Anil Puri and Mira Farka of Cal State Fullerton presented their midyear outlook and forecast in Irvine today. This is a follow-up to the major forecast they presented last October. What's the bottom line? Cautious optimism, in the wake of an economic catastrophe for California:
Despite encouraging developments, we expect the recovery to proceed at a moderate pace — a notch below the U.S. long-run potential growth and well below the historical rates of previous post-war recoveries. Our "no boom, but less gloom" outlook is shaped by our belief that while the U.S. is finally experiencing a real cyclical recovery, structural challenges and external shocks will nonetheless restrain the strength and the pace of the expansion.
This pretty well reflects the economic consensus right now (and continues a theme for Puri and Farka, who last year asked "Where's my boom?"). It's not "exciting," as Puri put it, but it is realistic. You could call it excessively conservative — Will we really only average GDP in the 2-2.5 percent band nationally, as institutions such as the Federal Reserve and the International Monetary Fund have argued? — or just sensible. There are what economists call "headwinds" out there, from the "mild recession" in Europe (according to the CSU forecast) to a volatile global oil market.
But there's also some relief, particularly in the labor front, as unemployment finally seems to be trending down toward pre-crisis level. Who knows how long it will take us to get back to 5-6 percent, but at least we're moving in the right direction. That said, the economy isn't creating high-quality jobs. And the unemployment rate has declined during a period of fairly weak GDP growth. Farka, in her presentation, attributed this to a reduction in the labor-participation rate, particularly among young people and women. This means that the unemployment rate is actually worse than the headline number.
The housing market is also showing signs of life, contributing modestly but notably to U.S. GDP growth. However, the rate of household formation is low, and neither Puri nor Farka expect the overall housing market to return to normal until the middle of the decade.
The real star of Farka's presentation, if you can call it that, was an analysis of public debt, which is projected to continue growing, unsustainably, forever. "We need entitlement reform," she said. "Not today, not tomorrow, but someday."
On the Southern California front, the news is improving, but the hole the state is digging out of is worse than at the national level:
The weaker-than-national performance of the California economy is attributable to its heavier dependence on real estate and construction industries. But it appears that we have hit the bottom or are very close to that. Our current forecasts are slightly higher than our October 2011 projections, but our general outlook on the economies of these regions has not changed significantly. In other words, we still expect moderate growth through the end of 2012 and well into 2013.
The depressing thing is that, both nationally and in Orange County, as well as in the rest of SoCal, we've endured a "lost decade." All the relatively good news from the past few months has brought us back to a 2002 level.
Farka argued that the economy is currently "growing in the shade" — not falling back into recession, but not roaring ahead at a typical post-recession pace. Puri added that growing in the shade is all well and good, but he asked whether the economy can survive growth in full sunlight, when government support is withdrawn and the U.S. is exposed to full-on global competition. Plus, 2013 represents a "fiscal cliff," Puri said, borrowing the words of Federal Reserve Chairman Ben Bernanke. In 2013, the Bush tax cuts will expire; the payroll tax cut will go away; the extension of long-term unemployment benefits will expire; and $1.2 trillion in mandatory spending cuts will kick in.
That's the looming structural crisis that we're confronting, even as the economy experiences a real cyclical recovery. Medicare and Medicaid, for example, will grow to consume almost a quarter of GDP by the end of the century. So we can be cautiously optimistic in the short term — the "stuckflation," as I call it, has gone away. But over the long term, pessimism is, sadly, the name of the game.