Executive Summary of the UCLA Anderson Forecast’s June 2007 National Forecast
By David Shulman
Last September we
highlighted our view that the U.S. economy
was headed for a soft landing, albeit one
with a great deal of turbulence caused by a
rapid deterioration in the housing market.
Although the actual data didn’t turn out
exactly as forecast, it turned out to be a
reasonably good description of the past few
quarters. Real GDP growth stalled at a
revised 0.6% growth rate in the first
quarter and we forecast that the economy
will be growing at less than a 2% growth
rate in both the second and third quarters
and then only modestly exceed 2% in the
fourth quarter.
This is not a recession
-- but it is certainly close. Real growth
in 2007 is forecast at 1.8%, roughly on par
with the near-recessionary environment of
2002 when real GDP advanced at a 1.6% rate.
Nevertheless by mid-2008 growth will return
to around 3% as the contraction forces
coming from housing abate and improvement in
net exports and investment propel the
economy forward. If our forecast is close to
the mark, the period from the second quarter
of 2006 to the first quarter of 2008 will
mark a historically anomalous long period of
below trend growth. Since unemployment has
yet to increase, there exists the
possibility that GDP growth has been
understated and will subsequently be revised
higher.
Because core inflation
will remain above the Fed’s 2% comfort zone,
we do not expect much help from monetary
policy until the fourth quarter. In recent
quarters we had thought the Fed would be
more forward looking and already eased by
now. Remember, if GDP growth has been
understated, the Fed’s reluctance to cut
rates would, in the light of hindsight, be
viewed as wise policy. Nevertheless, the
delay will push back the housing recovery
until well into 2008. In their May 9th
statement the Fed’s Open Market Committee (FOMC)
noted, “In these circumstances the
committee’s predominant policy concern
remains the risk that inflation will fail to
moderate as expected.”
To sum up, our forecast
calls for a continuation of the housing
induced sluggishness in the U.S. economy to
last into early 2008. For all of 2007 real
GDP growth is expected to be less than 2%.
In response to lower core inflation and a 5%
unemployment rate by the fourth quarter of
this year, we expect the Fed to cut interest
rates by a total of 75 basis points starting
in the fourth quarter. By mid-2008 we
anticipate an economy with the housing
decline behind us, the trade deficit
improving and moderately strong business
investment that will put the economy back on
a 3%+ growth path.
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