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Experts: Economy nearing cusp of recession

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Over the next six months, the U.S. economy will be at a near-recessionary stall, with unemployment rising and the real estate market still staggering, according to projections released Sept. 12 by a panel of economists at the University of California Los Angeles.

After limping along for most of the next year, the economy will start to regain strength in late 2008 or early 2009, as demand for housing begins to revive, said the economists, collectively known as the Anderson Forecast.

Rising exports and growing business investments in software and hardware should also bolster the economy, they said. But even then, growth will remain below historical trends.

"Such an economic performance is almost as close as you can get to avoid the technical definition of a recession," UCLA economist David Shulman said. He added that with growth dipping so low, the economy "runs the risk of falling into an actual recession, just as when an airplane's velocity dips down to its 'stall speed' and falls out of the sky."

Other economists have quibbles with some details of the forecast. But they agree that the economic picture is likely to worsen in coming months because of a rising number of foreclosures, more layoffs in the real estate industry and cutbacks in consumer spending.

Keitaro Matsuda, economist with Union Bank, projects that hiring will grow by slightly more than 1 percent over the next year - a bit higher than the UCLA projection - and says the unemployment rate next fall will be roughly the same as it is now. Nevertheless, he said that because the slowdown is coming from a peak period, it may still feel like a recession.

"There may be a growth recession, which is different from a classical recession," he said. "It means that growth may fall below its long-term trend. That's very likely to happen, and it could last well into 2008."

Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto, said he largely agrees with the Anderson Forecast's assessment.

"Next year is going to be sluggish, and it will be a couple years before the economy turns around," he said. "As far as whether the economy will be in recession or near-recession, it's hard for an ordinary person to tell the difference."

As has been true for the past couple of years, problems with the residential real estate market are at the center of the Anderson Forecast's glum report. And the economists say the market looks worse than it did just a few months ago.

In the last Anderson Forecast report, in June, the economists predicted that new-home construction would bottom out at a range of about 1.2 million to 1.3 million units nationwide per year. Now, they have lowered their estimate to between 1 million to 1.1 million units. They added that even when the market recovers in late 2009, homes will be built at a tepid pace of about 1.4 million units per year.

With tightening credit standards, there are far fewer home buyers in the market, and that will mean that prices fall.

This year, the national median price of a home is projected to fall 1.7 percent to $218,200, according to the National Association of Realtors. In a report released Sept. 11, the association predicted that the number of home sales would drop 8.6 percent this year, falling from 6.5 million in 2006 to 5.9 million in 2007 - the lowest number since 2002.

Those declines represent only the beginning - not the end - of the woes for the real estate market, the UCLA economists said. By the time the market hits bottom, home prices throughout the nation will be roughly 10 percent to 15 percent lower than at their peak, partly because it is harder for potential buyers to get loans, they said.

"The days of the 'NINJA' loans - no income, no assets, no job - are over and the oh-so-20th-century concept of cash down payments will once again become normal," Shulman said. "How many first-time buyers have $25,000 in cash to make a 5 percent down payment, much less the traditional 20 percent down payment (in high-cost areas) where the entry price approximates $500,000?"

"Housing could take two, three or four years to recover, depending on how fast the prices adjust," Levy said.

In the short term, however, lower housing prices mean less home building, which translates into fewer jobs for construction workers, mortgage brokers and real estate brokers.

Nationwide, the real estate slowdown has resulted in a cutback in spending on big-ticket items, especially cars. Shulman projected that only 15.7 million vehicles will be sold next year, the lowest number since 1998. In addition, he said, cutbacks in spending on furniture and appliances - which are often tied to new-home purchases - will lead to a decline in total consumer spending.

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