January
2008 Quarterly Forecast > The Nation
Nervous: Why This Time Really IS Different and Why We Will Survive the Near Recession Experience
By Ed Leamer and Patricia Nomura
This is nervous time. Lately, when all the recent economic news is seemingly negative and countless prognosticators are throwing around recession forecasts, we urge you to step back and be calm. The UCLA Anderson Forecast is not calling for a recession. You are right to be concerned, but remain calm. While the housing data are certainly ominous, we do not see a recession in 2008.
Housing is Predicting a Recession
Housing has been a great predictor of recessions, and is issuing a very loud alarm of trouble ahead. Since WWII, almost every time there has been a sharp housing decline, there has been a national recession. Eight out of the ten postwar recessions have been preceded by a sharp housing decline. What is very ominous is that we are in the midst of a housing decline that is every bit as severe as the ones that led into recessions.
Why no Recession Forecast? Because This Time is Different
A recession that is predicted by housing is long overdue. History reveals that the business cycle peak is usually no more than a year later than the housing peak, which would have us in a recession in 2006 Q4 at the latest, when you consider the housing peak to have been 2005 Q4. With seven quarters already behind us, this one is destined to be one of the longest lasting corrections. If we can get through another quarter or two, we will get this behind us and have the very first genuine “housing false alarm” – a major housing decline without a recession.
Another unique situation has been caused by innovations of subprime mortgages in the form of greatly reduced lending standards. This in turn has created a whole new class of borrowers, of which many are now walking away from their homes. And contrary to traditional thinking, it’s not because they lost their jobs. Since they can no longer rely on double-digit home appreciation to leverage against, they can no longer afford their homes. For many, homeownership may not still exist, but at least their jobs still do. This is different, too.
In the past, the story of manufacturing during and after recessions is trim and fatten, creating a V shaped cycle. This time, we are seeing an L shaped trend in manufacturing jobs. In the 2001 recession, we did a major trimming of 3 million manufacturing jobs, but since then, there has been no fattening. Today, manufacturing jobs are still below their levels at the start of the expansion in December 2001. We have never experienced anything like this before. Because of this, coupled with an extremely weak recovery in overall payroll jobs, the economy is not primed for major job loss. We have never tipped into recession with such a dismal performance on the job front during the boom period. This time, things really are different.
Optimism Ahead
The current weakness in housing has been completely offset by strength in our external accounts: rising exports and weaker imports. The substantial weakening of the dollar especially relative to the Euro is the first step in ensuring that the correction of our external deficit continues. We expect to see the recession in housing to stay in the housing market and not be a catalyst of major job loss outside the construction and finance sectors. The negative from housing will likely abate by late 2008, while exports are likely to be strong for years to come. Though consumer spending may weaken (depending in part on the outcome of the tax rebate debate), much of that problem will be passed on to other countries through weaker U.S. imports. Overall growth will be sluggish, but no recession. | 
