Report Predicts Recession Analyst sees layoffs, softening real estate

David Armstrong, Chronicle Staff Writer Tuesday, December 12, 2000

--------------------------------------------------------------------------------

The nation's record of 38 consecutive quarters of economic growth is expected to be broken in the middle of next year, according to a forecast released yesterday.

Although the downturn won't be as severe as the rest of the country, it will be painful for Bay Area residents, said Tom Lieser, a senior economist with the Anderson School Forecast Project at the University of California at Los Angeles, which authored this year's report.

The blue-chip forecast sees more dot-com layoffs in the Bay Area, a slowdown in the creation of jobs, a leveling of residential real estate prices and a modest rise in commercial real estate vacancies.

"High-tech workers may find it's no longer possible to find comparable jobs across the street," Lieser said. "Perhaps they'll be staying longer in the same job."

As for residential real estate, Lieser observed, "Some of the fantastic behavior that came out of that market, like all-cash transactions, should end."

The annual Anderson report predicts a mild recession for the nation as a whole, anticipating negative growth in gross domestic product, the definition of a recession, in the second and third quarters of 2001.

But that view isn't shared by some economists, who don't see a recession ahead and are more bullish about the economy.

Nationally, growth should be in the 2 to 4 percent range in 2001, according to Lynn Reaser, chief economist and senior market strategist for Banc of America Capital Management.

"The money supply is still growing, and there is still liquidity," Reaser said. "The Fed has signalled its intention to lower interest rates. Mortgage rates are down to 7 1/2 percent. There is a record issue of bonds; there is no credit crunch.

"California, we believe, will outperform the country," she said. "It has a much higher dependence on technology, which is moderating but not collapsing. It has a good deal of international trade and tourism, which are strong. It does not have the presence of old-economy sectors such as the automotive industry."

Even if there is a downturn, the bearish Anderson report does not expect it to be exceptionally turbulent for California. Lieser said the state "is performing near the ceiling," so it won't fall back as far as the rest of the nation.

The Anderson report, which has been issued yearly since 1952, is closely watched and has a reputation for prescience. The Anderson School predicted the recession of the early 1990s, concluding it would be more severe than did most analysts then studying the economy.

This time around, plummeting high-technology stocks, tight labor markets, falling corporate profits and scarcity of capital for new ventures will spell the end of the Bush-Clinton expansion, said Lieser and Edward Leamer, the Anderson School's forecasting director and co-author with Lieser of this year's report.

The Anderson School forecast, issued at a daylong conference on the new economy held in Los Angeles yesterday, concludes that the downturn should hit home in earnest by the middle of 2001.

The good news, according to Leamer, is "the recession is a mild one, and growth bounces back strongly in 2002 because of the underlying productivity gains that have been powering growth since 1995."

Looking specifically at California, Lieser attributes the state's late 1990s growth spurt to ''a wealth effect" created by stock-option payments in high-tech industries. According to Lieser, unpublished data in the second quarter of 2000 show an average yearly income of $96,000 among 380,000 California computer service professionals.

However, Lieser writes, "With a less appealing climate for stock options next year, and probably slower growth in new jobs in computer services, average compensation will likely drop, and will consist more importantly of regular wages."

The effect of the Golden State's supposedly tarnished fortunes includes a leveling of sky-high Bay Area home prices, where the median price is $460,000, up nearly $200,000 since 1996.

Unemployment, Lieser said, will rise to an unspecified degree from its current very low rate of 2 percent. Statewide, the report predicts a rise in California's unemployment rate from the current 4.9 percent to 5.4 percent in 2001, as the economy cools.

A nationwide recession would end the longest post-war expansion on record, a streak that topped an expansionist period in the Kennedy and Johnson administrations that lasted 35 quarters.

In predicting a national slowdown, Leamer cited the Nasdaq composite index's plunge, which took the high-tech exchange from 2,000 in January 1999 to 5,000 this April, before falling back to 3,015.10 yesterday.

"There is a reason for this wild ride," Leamer observed. "In the old economy, the assets were structures and equipment, which take time to build and which have substantial salvage value. The time to build slows the ride up and the salvage value softens the downturn."

By comparison, in the high-tech-driven New Economy, Leamer writes, "The assets have been ideas about using the Internet. These ideas have very little salvage value; only a mascot is left of Pets.com. This has made for a wild ride down."

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/12/12/BU.DTL&type=business

-- Carl Jenkins (somewherepress@aol.com), December 12, 2000