UCLA Anderson Forecast finally sees market reality, issues gloomy forecast

The UCLA Anderson Forecast, which had previously insisted that the general economy would withstand the housing bust, has (probably since enough time has passed from the last forecast to erase people's memories) issued a much gloomier forecast for the state. From an LATimes story:

Housing prices will hit bottom some time next year, but the California economy will be in distress for months to come, according to a closely followed UCLA economic report scheduled to be released today.

In a series of dire predictions echoed by experts throughout the state, the UCLA Anderson Forecast says that unemployment will continue to increase, consumer spending will decline and tax revenues will plummet...

The proposed $700-billion federal bailout of the financial system will have little effect on these longer-term trends, several economists said.

The massive government relief plan, if implemented, will stop the downturn in housing, said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto, "but is unlikely in the short term to reverse the sharp falloff in wealth and the loss of jobs that's already occurred."

The problem is that the housing crash caused severe job losses in construction and finance, and pulled down property values and consumer spending, leading to a shortage of tax revenue for the state. So even if housing levels out, it will take months or years to repair the damage in other sectors...

State and local governments are now seeing property tax collections fall because of lower property values and foreclosures. Sales tax revenues are also slipping as strapped individuals spend less...

There could be other looming dangers in the economy, said Sung Won Sohn, an economist with the Martin V. Smith School of Business and Economics at Cal State Channel Islands. Among them are commercial building, high-tech manufacturing, logistics and warehousing.

Other economists point to travel, tourism and entertainment, all areas in which people have reduced spending following the housing crash.

The forecast also predicts that increased government intervention in the economy will spur inflation and result in higher taxes -- no matter which candidate is elected in November...

Massive defaults on home mortgages also caused banks to tighten lending, not only to individuals but to businesses as well. Businesses unable to finance new ventures have in turn laid off workers and unemployment in the state has climbed to 7.7%, with 240,000 jobs lost in the last year...

Other sectors that might have compensated for declines in government spending and construction also appear troubled, said economist Sohn. Tourism and exports, for instance, will probably be weakened as foreign consumers face their own economic challenges...

Many economists now agree with the Anderson prediction that home prices will stop falling next year.

But the economy is too weak for prices to start rising any time soon, most economists said, and prices will remain low as long as the state has a staggering inventory of unsold homes, growing unemployment and tight credit.

Quick passage of a bailout package could keep California's economy from free fall, but it's unlikely to bolster business enough to create the tens of thousands of new jobs needed to stimulate growth, several economists said.