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UCLA Anderson Forecast: California Economy to Mirror U.S. with Job Growth Absent Even as Economy Recovers

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In its first quarterly report of 2010, the UCLA Anderson Forecast renders a “bipolar” diagnosis for the national economy, referencing the dual conditions of slow-but-sure growth in the national gross domestic product, coupled with an unemployment rate predicted to remain in double digits until 2012.

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The California economy remains focused on job creation as well, with conditions ripe for growth that has yet to appear.

In a report titled, “The Bipolar Economy,” UCLA Anderson Forecast Senior Economist David Shulman explores the duality of a national economy, where 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 spur growth, but businesses do not make long-term hiring decisions based on temporary government policies.

“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% rate for the first quarter of this year, and then level off to about 2%, leaving 2010’s overall growth around 2.3%. In 2011 and 2012, GDP is forecasted to be 2.3% and 3.2% % respectively. However, payroll employment is still forecasted to be two million jobs below the 2007 peak at the end of 2012.

In a cautionary note, Shulman opines that the real risk to the economy is inflation, as the Federal Reserve’s monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk, will tighten monetary policy and that inflation will remain under control.

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 calls for employment in 2010 to climb, but not to exceed levels of 2009. Once employment growth returns in 2011, employment will begin to grow faster than the labor force at a 2.3% rate and the unemployment rate will begin to fall. Real personal income growth is forecast to be 1.3% in 2010 and 3.7% and 4.5% in 2011 and 2012 respectively. The unemployment rate – currently at 12.5% – will fall slowly through the balance of this year and should average 11.8% 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.

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