LOS ANGELES-California and the nation can look forward to a generally slow and steady increase in GDP, but the improvement will be insufficient to drive a full recovery, according to the latest UCLA Anderson Forecast. In its second quarterly report of 2011, the forecast choes and reinforces the outlook it presented in March of this year, which called for slow growth through the end of the year as the state attempts to re-generate the 1.3 million jobs lost in the recession while also finding work from new entrants to the labor force.
UCLA Anderson Forecast director Edward Leamer predicts “normal growth” for the US economy through 2013, with “normal” defined as “3% GDP growth with payrolls growing at 150,000 to 200,000 per month and unemployment stuck at high levels.” But normal does not equate to a recovery, Leamer says. In his report, titled “No Recovery In Sight,” he differentiates between normal growth and the type of growth necessary for real recovery from the recent recession. In a recovery, the economy would grow at 5% to 6%, with payrolls growing at 250,000 to 300,000 per month and unemployment falling noticeably.
The differentiation is not a matter of semantics. Leamer notes that a recovery is not simply a matter of the economy returning to where it was when the recession began. Instead it requires a return to trend, meaning the economy would have to get to where it would have been had there been no recession, which requires more than 3% GDP growth.
Leamer identifies the “personal consumption expenditures” segment of GDP as a key sector preventing normal growth from rising to recovery, with the housing and automobile sectors the major culprits. Until consumers start buying homes and cars, the recovery remains in the future, he says. On the employment front, Leamer believes that a robust job recovery is prevented by permanent displacements of millions of workers whose jobs are now performed by a combination of technological advances and low-wage foreign workers, along with construction and retail jobs that are not likely to return.
“In other words, we have as many as 5.5 million workers who are permanently displaced and only about three million who are likely to be recalled,” Leamer said. It is likely to take a very long time for those 5.5 million displaced workers to find jobs again, and in the meantime the economy will grow, but not as robustly as in traditional recoveries, he forecasts.
The UCLA Anderson forecast for California, authored by senior economist Jerry Nickelsburg, remains substantially the same as it was in March, when Leamer foresaw a continuing period of slow growth with stress in the labor markets. In his report, titled “A Breather in the Process of Recovery,” Nickelsburg cites two key elements impeding California’s recovery. The first lies in the national forecast, which calls for slower growth in consumer spending. The second is a shift occurring in the residential construction sector.
The forecast calls for 1.7% employment growth in 2011, 2.4% in 2012 and 3.1% in 2013. Unemployment will continue to fall through the year, averaging 11.7% in 2011. Employment growth won’t push the unemployment rate below double-digits until the second quarter of 2013, reaching 9.2% by the end of that year. Real personal income growth is forecast to be 1.7% in 2011, and 3.3% and 3.8% in 2012 and 2013 respectively.
The shift in residential construction is rooted in demographics and geography. The demographic shift, confirmed by the 2010 Census suggests a significant shift in demand towards condominiums and apartments. As a result, future construction will move towards multifamily units.
This shift to multifamily units hurts inland California in three ways, according to Nickelsburg's analysis. First, workers are less likely to move inland into an apartment and commute toward the coast. Second, fewer construction workers are required to build multifamily units and third, the inland areas of California are more dependent on construction to fuel their regional economies than coastal areas. Taken together, these shifts are going to be a significant drag on inland California economies that in turn becomes a drag on the state’s economy as a whole, Nickelsburg concludes.
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