UCLA economists say state will avoid recession

Monday, June 25, 2007
Last modified Tuesday, June 19, 2007 9:28 AM PDT

UCLA economists say state will avoid recession

By: DAVE DOWNEY - Staff Writer

California's economic engine is going to sputter for several months as the result of job losses in construction and real estate finance, UCLA economists predicted in reports being released today.

But the state and nation will not plunge into recession because growth in international trade will continue to be robust, said economist David Shulman, who wrote a report examining the outlook for the national economy. In a companion report, economist Ryan Ratcliff peered into the crystal ball for California. The predictions were issued in the widely followed UCLA Anderson Forecast.

"The housing weakness is going to be contained," Shulman said in a phone interview Monday. "And part of the weakness in housing will be offest by an improvement in net exports."

Shulman said a surge in sales of domestic products to countries in Asia and Europe will boost the U.S. economy.

"The rest of the world is growing faster than the United States, which wasn't true three years ago," he said. "We were the locomotive of the world economy; now we're the caboose."

Despite the global economy acting as sort of a safety net for California and the nation, the housing market will remain weak for some time and send ripple effects throughout the state's economy, the report says.

In California, the pace of new-home construction has declined by about half since the 2005 peak, and sales of all types of housing have fallen off by close to half. Foreclosures are spiking at levels approaching those of the recessionary 1990s, the forecast shows.

In contrast to past recessions, when waves of foreclosures were triggered by job losses, most recent foreclosures have been the result of families having overextended themselves. Many stretched to buy houses they could barely afford and chose to take out loans with rates that adjust upward after two or three years. The biggest wave of those rising house payments is due to take place in early 2008, the report shows.

It could be the middle of 2009 before the market turns the corner, according to the report.

Surprisingly, though, the housing slump has had minimal effect on the wider economy so far, he said. Job growth has slowed slightly in construction and real estate finance, but for the most part those housing-related industries have avoided widespread layoffs.

That is about to change, Ratcliff wrote in his report. And the job losses that are coming will hold down California's overall job growth rate to less than 1 percent over the next year, he said.

"...The rest of 2007 and beginning of 2008 will be the period when real estate weakness finally spills over into the job market," Ratcliff said.

San Diego County, where construction peaked a year earlier than the state as a whole, already has felt the impact. Construction employment locally declined from 93,900 in the first quarter of 2006 to 88,500 in the first three months of this year, according to an earlier UCLA forecast issued for San Diego County. Economists predict a further slide to 82,000 by the first quarter of 2008.

As for the housing slump, if historical trends are an indication, two more years of weak sales and flat-to-slightly-falling prices could be in store, Ratcliff said.

He said building activity tends to peak once every eight years, then the market tanks for an average 3.8 years before bottoming out. Ratcliff also noted that construction peaks -- such as those in 1972, 1977 and 1986 -- tend to be followed by recessions within three years.

The last peak came in 2005.

"The two years and change that have elapsed since the recent peak of annual (building) permit activity in California are unfortunately still within the range of delays between permit peaks and recession in previous cycles," Ratcliff wrote. "We're not out of the woods yet."

Housing woes aside, Shulman said the strength of international exports will prevent the sluggish housing market from igniting a recession.

Not everyone agrees.

"That's pure guesswork," said Robert Campbell, an independent economist from San Diego who closely tracks the market and advises real estate investors. "I think that's just wishful thinking. All the momentum is on the down side."

The soaring cost of housing and energy is sharply undercutting consumers' ability to shop, and consumers' habits are the basis for 70 percent of the economy, Campbell said.

"Whatever we gain in exports, it will be overshadowed by a lack of demand on the part of the American consumer," he said. "I don't see how we can avoid a recession. It's the rising cost of living that is killing everybody."

-- Contact staff writer Dave Downey at (760) 740-5442 or ddowney@nctimes.com.