About that California economy...

Wonder just when the California economy is expected to revive itself? According to economists at Chapman University, although the recession may technically lift by the second half of the year, we won't feel better about things until 2010. First, from an L.A. Times story:

The Chapman forecasters expect nonfarm payroll employment in California to continue falling into next year before beginning to rebound in the fourth quarter of 2010. California will lose an estimated 437,000 jobs in 2009 and an additional 56,000 jobs next year, they said...

Job losses have spilled across all sectors as layoffs in the construction industry led to cutbacks at law firms, accounting firms and most other sectors, excluding health and education. Even as the economy turns around, cautious companies will probably be slow to begin hiring again, which will lead to a sluggish recovery in the state...

The Southern California median home price last month was $249,000, down 51% from May 2007, according to figures released Wednesday by MDA DataQuick of San Diego. It's the fifth straight month that median prices have hovered around $250,000, though May did show a slight increase in prices for the region.

Chapman forecasters expect home prices to strengthen in 2010 as banks become more willing to lend to prospective buyers and fewer new homes come on the market. Home prices will rise 0.8% in the state next year after falling 35% in the state in 2008, the economists say...

A few days earlier, the UCLA Anderson Forecast released its own projections on the local and regional economy, and pretty much rained all over Chapman's parade, citing increasing unemployment and an economy that won't bounce back until at least late 2011. Also from an L.A. Times story:

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state's budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today...

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California's population, sowing the seeds of another housing bubble, the report said...

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted...

So who's right and who's wrong? Well, UCLA insisted there was no recession until it was so painfully obvious they had no choice to reverse themselves (and without ever admitting any fault), and Chapman was so off on their projections for Orange County that the local BIA group decided to give another economic forecasting group a try for awhile. I guess we'll have to wait until 2011 to see!

Plunge in housing starts: good news or bad?

Lately, it seems that trying to figure out the health of the housing market from the most recent stats on starts, sales and prices is a lot like reading tea leaves. The latest bit of news is that housing starts fell sharply in March, although starts for single-family homes has remained constant. According to the L.A. Times, that could mean good news:

Groundbreakings on single-family homes held steady for the third month in a row in March, even as the number of condominium units and apartments under construction fell sharply, according to federal data released Thursday.

Economist Edward Leamer, director of UCLA's Anderson Forecast, said the stability in single-family home construction is a positive sign.

"The downward trend we've been seeing for a long time isn't evident anymore," Leamer said. "We won't know if we've really hit the bottom for a couple of months, but this is certainly consistent with being near the bottom."

But not all the news was good. Construction began on 152,000 apartment buildings nationwide in March, down nearly a third from the previous month and 51% from a year earlier. In the West, builders began work on just 10,000 multi-family buildings in March, a fourth of those that were started in February and down even more from the previous year.

That, along with the fact that there's still less construction going on now than there was last year, brought the overall numbers for new housing down 48% nationwide over the same month in 2008.

Over at the New York Times, they're painting a slightly different picture:

“There’s still no clear indication that the construction market is coming back,” said Mike Larson, a housing analyst at Weiss Research. “Even if companies want to start projects, they’re having a harder time getting the money to do so. We’re being overwhelmed by distressed inventory as well as regular sellers trying to get out of their homes. There’s not a heck of a lot of incentive for builders to ramp up construction.”

Still, some housing experts say the decline in home building was a crucial step toward lowering the glut of unsold houses and condominiums on the market so that housing supply once again lines up with demand...

And what about foreclosures?

Also on Thursday, the data firm RealtyTrac reported that foreclosure filings surged 9 percent, to 803,489 properties, in the first quarter of 2009. RealtyTrac said that foreclosure notices increased 17 percent in March from February.

“We saw a record level of foreclosure activity,” James J. Saccacio, chief executive of RealtyTrac, said in a statement. He added that foreclosures would probably increase in the next months as temporary halts to foreclosures expired at banks and agencies like Freddie Mac and Fannie Mae.

The flood of cheap foreclosed homes and distressed properties has helped push home prices lower across the country, especially in areas hit hardest by the housing downturn, like Southern California, Arizona and Florida...

UCLA Anderson Forecast calls for dark days ahead

After completely missing the boat on the recession (and even doubling down last year on the premise that there would be no such thing), it seems that once presented with evidence to the contrary, the economists at the UCLA Anderson Forecast have climbed to the highest hills to shout "danger ahead!" So is this just PR-based histrionics to regain some credibility or do they have a point? From an L.A. Times story:

Wall Street may be seeing glimmers of a recovery, but UCLA economists are coming out with a new forecast today that offers a grim picture of the year ahead. Nationwide, the unemployment rate will worsen -- peaking late next year at 10.5%.

And in California, which has been battered by tumbling housing, retail and manufacturing sectors, the jobless rate will soar to 11.9% by mid-2010, the latest UCLA Anderson Forecast says...

In releasing their report, however, UCLA economists noted the challenge they faced in trying to forecast the future in the current volatile environment. With dramatic changes in federal policy occurring almost on a weekly basis and few historical parallels with which to compare the current recession, forecasts are being delivered in the most uncertain of times for economists...

Early last year, UCLA said the nation would suffer from tough economic conditions but would ultimately avert a recession. Leamer said that at the time, he did not believe consumer spending could tank the way it did in the latter part of 2008.

This time, the closely watched UCLA report does not hold back...

The financial crisis, they say, has swelled into such a global problem that national policy may be ineffectual. The United States needs its international trading partners to reverse their slowdowns and reignite the exchange of imports and exports.

Nationally, the UCLA forecasters say the economy will begin to grow slowly by the fourth quarter of this year. That's when residential construction should also begin to turn around, but exports will continue to slide downward until the beginning of 2010.

Consumer prices should snap out of a downward trend the second half of this year, but disposable income rates will not match the high levels of 2004 until 2011.

In California, the economy may stop shrinking by the fourth quarter, but it will remain flat and probably will not grow until the beginning of 2010. Normal growth won't return until the middle of 2010, and high unemployment will remain until 2012 or longer, the forecasters said...

UCLA expects a dismal 2009

After being somewhat late in calling the current recession, the UCLA Anderson Forecast is now predicting a dismal 2009 while dissing the private Chapman University's own forecasts. From an L.A. Times story:

Two million jobs could be lost nationwide next year under the weight of a severe global recession that shows no sign of relenting soon, UCLA forecasters say...

The nation's unemployment rate will rise to 8.5% by late 2009 or early 2010, according to the forecast -- further straining a job market that matched a 34-year high last month by shedding 533,000 positions.

Undergirding the joblessness will be a continued decline in real estate values, diminishing wealth as a result of the stock market crash and weaker consumer spending.

The negative forces are predicted to help change the trend in the nation's real gross domestic product from a growth of 1.3% this year to a 1.6% contraction next year. In 2010, the authors say, there might be a turnaround...

The forecast for California also appears grim. Manufacturing jobs are expected to disappear and tourism is likely to suffer from recessions overseas, the report said.

The state's unemployment rate, which is currently at 8.2%, could rise to 8.7% and remain there until 2010...

Retail, transportation, warehouse employment and temporary jobs are expected to suffer the most, while education and healthcare could hold steady...

The UCLA forecast comes two days after a similar report was released by Chapman University in Orange. A tongue-in-cheek rivalry has formed between the two schools.

James Doti, Chapman's president, chided UCLA for failing to call a recession during its forecast in June. He also trumpeted his economists for being among the first to deem the nation's economy in recession last year.

Leamer downplayed the issue in a phone interview Wednesday. "We don't particularly notice them," he said about Chapman.

UCLA Anderson Forecast finally sees market reality, issues gloomy forecast

The UCLA Anderson Forecast, which had previously insisted that the general economy would withstand the housing bust, has (probably since enough time has passed from the last forecast to erase people's memories) issued a much gloomier forecast for the state. From an LATimes story:

Housing prices will hit bottom some time next year, but the California economy will be in distress for months to come, according to a closely followed UCLA economic report scheduled to be released today.

In a series of dire predictions echoed by experts throughout the state, the UCLA Anderson Forecast says that unemployment will continue to increase, consumer spending will decline and tax revenues will plummet...

The proposed $700-billion federal bailout of the financial system will have little effect on these longer-term trends, several economists said.

The massive government relief plan, if implemented, will stop the downturn in housing, said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto, "but is unlikely in the short term to reverse the sharp falloff in wealth and the loss of jobs that's already occurred."

The problem is that the housing crash caused severe job losses in construction and finance, and pulled down property values and consumer spending, leading to a shortage of tax revenue for the state. So even if housing levels out, it will take months or years to repair the damage in other sectors...

State and local governments are now seeing property tax collections fall because of lower property values and foreclosures. Sales tax revenues are also slipping as strapped individuals spend less...

There could be other looming dangers in the economy, said Sung Won Sohn, an economist with the Martin V. Smith School of Business and Economics at Cal State Channel Islands. Among them are commercial building, high-tech manufacturing, logistics and warehousing.

Other economists point to travel, tourism and entertainment, all areas in which people have reduced spending following the housing crash.

The forecast also predicts that increased government intervention in the economy will spur inflation and result in higher taxes -- no matter which candidate is elected in November...

Massive defaults on home mortgages also caused banks to tighten lending, not only to individuals but to businesses as well. Businesses unable to finance new ventures have in turn laid off workers and unemployment in the state has climbed to 7.7%, with 240,000 jobs lost in the last year...

Other sectors that might have compensated for declines in government spending and construction also appear troubled, said economist Sohn. Tourism and exports, for instance, will probably be weakened as foreign consumers face their own economic challenges...

Many economists now agree with the Anderson prediction that home prices will stop falling next year.

But the economy is too weak for prices to start rising any time soon, most economists said, and prices will remain low as long as the state has a staggering inventory of unsold homes, growing unemployment and tight credit.

Quick passage of a bailout package could keep California's economy from free fall, but it's unlikely to bolster business enough to create the tens of thousands of new jobs needed to stimulate growth, several economists said.

UCLA Anderson Forecast still says no recession

Claiming that he's still holding onto a "shaky view," Ed Leamer, Director of the UCLA Anderson Forecast says California and the U.S. will still avoid a technical recession (two consecutive quarters of negative growth) but that it still won't be an enjoyable time. From an L.A. Times story:

Under pressure from falling home values, high oil prices and rising unemployment, the economy in California and the nation will perform anemically in the coming months -- but there still won't be an actual recession, UCLA forecasters say.

"I am holding on to what is now a shaky view: no recession this year," said economist Edward Leamer, director of the quarterly UCLA Anderson Forecast, which is being released today.

The predictions, however, call for somewhat more pain in the months ahead than previously forecast, with little improvement this year or next.

Not good, but not a recession, which is commonly defined as two consecutive quarters of negative growth in gross domestic product...

The drag on the economy from the buckling housing industry may become the most severe since the Great Depression, the report said. There will be little or no growth in gross domestic product this quarter, and GDP will probably slip into negative territory in future months before finishing next year with a tepid average improvement of 1.2%.

A key factor in favor of the economy, the forecast says, is that so far the pounding of the housing market has not badly damaged the job market.

In the 1990s, Southern California home values fell after many workers -- particularly in the aerospace and defense industries -- lost their jobs and couldn't keep up mortgage payments. Foreclosures peaked in 1997, when employment already had recovered, because many homeowners had struggled for months to hang on.

"This time, what happens in housing stays in housing," Leamer said, as many employers worried about the economy hold off on new hires but decline to cut staff.

Many homeowners are choosing to sell their houses at a loss and move -- not because they lost their jobs, he said, but because they owe their lenders more money than their houses are worth.

Bailing out makes financial sense to them. "The lenders have provided an option to walk away if things go bad -- you might as well exercise that option," Leamer said.

Distress sales will continue to wreak havoc on home valuations for the rest of the year, the forecasters said...

"The unprecedented speed of the price adjustment means that instead of several years of slow bleeding [like the 1990s] we have compressed the necessary adjustment into two years of intense housing pain," wrote UCLA economist Ryan Ratcliff. "Mom always said it's better just to rip the Band-Aid off."...

UCLA Anderson Forecast wrong?

So are we in a recession or not, either in California or the U.S.? The UCLA Anderson Forecast says no, but Christopher Thornberg, who used to write the same reports before departing to launch Beacon Economics, says the signs are obvious. The 'dismal science'? Not anymore!

First, from the San Francisco Chronicle:

"What we have in California is a recession. We have it right now," said Los Angeles economist Christopher Thornberg, a principal at Beacon Economics and a former UCLA Anderson Forecast staff member. "Jobs are falling. Taxable sales are falling. This is a recession."...

There simply aren't enough jobs in California building homes and making mortgages to create a recession without other areas of the economy crumbling too, UCLA analysts insist...

That position is based on the view that the spillover from housing will be limited. Other experts argue that ripple effects from housing will be profound, especially when they're combined with the clampdown on credit that is making loans harder to get for both consumers and businesses.

"UCLA seems to have the view that housing cannot sink the economy, and that's wrong," Thornberg said.

Next, from the San Diego Union-Tribune:

Thornberg, who founded Beacon Economics in Los Angeles after leaving UCLA, said that while he understands the forecast's rationale, he disagrees with the conclusion.

“They're right that this is unlike previous recessions. But so was the recession of 2001. That doesn't mean it didn't happen,” Thornberg said. “This one's going to be pretty nasty and definitely worse than 2001. That was really half a recession. It only affected the business side of the economy and not consumers. But consumers aren't being left out of this one.”

Thornberg said the economy is backing into a recession. In a typical recession, he said, huge layoffs put a crimp on spending that affects things such as housing prices.

This time, he said, the collapse of housing and the tightening of credit have led to spending cutbacks that lead to job losses...

From the Sacramento Bee:

The fact that the U.S. recession hasn't begun yet means nothing, said former Anderson forecaster Chris Thornberg, now a private consultant. It takes time for the housing market to cause a recession, he told an audience in Sacramento last week.

"A housing bubble is like a slow-moving train wreck," Thornberg said at a meeting of the Appraisal Institute's Sacramento Sierra Chapter. Thornberg, the head of Beacon Economics in Los Angeles, said California is already in a recession; the nation is heading into one.

Among the signs of a possible recession: a drop in national payroll jobs of 63,000 last month and continuing declines in the stock market. Sacramento-area unemployment, at 6.4 percent, is the highest it's been in 11 years. Statewide unemployment is 5.9 percent, or nearly one percentage point higher than a year ago.

UCLA Anderson Forecast insists no recession yet

The UCLA Anderson Forecast has released their latest report, which insists that the housing bust will not bring the overall economy into recession. Not surprisingly, there are many other economists who would disagree.

First, the Anderson report according to the L.A. Times:

Brushing aside conventional wisdom, UCLA economists say California and the nation will survive the housing slump and job losses without plunging into recession -- although it will still be miserable for many Americans.

"We are holding firm: no recession this time," UCLA Anderson Forecast Director Edward Leamer said in a report being released today...

Housing remains the big drag on the economy, UCLA analysts say. But they say the rising tide of foreclosures is related more to falling prices and escalating interest rates than to job losses, which triggered previous spikes in foreclosures.

People "are walking away from their homes in droves not because they lost their jobs but because home prices are falling," Leamer said.

Apparently Dr. Leamer is sticking to his guns because he's already made his bet, and rather than reverse course is, in Las Vegas parlance, instead doubling down:

In staking out the contrarian position, Leamer noted that UCLA bucked other forecasters in 2001 by correctly predicting that year's recession.

"We got it right, and we stood alone back then," he said. In jest, he added later that he had "submitted my resignation letter, in the event I am wrong."

He forgot to add "Nya nya!" Still, he is leaving himself some wiggle room should his bet become obviously wrong:

Whether truly in recession or not, Leamer said the economy would be sputtering. It remains so fragile that "if there is a quick halt to consumer spending, we will for sure have a recession in 2008," he added.

National unemployment will peak at 5.6% at the beginning of 2009, according to the forecast, from 4.8% currently.

"In a recession, jobs are easy to lose and hard to find. This time there are not a lot of layoffs, so jobs aren't easy to lose, but they are hard to find," Leamer said.

So far, most of the jobs lost in California and the nation have been in construction and financial services, but those losses are small compared with the severe manufacturing job losses in the recessions of 1990 and 2001.

After the 2001 recession, 358,000 manufacturing jobs were lost in California, UCLA economist Ryan Ratcliff noted. By comparison, the state has shed 55,000 financial sector and 106,000 construction jobs since 2007...

Statewide unemployment will peak at the end of 2008, and will decline slightly in 2009, but will remain close to 6% until 2010 -- when it will fall to 5.5%, UCLA predicts...

Home prices will also be slow to bounce back, and the UCLA forecasters do not predict when the housing market will recover.

However -- as compiled by the L.A. Times -- Dr. Leamer may be fairly lonely in his assessment:

* Warren E. Buffett, chief executive of Berkshire Hathaway Inc.: "By any common-sense definition, we are in a recession."

* Lawrence H. Summers, former U.S. Treasury secretary: "We are facing the most serious combination of macroeconomic and financial stresses that the U.S. has faced in a generation -- and possibly, much longer than that."

* Jack Welch, former General Electric Co. CEO: "If I had to bet a dollar or two, I'd bet we'll have a positive GDP in the first quarter, and the second quarter. But it certainly is a slowdown of enormous proportions from what we were experiencing."

* Donald H. Straszheim, vice chairman of Roth Capital Partners: "It's clear to me that the U.S. economy is in a recession."

* David Rosenberg, Merrill Lynch economist: "According to our analysis, this [recession] isn't even a forecast anymore, but is a present-day reality."