April 4 , 2001 
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UCLA FORECASTERS SEE NATIONAL RECESSION AS INEVITABLE IN 2001; CALIFORNIA 
WILL NOT BE IMMUNE, WITH BAY AREA VERY SUSCEPTIBLE





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LOS ANGELES --Economists with the UCLA Anderson Business Forecast see even 
more clear indicators of a recession for the nation in 2001 and project a 90 
percent chance that the nation's longest economic expansion will come to an 
end no later than the first quarter of 2002. 
"The year 2001 is a transition year that will take the U.S. economy from the 
Internet Rush of 1996-2000 to a lower level of sustainable economic growth in 
2002," said Edward Leamer, UCLA Anderson Business Forecast director and 
Anderson School professor. However, getting from here to there will involve 
some painful adjustments, he warns, and "monetary medicine" from the Fed 
won't stop the pain this time.
According to the econometric model used by UCLA's forecasters, the 
probability of a 2001 recession has increased nearly 30 percent since 
December 2000. Just three months ago, Dr. Leamer's forewarning of a recession 
was the most pessimistic -- and, as it turns out, the most accurate forecast 
made that quarter. 
"The expansion of 1999-2000 was driven by 'New Economy' investment 
opportunities. Firms rushed pell-mell to be the first kid on the block to 
have a cool website. Fear was a big motivator. Internet firms feared losing 
first-mover advantage. Bricks-and-mortar firms feared they would lose out to 
pure Internet business models. Almost every enterprise in the U.S. invested 
heavily in IT equipment and software, and hired the associated personnel," 
said Dr. Leamer. "Things are different now." 
The national recession and slowdown in investment in information technology 
and software has different implications for the principal regions of 
California. A recession is quite likely for the Bay Area, while Southern 
California will experience many economic stresses though skirting an outright 
recession. 
Dr. Tom Lieser, author of the California Forecast, expects to see a 
"high-tech" recession in California that will have a disproportionate impact 
on the San Francisco Bay Area. "We will most likely see not only a slowing of 
demand for electronics, communications equipment and related products, but 
also a weeding out of the less well-capitalized firms in these industries," 
said Dr. Lieser. 
The UCLA economist also expects a weak expansion in employment through 2002, 
with a corresponding rise in unemployment rates. A substantial slowdown in 
the California service sector -- a mainstay of the state's economic growth -- 
is also quite likely. 
"The strong increase in residential building permits seen during the 
November-January period will likely be short-lived," said Dr. Lieser. "We 
expect to see declining home prices in the Bay Area this year. Southern 
California will also experience slower home sales and a lower rate of price 
increases." 
Higher energy prices, the economists argue, may pose a greater problem for 
other states than for California, because of the state's lower per capita 
consumption. On a per capita basis, California ranked 49th out of 50 in 
electricity consumption and 26th in natural gas consumption, both in 1999. 
Even with the state's notorious dependence on the automobile, it still ranks 
only 15th out of the 47 reporting states in per capita gasoline consumption. 
And while the recent brownouts and blackouts may not perceptibly affect 
California incomes and employment in the short term, a prolonged electricity 
crisis could discourage business expansion significantly in the longer run.
The UCLA Anderson Business Forecast is the most widely followed and 
often-cited forecast for the state of California, and was unique in 
predicting both the seriousness of the early-1990s downturn in California and 
Southern California, and the strength of the state economy's rebound since 
1993. 
The Forecast was presented at an all-day conference at Korn Convocation Hall 
at The Anderson School at UCLA. In addition to providing the outlook for the 
state and national economy, the conference examined the economic impact of 
California's energy crisis through a series of panels led by some of the 
nation's most prominent authorities. Speakers included Loretta Lynch, 
president of the California Public Utilities Commission, Mark Bernstein, 
senior policy analyst at RAND Corporation, Barry Sedlik, manager, economic 
and business development, Southern California Edison, and Joseph M. Otting, 
executive vice president, Union Bank of California.