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•           National recession likely to end this Quarter
•           Recovery to be hampered by unwillingness of financial institutions to lend and consumer unwillingness to borrow

The worst recession in 70 years likely ended in the current quarter, but the negative impact of the downturn will last well into the next decade, say economists at the University of California, Los Angeles. The roots of the recession originated in consumer over-indebtedness and that consumer spending, necessary for a robust recovery, will be tempered both by the unwillingness of financial institutions to lend and for consumers unwillingness to borrow, says the UCLA Anderson Forecast.

In California, the economists tentatively assert that the state will join the nation in its economic recovery, but the incipient contraction of state and local government will damper the impact of the national resurgence for at least the near future. In California, there exists good news. Housing markets, where prices have adjusted to levels that make existing homes more affordable, are seeing sales increasing and conditions ripe for new residential construction, says UCLA Anderson Forecast Senior Economist Jerry Nickelsburg.

In trade and manufacturing, there is new evidence that demand for California-produced goods is increasing. Even in the very weak consumer sector, there are indications that the collapse of hospitality, retail, wholesale and transportation employment may be coming to an end, he writes.
But the downside is unemployment, which Mr. Nickelsburg says is “ugly” and will remain so for some time to come. “More rapid growth than can be expected over the next twelve months would be required to bring the unemployment rate down,” Mr. Nickelsburg writes, asserting that the still-contracting state and local government sector only compounds the unemployment problems.

Overall, the forecast for California remains much as it did in June, when UCLA issued its last predictions, the only change being a slightly more optimistic national forecast driven by increased consumer confidence and an increased demand for California produced goods. But no dramatic events have occurred to change the general nature of the forecast. On an annual basis, employment is forecast to contract -3.7 percent in 2009 and will barely grow at a 0.2 percent rate in 2010. The unemployment rate will grow to a high of 12.2 percent for fourth quarter 2009 and will average 11.6 percent for the year. Though the state economy will be growing by 2011, it will not produce enough jobs to get the unemployment rate below double digits until the end of that year.

Nationally, “after four quarters of decline, economic growth is resuming. We forecast that real GDP will increase at 2.1 percent in the current quarter and 2.3 percent in the fourth quarter,” writes UCLA Anderson Forecast Senior Economist David Shulman. “For all of 2010, we forecast quarterly growth to average 2 percent with noticeable improvement at the end of the year.”  Sluggish overall growth is predicted, as the unemployment rate will be above 10 percent well into next year. Mr. Shulman adds that the majority of short-term growth will come from a dramatic reversal in inventories, where after plunging at a revised annual rate of $159 billion in the second quarter, real inventories are expected to increase by $12 billion in the fourth quarter of this year. Two other important swing factors will be the recovery in exports and the long awaited rebound in residential construction.

Mr. Shulman’s cautious view regarding growth rests on the belief that after a two decade spending spree, first rooted in rising stock prices and later on rocketing home prices fueled by easy credit, has ended. Consumers, rather than relying on rising asset prices, will be saving as they did in the past, by a reduction in current consumption.  “Credit-impaired lower income consumers can’t spend the way they used to and wealth-impaired affluent consumers won’t,” Mr. Shulman writes.

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