Tuesday, June 19, 2007

The R Word!

This is the second day of the summer session version of Econ 2 online. Reading over the Discussion Board introductions I find that we have students from many different colleges and universities enrolled in Econ 2 at Saddleback, including UCLA, and arch rival USC.

The summer session is only eight weeks long and it therefore fast paced. Next week students will tackle Chapter 6 on "Macroeconomics: Big Picture" where they will be introduced to the core concepts of macroeconomics.

The following article from today's L.A. Times caught my eye because it featured an analysis of the macro economy from UCLA macro forecasters, and quoted one of my favorite Profs from my grad school days: David Shulman.


Report from UCLA team skirts the R-word

First-quarter growth fell. Forecasters say it's not a recession, but 'it is certainly close.'

By Annette Haddad

Times Staff Writer

June 19, 2007

The sluggish housing market is starting to drag down the rest of the economy, leading UCLA forecasters to conclude that although the U.S. is not actually in a recession, "it is certainly close."

The nation's economy grew by a sickly 0.6% in the first three months of the year, the smallest increase in four years and a sharp decline from the fourth quarter of 2006, according to the widely watched UCLA Anderson Forecast.

UCLA economists don't think economic growth will slip for a second straight quarter, which would signify a recession. But they predict that the economy will stay in a funk till next year as falling home values and rising gas prices put a crimp on consumer spending.

"We suspect that the weakness in the housing market is finally spilling over into consumption spending," wrote senior economist David Shulman in the quarterly forecast being released today. "Retail sales appeared to stall in April and automobile sales have become decidedly weak.

"This is not a recession, but it is certainly close," Shulman said.

The Anderson Forecast is closely watched because it predicted the 2001 recession before others.

In a separate report on the California economy, UCLA forecasters predicted home values would continue to fall slightly or remain flat in most parts of the state as many homeowners struggled to make higher payments on adjustable-rate mortgages.

"The pipeline of mortgage resets suggests it may be mid-2009 before California sees a normal housing market again," said the report by economist Ryan Ratcliff.

Randy Becker doesn't need to read UCLA's forecast to know the housing market is in a world of hurt.

A Redlands-based subcontractor, Becker helps developers hook up their new homes to sewer lines. With the fall-off in new construction, Becker has laid off more than 40 workers — or about half his staff — since last fall.

"Builders used to sell 14 homes a week; now it's four a month," he said. "When I lay people off, I tell them it's nothing personal, but I can't make any promises."

To keep his people busy, Becker is competing for contracts in Arizona and Central California. His company, Advanced Underground, no longer farms out jobs such as laying wires and cables — it keeps the work in-house to save jobs.

"It's a matter of survival," he said. "We will tweak and bend and do whatever we need to do to stay busy."

Like UCLA, he sees the tough times lasting for about two more years.

As bad as things are, economists expected there would have been more job losses in the construction sector by now, given the depth of the housing downturn. Median prices have fallen by 10% in some counties over the last year, the report notes, while defaults and foreclosures have risen sharply.

On top of that, thousands of people lost their jobs earlier this year as borrowers with shaky credit defaulted on their sub-prime loans, leading prominent lenders to close their doors.

"Real estate has taken a bite out of job growth — just not as big a bite as we expected, and not in the way we expected," Ratcliff said.

In the first quarter, payroll growth (excluding farm jobs) slowed into the 1.5%-to-2% range, Ratcliff found — still not bad, all things considered.

"The relative strength of the California labor markets has been surprising," he said.

But there might be an explanation. UCLA economist Jerry Nickelsburg theorizes that there is a lot more joblessness among construction workers than the official numbers show, noting that self-employed workers and day laborers aren't counted in state payroll data.

"The official unemployment rates are understating the unemployment as they are unable to count the hidden workers," Nickelsburg said. "But the contraction in housing employment falling on the self-employed and hidden workers cannot go on forever."

Indeed, state officials reported Friday that the jobless rate grew to 5.2% in May, up from 5.1% the month before, largely because of mounting job losses in construction and real estate finance. Ratcliff predicts that job losses in those two sectors will help push the state's unemployment rate to 5.5% in a little over a year.

The dour assessment of the state and national economy from UCLA may seem contradictory given a continued bull market on Wall Street. The Dow Jones industrial average is up more than 9% this year, while the broader Standard & Poor's 500 index has advanced nearly 8%.

According to UCLA, however, the fortunes being made by investors reflect strong growth in overseas markets, in which U.S. companies are major players.

"Indeed, it is the strength of the global economy that is powering the stock market to new highs," Shulman wrote. "It is no accident that the Wall Street rally is being led by the giant global corporations who are benefiting most from the worldwide expansion."

In determining economic growth, UCLA forecasters measure gross domestic product adjusted for inflation, which is called real GDP. They said growth in real GDP fell to 0.6% in the first quarter, from 2.5% in the last three months of 2006 and 5.6% in the same period one year ago.

Forecasters say the economy will grow at about 2% for the rest of the year.

The UCLA economists said inflation remained a concern, making it unlikely the Federal Reserve would cut its benchmark interest rate — now 5.25% — until late this year.

Shulman said housing prices were still headed lower nationwide and would be down about 10% from their peak by 2009. But the economic damage from the housing market will ebb by the middle of next year as other business activities and strong exports help make up the difference.

By mid-2008, the economy will be on a pace to grow at a healthy 3%, UCLA predicted.

Kevin Panet is hoping for a quicker recovery.

Last year, the Moorpark resident was making close to $100,000 a year with benefits as a training manager for Ownit Mortgage Solutions Inc. of Agoura Hills.

Then shortly before Christmas he was laid off as the company struggled to get financing for its sub-prime loans and later filed for bankruptcy protection.

Panet regrouped, obtained a real estate agent's license and found another mortgage job six weeks ago. But this time he works as a loan salesman on commission. The big salary is gone, and he must pay for his own health insurance and marketing expenses.

"Am I scared? Yes," he said. "But I got a great job for myself and I know that the real estate market goes in cycles


Summer Session Extra Credit: How is a recession defined in macroeconomics? What is the current unemployment rate in California? If you are the first Summer Session student to send me an e-mail at kwoodward@saddleback.edu with the answer, you will be rewarded with two extra credit Discussion Board points. Only one blog extra credit question per student can be answered in any given week for Discussion Board extra credit

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