 The Angry Economist
CALIFORNIA— One of the more interesting aspects of this year’s UCSB Economic Forecast was the studies declaration of war against a rival study issued by their academic brethren down the road at UCLA. For those who missed it, in 2006 the UCSB Economic Forecast is treading on UCLA’s territory by issuing an economic forecast that includes the greater Los Angeles Basin. This was not an overt attack, for the Los Angeles section was only contained on the reports compact disk, and not on its printed pages.
For the last five years, UCSB’s Economic Forecast Unit has been remarkably accurate. More importantly for those of us living in Southern California, for most of this time they have refused to join with UCLA’s predictions of a housing bubble.
While the storied (and supposedly more accurate) UCLA Economic Forecast has been predicting a housing collapse since 2003, the two guys at UCSB kept reminding us that our economy is no longer driven by local events. California in general and Southern California in particular are magnets for the nations wealthy in their retirement years, and there are more of them coming.
And for most of the last five years, UCSB has been right on the money. Which is probably why the UCSB Economic Forecast Project is moving in on UCLA’s territory.
Despite UCSB’s reputation for rosy (and accurate) forecasts, this year they’re telling us that our economy is not impervious to trouble. Indeed, we may be due for some soon. Interestingly, now that the folks in Brentwood think things are getting better, the economists in Goleta are getting nervous. After predicting the end of the world (literally) in their previous forecasts, UCLA’s Economic Forecast sees a soft landing for the housing market, and thus a positive for the economy. In other words, they’ve finally seen the wisdom in UCSB’s work.
Where UCSB differs is that for the first time, they are using the “R” word, Recession. Not now, and not next month, but there are growing concerns among many economic minds that Greenspan’s final legacy will be an interest-rate led recession that hits the country sometime in late 2007. Here’s why…
Driving the economy at the Federal Reserve is a lot like driving an aircraft carrier in a small bay at slow speed. Moving the throttle or rudder right now by increasing interest rates does nothing to affect the immediate course of the economy; it is in nine to sixteen months that they are felt.
Thus, the interest rate tightening that has been the subject of much discussion for most of the last year will affect us next year. Though he leaves the fed being called maestro, Alan Greenspan hasn’t been perfect, and he made some real enemies for tightening too fast and too much after the dot.com bust of the 1990s.
That’s what Bill Watkins at the UCSB Economic Forecast fear is happening now. With Bernanke living in Greenspan’s shadow, Watkins is concerned that the new Chairman of the Federal Reserve will be unable to stop the interest rate increases begun under his predecessor until they push us into a recession Watkins points to the inverted yield curve as proof that this is already happening. When short-term interest rates are higher than long-term rates, it is not a sign of market imbalance: it’s a sign that the Fed has tightened too quickly.
I call this to your attention because, as I mentioned near the top, UCSB is predicting this, and UCLA isn’t. Given their respective track records, that’s reason enough to sit up and take notice.
Disclaimer: William P. McGowan received his doctorate in Economic History from UCSB.
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