California Business Minute™

Hi, I am Tim Johnson and welcome to the California Business Minute.

UCLA and Chapman Universities have presented their mid-year economic forecasts. 
In both forecasts, they identified reductions to GDP growth ranging from 3.1 to
3.4 percent for 2010 to 2.4 to 3.2 percent in 2011 when typical GDP growth is
nearly 6 percent after a recession. The words ‘tepid’ and ‘uptick’ were the best
adjectives used from both forecasts.  Are we headed for another economic collapse? 
You be the judge.

CHAPMAN FORECAST
Chapman University presented its annual midyear forecast earlier this month. It
provided some glimmer of hope as presented by Chapman President Jim Doti and
Easmael Adibi, director of the A. Gary Anderson Center for Economic Research at
Chapman.  The forecast illustrated that there will be an uptick in new jobs,
consumer confidence and median home prices.  However, the forecast identified
that it will be a ‘weak but sustained recovery through 2011.’  The lagging
construction industry is expected to stall a more robust rebound.

“We expect the recovery will be very, very slow and that growth will be softer
than in the nation as a whole,” said Adibi. “But job growth will continue to be
positive rather than negative.”

According to Jim Doti, typical, GDP growth is in the 6 percent range following
a recession. Chapman’s forecast last December called for a mild recovery – around
3 percent. The forecast expects that the GDP growth rate — 3.7 percent the past
three quarters — will cool to 3.1 percent for all of 2010, and 3.2 percent in 2011.
What's unfortunate, Doti said, is that the pattern of deep recessions commonly
followed by robust recoveries averaging 5.8 percent, as in the 1971, 1983 and 1985
is not expected this time.

California's economic recovery will be somewhat behind the nations’ according to
Adibi  He identified that it is yet another reason to retool California's mammoth
government to be friendlier to businesses, which he identified are the engines for
job creation. Adibi expects "another difficult year" for California's state budget,
leading to tax increases.

Adibi also predicted that even though the state will add jobs every month this year,
it will end the year with an average of 1.4 percent fewer workers than in 2009. He
said that 2011 would be much better, adding 182,000 more jobs than last year, for
a growth rate of 1.3 percent.

The Chapman forecast identified that for both in the state and the nation, job growth
has grown steadily since the beginning of this year. But the rate of national job
creation in the private sector hit a snag last month, when businesses added just
41,000 new workers compared with 218,000 in April. The unemployment rate fell to 9.7
percent, but that is only because the government hired 411,000 temporary census
workers in May. The Chapman forecast identified that the same trend may show up in
California, when state and local job figures are released. The Census Bureau employed
roughly 55,000 census workers last month, including about 6,000 in San Diego County.
As a result, the jobless rate will likely show a sharp decline in May.  But Aside
from the census employment, economists do not expect much job growth in California —
but they do expect growth. Since the beginning of the year, both California and San
Diego County have been steadily adding jobs, although the state’s anemic growth rate
lags the national average.

Doti said that federal spending is propelling the recovery, but if the heavy debt
isn't reduced, it would reduce long-term economic growth.

UCLA FORECAST
The newest UCLA economic forecast makes the case for a tepid recovery from the national
recession, with unemployment levels slowly declining.

UCLA released its mid-year forecast illustrating familiar tones from the Chapman
forecast.Senior economist Jerry Nicklesburg and Forecast Director Edward Leamer
presented the findings.

UCLA forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in
2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries
and even a bit below the 3.0 percent long-term normal growth. With this weak economic
growth comes a weak labor market and unemployment slowly declines to 8.6 percent by
2012, as identified by the forecast.

The California economy will recover more slowly from the Great Recession than the
nation as a whole. Its slow recovery in jobs will leave unemployment at 12.1 percent
for the rest of the year. Although the forecast illustrates that the state will grow
more rapidly in the following two years, job creation will not be fast enough to push
the unemployment rate below double digits until 2012. “Unlike other deep recessions,
the rapidity of the recovery, at least on the unemployment front, will be muted,”
says Nickelsburg.

Leamer says significant reductions in the unemployment rate require real Gross Domestic
Product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0
percent, enough to sustain unemployment levels, but not strong enough to put Americans
back to work. As a consequence, consumers concerned about their employment status are
reluctant to spend and businesses concerned about growth are reluctant to hire.

“If the next year is going to bring exceptional growth, consumers will need to express
their optimism in the way that really counts – buying homes and cars. And that is not
going to happen if businesses continue to express their pessimism in the way that
really counts – by not hiring workers,” said Leamer. Expansive, free-spending consumers
fueled past economic recoveries, but today’s “frugal consumers” cannot be counted on
to power a strong recovery for the foreseeable future.”

The tepid growth forecasted leaves plenty of excess capacity, subdued pricing power
and very little inflation.  The UCLA forecast believes this will allow the Federal
Reserve to postpone interest rate increases that the forecast expects to come late
this year or early next, as the sustainability of a modest recovery becomes clear
and as the need for preemptive action against future inflation begins to dominate
monetary policy decisions, the economists says.

I am Tim Johnson and this has been the California Business Minute.