SAN FRANCISCO, June 18 (Reuters): The economy will likely avoid a formal recession, but its outlook through the end of next year is decidedly "subprime" with the deep housing downturn restraining growth to just above 1 per cent, a UCLA Anderson Forecast report released Wednesday said.
A "witch's brew of the popping of the housing bubble, a wounded financial system and increasing inflationary pressures coming from rising commodity prices will keep the economy on a subprime growth path for the next several quarters," according to the forecasting unit's report.
Despite aggressive Federal Reserve interest rate cuts since last September intended to stimulate the US economy, it will post "tepid" average gross domestic product growth rate of 1.2 per cent from the third quarter of 2007 through the fourth quarter of 2009, the report said. It also sees the unemployment rate hitting 6 per cent by the end of next year, up from 5.5 per cent in May.
"Moreover, because both headline and core inflation will remain uncomfortably high over the next several quarters, we believe the Federal Reserve has ceased cutting interest rates and that the next change in policy will be to increase the federal funds rate starting in mid-2009," the report said.
The unit's economists expect the remainder of this year and 2009 to resemble recoveries from recessions in 1990-91 and 2000-01, each spurred largely by asset price declines, in commercial real estate in the former and stock prices after the Internet bubble burst in the latter.
The housing market's steep decline-its worst tumble since the Great Depression, so far wiping out about $3 trillion in home equity-coupled with gasoline prices topping $4 a gallon argues against a resurgence of brisk consumer spending in the near term.
"To be sure the $108 billion in tax rebates will certainly help in the third quarter, but in our view it will be analogous to a one quarter 'sugar rush' for the economy," the report said.
"In fact the combined effect of the waning effects of the tax rebates and the end of the investment incentives associated with the government's stimulus package in December, could very well lead to a decline in GDP in the first quarter of 2009," the report added.
On a broader note the report said growth in consumer spending, financed by the collapse in savings and increased borrowing from abroad, may have peaked.
Meanwhile, net exports are on the upswing, adding less than 1 per cent to real GDP growth, but just enough to stave off recession, the report said.
The Federal Reserve appears to turning its attention toward traditional inflation concerns amid higher commodity prices. "What is worrying the Fed is that real interest rates are lower now than they were during the deflation scare of 2003-04," the report said.
"Most observers now believe that it was the very low real interest rates of that period that set the stage for the housing and credit bubbles that came later," it added. "As a result, we do not believe that the tepid economic growth we are forecasting will prevent the Fed from raising interest rates in mid-2009."
Meanwhile, the economy of California, the most populous US state, will remain weak this year as the downturn in its housing market persists, but strong exports and agricultural activity will help offset that drag, according to a UCLA Anderson report released Wednesday.
"Though you still hear talk of recession these days, it does not appear that California will exhibit the kind of job loss that typically goes with a national recession," the report said. "Indeed, for California this is primarily a housing related adjustment to a very overheated speculative market."
"The carnage is palpable but contained as California benefits from some very traditional industries and its position in the sun on the edge of the Pacific Rim," the report added.
