Headed for a Recession
                               or increase in the 
                        Chicken Little Syndrome?     



                                              

This past week, three California universities, UCLA, Orange County’s Chapman University 
and Stockton’s University of the Pacific released economic forecasts on the state.  

The mainstream media has been painting a bleak picture for California’s economic future. 
But perspective is needed before buying into the proverbial headlines.  Such is the case
with the three forecasts released last week. The forecasts vary, so depending upon what
you read, heard or saw, a review is important to keep things in perspective specifically since
headlines can trigger one’s emotions yielding a so called unsubstantiated ‘Sky is Falling’
response due to the media hype and the lack of understanding economic conditions.

The three forecasts present different results. So to understand their differences, it is first
important to understand that the definition of a recession is negative economic growth for
two or more consecutive quarters. 

Now that this has been clarified, the following breakdowns the information presented by each
university.

UCLA’s Anderson Business School forecast identifies that California and the nation will
escape a recession in 2008 despite rising oil prices, a sinking residential housing market
and a turbulent stock market.

The rational behind UCLA’s forecast is that so far the downturn in the economy has only
impacted one major sector and that no other sector or sectors seems likely to turn down
sharply hence keeping the state out of a recession. 

UCLA also identifies that job losses will occur in construction and financial sectors
[losses of 99,000, (75,000 in construction, 24,000 in real estate finance)] causing total
unemployment to peak by the end of next year at 6.1 percent rate.  Their forecast identifies
that the rate will remain at this level through 2009.

Additionally UCLA’s forecast sees job growth at only 0.5 percent for 2008.

Real personal income growth is forecasted to rise by 1 to 2 percent.

UCLA’s forecast predicts that stock prices will rise 10 to 12 percent in 2008 even amid
tightening credit markets and marginal economic growth.  UCLA’s Ryan Ratcliff, identified
that white collar jobs in business, education, health care and tourism remain healthy softening
the blow from the downturn in the residential real estate.

UCLA also identifies that the State will face a budget shortfall of $8 billion over the next two
fiscal years because of weaker than previously expected income, sales and corporate tax
collections. Similar to the state’s Legislative Analyst prediction.

UCLA forecasters also believe that if the FED does not call for further reductions in the interest
rates, they will not stand by their forecast, for UCLA believes intervention by the FED is the only
way to avoid a recession.

Chapman University in Orange County concludes that the state will plunge into negative territory
for at least two quarters in 2008 with job growth of only 0.1 percent.

Similar to UCLA’s forecast, Chapman cites the direct and indirect effects of tighter credit, falling
residential real estate and slowing home sales as conditions for a recession.

However, Chapman’s forecast is gloomier because they believe a slowdown will appear in commercial
real estate, subsequently adding to the already unstable economy.

Chapman believes that California will add only 12,000 new jobs next year as compared to 189,000
this year and typically around 225,000 per year. Job growth will only be 0.1 percent, yet personal
income will grow by 3.1 percent.

Chapman’s forecast calculates that the state budget shortfall could be $10.6 billion in 2008 as
compared to the state’s Legislative Analyst’s Office forecast.

University of the Pacific Business Forecasting Center believes that the state’s economy will limp
through the first half of 2008 and will see an up tick by year’s end. Their forecast identifies that by
2009, the economy will begin to run again at a substantial pace.

Pacific forecasts that the Gross State Product will expand at a 3.3 percent before accelerating to
an average growth rate of 5.1 percent in 2009 and 2010.

Unemployment rates will rise to 5.8 percent before falling to 5.5 percent in 2010.

Employment growth will slow to 0.9 percent; then will grow to 1.4 percent in 2009 and climb to
1.5 percent in 2010.

Personal income will grow an average of 5.4 percent from 2008 to 2010.

It readily appears that Chapman University gives the gloomiest of the three forecasts.  University
of the Pacific takes the higher road, providing a brighter forecast of the three illustrating a short
downturn with higher job growth and a subsequent robust Gross State Product growth in the near
term.  UCLA's  forecast takes the middle of the road, yet predicts the lowest of the three in terms of
personal income. So who is right?

Keeping things into perspective is important.  For example, California has over 13 million housing
units.  If 390,000 units go into foreclosure (as identified by real estate analysts) it only accounts
for three percent of the total in the state.  While unfortunate, it is far from a collapse. 

Continuing to keep things into perspective, Global Insights, a well respected economic analysis
consultancy projects that California will only see a 1.1 percent decline in economic output roughly
$18 billion in a $1.6 trillion economy.

Additionally, receiving little if any acknowledgment from the press and news media, California is about
to set a statewide benchmark in the number and total value of mergers and acquisitions of businesses
this year.  It is estimated that this activity could be near $140 billion for 2007.

So, there appears to be no spill over into other sectors because private equity continues to make major
investments and this record setting trend is forecasted to continue into the first half of the 2008
thus providing a positive outlook in terms of business and job growth that should manifesting itself
into tax payments potentially making up for some of the loss in state tax revenues from residential real estate.

But unfortunately no matter what forecast used, it is apparent that California’s economy is slowing
and this time it is very different from the two previous downturns. 

The downturn in the 1980’s was created by the reduction in defense spending coupled with military
base closures impactin defense based communities.  The 1990’s downturn was created by the burst of the ‘Dot.com’ industry impacting tech based communities specifically the San Francisco Bay area. But
this downturn will manifest itself across the state more than the two previous downturns because the
foreclosures on homes are found across the state and the loss in residential values is prevalent throughout California.

This downturn (if yet to be determined a recession) will manifest itself in the loss of tax dollars and
potentially the subsequent reduction in public sector services.  An editorial in the Sacramento Bee
by columnist Dan Walters provided an important perspective.

Cities and counties will need to tighten belts and look for new opportunities to deliver services. But, no
matter what the headlines read, keep into perspective that California is the eighth largest economy in
the world.  That 60 to 70 percent of the state’s tax base comes from the multi-nationals that either call
California home or do business in the state, the very multi-nationals that are participating in the mergers
and acquistion activities mentioned above.

So, you be the judge on determining what forecast you believe is right but don’t be a ‘chicken’ when
it comes to living and working in a slowing economy. Don't buy into the hype. There are opportuntiies.
The Golden State's prominence may not be bright in 2008, but this is California and its future will shine.