The recent sell-off in the equity markets was needed because equity prices had gotten ahead of the recovery. Still, watch for bubble-like signs in other parts of the financial markets – especially risk spreads and cap rates on trophy properties.

Expect slightly above-average economic growth to continue in the second half of 2011 and into 2012. However also expect the recovery to stumble in 2013 as the federal government starts to unwind the massive deficit that was built during efforts to pull the economy out of the recession.

California's economy is set for a prolonged recovery with unemployment remaining in the double digits and home prices remaining flat through 2012.

Although the pace may seem painfully slow, numerous economic indicators are improving in Los Angeles County including taxable sales, income, venture capital, hotel occupancy rates, and employment.

The forecast by Beacon and Pepperdine raises the question of how so many press reports can sound so dire in light of the more positive outlook in the 2011 Los Angeles Economic Forecast Book. An excerpt from the forecast explains:

On June 7, Federal Reserve chairman Ben Bernanke spoke at an International Monetary Conference in Atlanta. The disparate headlines in the Los Angeles Times and Wall Street Journal the following day were telling. The Times headline read “Bernanke predicts stronger recovery in second half of year” while the Journal stated bluntly “Fed sees recovering lagging.”

The difference in reporting is not the result of the historical role of the chairman or deliberate obfuscation of the Fed's views on the world. Rather it has more to do with the dichotomous view of the recovery between Wall Street and Main Street.

Recent views on Main Street America have been relatively pessimistic, not surprising given the overall weakness of the recovery. While the US economy has been growing at a 3% clip since the end of the 2008-09 recession, the growth rate is only average,and average simply isn't good enough to get the economy back on its long run trend line.

The US economy should have expanded by close to 4% over the course of the downturn. Instead it shrunk by 4%. Add it up and the nation's economy is ‘behind’ by an amount totaling 8% of GDP, a hefty number indeed. Little wonder then that the labor markets are still so far from their 2007 peak.

Yet the economy has been improving, picking up speed, and Main Street headlines have been too pessimistic in Beacon Economics’ opinion, even given the litany of poor economic reports released in recent weeks. That Los Angeles Times headline reflected the fact that Bernanke's speech was uplifting to Main Street's point of view stating that the current hits to the economy were temporary and that the recovery would continue anew in the second half of the year. By this same token, the news Wall Street heard did not match their higher expectations.

Beacon Economics believes the divergent headlines about Bernanke's speech were both appropriate. We are optimistic about the US economy for the second half of 2011 and 2012. But also know we not out of the woods by any stretch, and believe the financial markets have gotten ahead of themselves. The retrenchment in asset values seen in recent weeks is a welcome relief from that perspective. The last thing the United States needs is another massive bubble like the two that have buffeted the economy over the past 15 years.