UCLA Anderson Forecast: GDP growth, high unemployment make for 'bipolar' economy
By Hilary Rehder March 24, 2010 Category: Academics & Faculty
In its first quarterly report of 2010, the UCLA Anderson Forecast gives a "bipolar" diagnosis for the national economy, referencing slow-but-sure growth in the national gross domestic product, coupled with an unemployment rate predicted to remain in double-digits until 2012. The California economy, researchers say, remains focused on job creation, with conditions ripe for growth that has yet to appear.
In addition to the U.S. and California reports, the Anderson Forecast for the first time includes the new Ceridian–UCLA Anderson Pulse of Commerce Index (PCI) by UCLA Anderson School of Management in its quarterly publication, with an emphasis on the index’ regional data for California and the western states.
The National Forecast
In a report titled, "The Bipolar Economy," UCLA Anderson Forecast senior economist David Shulman explores the duality of a national economy, in which GDP is growing while job creation remains scarce — and is expected to remain scarce through 2012.
Shulman suggests that the Washington's economic stimulus packages may have unintentionally caused the economic schizophrenia. Tax cuts and spending programs, coupled with a non-sustainable zero-interest policy do spur growth, but businesses do not make long-term hiring decisions based on temporary government policies, he says.
"Nevertheless, the economy is now on a growth path and employment will soon be increasing, albeit modestly," Shulman writes.
The Forecast's case for recovery is based on strength in business equipment and software, exports, and a revival in home construction from postwar lows. With the exception of housing, these factors are already making positive contributions to the economy.
Growth will be held back by declines in non-residential construction and stagnation and retraction in the state and local government sectors. The Forecast expects the economy to grow at a 3.2 percent rate for the first quarter of this year, and then level off to about 2 percent, leaving 2010's overall growth around 2.3 percent. In 2011 and 2012, GDP is forecasted to be 2.3 percent and 3.2 percent, respectively. However, payroll employment is still forecasted to be 2 million jobs below the 2007 peak at the end of 2012.
In a cautionary note, Shulman says that the real risk to the economy is inflation, arguing that the Federal Reserve's monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk and will tighten monetary policy, and that inflation will remain under control.
The California Forecast
Writing about California, UCLA Anderson senior economist Jerry Nickelsburg notes that despite the recession having officially ended, California's unemployment rate continues to rise, while local governments continue to shed jobs.
The outlook for the balance of 2010 is for little or no growth in the state, with the economy picking up speed slightly by the beginning of next year. More normal growth rates for California should be in place by the middle of 2011. The keys to California's recovery are a growing demand for manufactured and agricultural goods from outside the state, the recovery of U.S. consumption, which increased the demand for Asian imports and for products from California's factories, increased public works construction, and increased investment in business equipment and software.
The Forecast predicts employment will climb in 2010 but will not exceed levels of 2009. Once employment growth returns in 2011, employment will begin to grow faster than the labor force, at a 2.3 percent rate, and the unemployment rate will begin to fall.
Real personal income growth is forecast to be 1.3 percent in 2010, 3.7 percent in 2011, and 4.5 percent in 2012. The unemployment rate, currently at 12.5 percent, will fall slowly through the balance of this year and should average 11.8 percent for 2010. Though the state's economy will be growing, it won't be generating enough jobs to push the unemployment rate below double-digits until 2012.
The Ceridian–UCLA Pulse of Commerce Index
Earlier this year, UCLA Anderson and Ceridian Corp. jointly announced the creation and release of the Ceridian–UCLA Pulse of Commerce Index by the UCLA Anderson School of Management. The index tracks real-time diesel fuel purchase transactions at more than 7,000 truck stops in the U.S., measuring shipments of products across the country.
The initial releases of the PCI focused on its ability to track the national economy and correlate with GDP. In the UCLA Anderson Forecast's most recent publication, Forecast director Edward Leamer, who is also chief economist for the PCI, demonstrates the index's ability to shed light on regional economies.
Significantly, the PCI data allows for analysis of trucking commerce at the county level, for individual cities and for the various interstates and highways. For highways, total fuel purchases is one measure of the importance of each route. A measure that more accurately reflects the amount of goods being moved is found by dividing gallons by miles. In California, the PCI shows that it is the southern routes (I-10 and I-40) that carry the most product, along with I-5 in the center of the state. I-80, by contrast, is not so heavily traveled and has the most extreme seasonal variances.
As part of his report examining California and its neighboring Western states, Leamer uses the PCI to demonstrate how seasonal conditions impact the various states in the region. Nevada and Utah, where winter has a larger impact on travel, are shown to have the biggest declines in trucking activity over the last three months, while California, and to an even greater extent, Arizona, experience almost no seasonal impact at all.
Overall, California trucking — which experienced relatively smaller declines than its neighboring states — is almost fully recovered in relation to the peaks enjoyed in 2006 and 2007, while Utah, Arizona and Nevada show the steepest declines related to their peaks, with Utah still in free fall.
The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. More recently, the Anderson Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001.
The Ceridian–UCLA Pulse of Commerce Index is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. Working with economists at UCLA Anderson School of Management and Charles River Associates, Ceridian provides the index monthly and also offers companies access to more detailed fuel-use information. Ceridian is a global business services company providing electronic and stored value card payment services and human resources solutions. UCLA Anderson School of Management is perennially ranked among top-tier business schools in the world. Charles River Associates is a leading global consulting firm that offers economic, financial, and business management expertise to organizations around the world.