By Karen Albrecht
Daily Bruin Contributor
An economic slowdown and recession is predicted to end the
longest period of expansion in United States history, according to
a fourth quarter report by the UCLA Anderson Business Forecast.
There is a 60 percent chance that the 38-quarter expansion will
end this year, according to Edward E. Leamer, director of the
Anderson Business Forecast and professor of economics, management
and statistics.
The economic downturn is due to the bankruptcy cycle of the
dot-coms and the collapse of the stock markets, but the slowdown
may not be severe, he said.
“The greater stability of the economy since 1982 is the
primary reason to believe that the downturn will be short and
shallow,” Leamer said.
The forecast predicted negative growth in only the second and
third quarters of 2001, accompanied by inevitably higher
unemployment rates. These factors were predicted to force the
Federal Reserve Board to lower interest rates significantly by the
end of 2001.
Contrary to this forecast, the Fed did not discuss action to
lower interest rates in a Dec. 19 meeting, Leamer said.
But, the interest cut last week suggests the Fed now believes a
recession is probable, he said.
Reflecting the forecast, the Fed announced a half-point cut in
interest rates Jan. 3 in response to declining consumer confidence,
a decrease in factory orders, and a weakening financial market.
President-elect George W. Bush’s across-the-board tax cut
plan is unlikely to go through Congress as a result of this action
by the Fed, according to Leamer .
In California, the Bay Area is likely to be hardest hit by the
impending recession, according to Tom Lieser, author of “The
Outlook for California.” In the Silicon Valley, fast
appreciation of technology stocks has made stock options an
attractive recruitment tool, he wrote.
Consequently, large wealth gains have been reported in
California in the last several years, and the Bay Area now has the
highest per capita income and highest home prices in the nation,
Lieser said.
Signaling the end of this expansion are tight labor markets,
dependence on foreign capital, and sated consumers who are at the
end of their spending binge, according to Leamer.
“We have concluded that the financial market conditions
which supported the state’s high-tech boom have now subsided,
and are likely to deteriorate further,” Lieser said, citing
losses of over 40 percent between March and November 2000.
The impact on Southern California will be much weaker, as they
have avoided the capital intensive industry central to the booming
economy in the Bay Area.
Suggestions that recessions are no longer inevitable are
erroneous, according to Leamer. The “new
economy,”characterized by the Internet and high-tech industry
boom, experiences the classic business cycle of boom and bust,
extraordinary only in its intensity and brevity.
“In the new economy, the assets have been ideas about
using the Internet,” Leamer said. The result, he added, has
been a “wild ride up,” followed by a “wild ride
down” due to the lack of collateral supporting these
ideas.