UCLA Ziman Center Downgrades Recession Risk

The risk of a recession in 2020 has fallen from previous reports. This month, UCLA Ziman Center for Real Estate published its latest economic analysis, reducing the risk of a recession from earlier predications. The new analysis comes as the result of several pressure points, like the trade disputes and housing starts, have improved.

“A lot of worries from September have gone away. There seems to be a temporary truce in trade; the new NAFTA, the USMCA, is passing; housing starts are better; and the stock market broke out, and there is a wealth effect coming from that that will help the consumer,” David Shulman, senior economist for the Ziman Center and UCLA Anderson Forecast, tells GlobeSt.com. “The recession risks are now lower. If we want to put numbers on it, we would have predicted 45% in September, which is pretty high. Today, we are predicting a 30% chance of a recession, which is a big downgrade.”

The Federal Reserve’s activity has also played a role in reducing the risk of a recession next year. “The Fed’s interest rate policy has helped a lot as well. There is a plumbing problem in the Treasury Repurchase market, and the Fed has been flooding the problem with reserves,” says Shulman. “That has really loosened the financial conditions. It isn’t so much the rate cut, which has helped, but it is Fed’s response to the problems in the repo market that have really changed financial conditions. That is a bigger deal than the rate cut.”

That isn’t to say there aren’t market concerns in the year ahead. The report highlights auto credit as a primary concern, but recent events have also raised an eyebrow. “We think that investment will be better, but the issues with Boeing could now lower GDP in the first quarter,” says Shulman. “That is a new negative. We were assuming that we would get deliveries in the first quarter, and that is not happening. That could lower GDP growth by half a point in the first quarter.”

WeWork is another recent upset that could add pressure in the real estate market; however, it is unlikely it will cause economic pressure. “We never understood the business model that would get that kind of multiple. The co-working space was taking 40% of the net absorption in some cities,” says Shulman. “That is now going in reverse. There is a little more risk on the office sector, but that isn’t going to tip over the economy. It is going to affect some real estate owners.”