On Wednesday, March 9, 2011, economists with the UCLA Anderson Forecast declared that the U.S. economy is getting better, even if the pace is slow and somewhat bumpy. The economy is expected to grow 3.8% in the first quarter of 2011 and maintain an average 3% increase thorough 2013. While welcome, this rebound compares to an average growth rate of 5% to 8% that has followed previous recessions.

The employment picture, however, will be an ongoing trouble spot. Even though the national unemployment rate dipped to 8.9% in January 2011, the UCLA group concludes that this was a "statistical anomaly" due to an unexpected decline in the labor force and that the unemployment rate will rise during the spring before falling below 8% by the end of 2013. If this forecast proves to be true, it would mean more than five years of unemployment rates that are double the normal level.

Factors that will drive the economy forward include strong purchases of equipment and software by business, improving exports stimulated by the weak dollar, and growing auto sales to replace worn-out vehicles. The current low interest rate environment is spurring capital investment by businesses and auto sales by consumers. In addition, emerging markets in Asia are showing strong interest in U.S. farm products, medical supplies, machinery, and airliners.

On the down side, the UCLA forecasters point to ongoing problems in the housing market, which "continues to wallow in its modern day depression."  While one would expect the low interest rate environment to stimulate greater demand for housing, this factor is more than canceled out by the oversupply of housing created during the bubble, the subsequent addition to the stock housing from foreclosures, and more-stringent credit requirements imposed by lenders. The forecasters don't expect housing starts to reach the average replacement level of 1.5 million units annually until 2013. There were 586,000 starts in 2010, and 658,000 starts are projected for this year.

Another "laggard" on the economy is state and local government. UCLA compares what is happening now in the governmental sector--not just in California, but across the nation--to what happened in the industrial sector over the past 40 years. The report asserts, "Simply put, promises were made with respect to public employee pensions and postretirement health benefits have become financially infeasible."  These commitments, coupled with rising caseloads in the Medicaid program (Medi-Cal in California), will put increasing pressure on state and local government budgets even as tax receipts rise as the economy recovers.

The forecasters warn of two significant risks to the economy: rising inflation and oil prices. While the Federal Reserve has been focused on combating deflation and high unemployment through November 2010, there is growing concern about inflation. Pointing to rising commodity prices and apartment rents, UCLA forecasts inflation to exceed the Federal Reserve's informal 2% target rate in 2013. In anticipation of rising inflation, the bond market is expected to rise, with yields on ten-year bonds, reaching 4% this spring and 5% by the end of 2013. For those who are looking to refinance their mortgage, "The train is leaving the station."

Oil is the big wild card. UCLA's report provides little in writing on this issue, perhaps because of the timing of the developments in the Middle East and the publication date of its report. However, during the presentation, David Shulman, the project's senior economist, acknowledged that their forecast assumes the recent rise in prices is temporary. However, if oil reaches $140 per barrel (prices are currently around $105 per barrel), "lots of bad things happen."

For California, UCLA sees slow growth until the end of the year, with their outlook dimming somewhat from their December 2010 forecast. Personal income in California is expected to grow 3% for the current year compared to 5.1% for the nation as a whole. The state is expected to pick up steam in 2012 and 2013, with increases of 5.5% and 6.2% forecast.

The California labor market will remain weak, trailing the slight improvements nationally. The state's unemployment rate is expected to average 11.6% for 2011 and not drop below 10% until the first quarter of 2013, two years from now. This is a huge barrier to resolving the state's economic problems.

As previously reported, the UCLA economists see a two-tiered recovery, with the state's coastal regions improving while the inland regions lag. For the Central Valley and the Inland Empire, little, if any, growth is projected through 2013.

--Robert Miyashiro