on track even in the face of continued high unemployment.
"Simply put, the financial emergency of 2007-09 is over, and we believe the Fed will soon recognize this reality" by tightening monetary policy, UCLA Anderson Forecast Senior Economist David Shulman said.
In their first quarterly report of the year, economists with the forecast predict the nation’s economy will grow at an annual rate of 3.2 percent during the first three months of the year before leveling off to 2 percent for the remainder of 2010.
Economic growth — as measured by gross domestic product (GDP) — is expected to average 2.3 percent in 2011 and 3.2 percent in 2012, propelled by strength in business equipment and software production, exports, and a revival in home construction from postwar lows.
But job growth is expected to remain anemic through 2012, with unemployment averaging 9.7 percent this year and not dipping below 9 percent until 2012, when it’s expected to average 8.6 percent.
The forecast predicts that California’s unemployment rate, currently 12.5 percent, will ease a bit and average 11.8 percent for the year.
California’s economic prospects depend on demand for manufactured and agricultural goods from outside the state, public works construction, and investment in business equipment and software.
Although the state’s economy is expected to grow, it won’t generate enough jobs to bring unemployment back into single-digits until 2012, the forecast predicted.
Some pundits have the called the current trend of economic growth coupled with high unemployment a "jobless recovery." Shulman has coined his own term: "The Bipolar Economy."
Government stimulus programs — including tax cuts, spending programs, and near-zero short-term interest rates — have spurred growth, he said.
But unemployment may be so persistent because companies aren’t going to base long-term hiring decisions on "temporary tax and spending programs coupled with a nonsustainable zero interest rate policy," Shulman said. …CONTINUED
Shulman identified inflation as the greatest risk to the economy, but said he expects the Federal Reserve to tighten monetary policy to keep inflation under control.
The Fed’s monetary policy "has strewn kindling wood throughout the economy that could ignite into inflation at any time," Shulman said. Economists at the UCLA Anderson Forecast "believe that the Fed understands this risk and that is why we believe policy will be tightened this year."
The forecast anticipates that the Fed will gradually raise its target for the federal funds rate — the rate banks charge each other for overnight loans — from zero to 0.25 percent now to 3.4 percent by the second quarter of 2012. Yields on 10-year Treasury bonds are expected to increase from 3.8 percent to 4.8 percent during the same period.
The Fed has already announced that it will wrap up $1.25 trillion in purchases of mortgage-backed securities this month, a move that’s expected to gradually push mortgage rates up (see story).
In a March 15 forecast, economists with the Mortgage Bankers Association said they expect rates on 30-year fixed-rate mortgages to rise from an average of 5.1 percent during the first three months of 2010 to 5.8 percent in the final quarter of the year.
That forecast anticipates that rates for 30-year fixed-rate loans will average 6.2 percent in 2011 and 6.4 percent in 2012.
The MBA expects sales of existing homes will grow nearly 4 percent this year, to 5.34 million, and reach 5.72 million in 2011. Sales of new homes are expected to rebound from a record low of 372,000 in 2009 to 398,000 this year and 528,000 in 2011.
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