Economic expert predicts doldrums through 2012

Euro turmoil poses big block to recovery

CLU CERF Executive Director Bill Watkins said 2012 will be "an uphill slog through a minefield."

Photo: Brian Stethem

A leading Ventura County-based economic forecaster says 2012 will be "an uphill slog through a minefield."

Bill Watkins, executive director of the Center for Economic Research and Forecasting at California Lutheran University in Thousand Oaks, made the remark as he unveiled his 2011 fourth-quarter California and United States economic forecast. Watkins is to present the forecast today in Studio City.

"A slow, long recovery is the basic story, and the biggest mine out there is the eurozone," he said. "The Middle East is also a potential problem, and a lot of countries including China are downgrading their forecasts."

While the U.S. economy is improving, he says it remains weak, which limits the potential for growth.

That said, the manufacturing and energy sectors are showing strength and the financial sector is in better shape than a year ago. He said bank charge-offs are below $40 billion, which is a good indication of improvement. However, many other sectors continue to underperform, and the weak real estate market in particular continues to hold back economic recovery across the nation. Charge-offs are the estimated dollar losses of unrecoverable loans

The forecast calls for U.S. unemployment to taper off slowly, but joblessness will remain an issue, particularly in California.

On the positive side, Watkins says energy prices will "almost surely decline," as production and reserves of oil and natural gas are up, and this will help boost the economy.

Things are getting better in the housing market, with foreclosures still high overall but trending downward.

However, unless there's a change in policy, Watkins says, it will continue to be expensive and difficult for companies to do business in California, and more middle-class families are likely to leave the state in search of jobs and affordable housing.

"We expect California's economy to lag behind the United States economy, and while California's unemployment rate will slowly fall, it will remain stubbornly above the United States unemployment rate," he says in the forecast. "Businesses will continue to avoid California as best they can."

Coastal California, including Ventura County, with its wealthier population and stronger home prices, will continue to enjoy lower unemployment and relative prosperity, while improvement will come more slowly inland, Watkins says.

Defense spending cuts are likely to hurt the already-weak California economy and could pose a risk to Naval Base Ventura County and affect the local economy, he says.

However, a major crisis could derail the timing and scope of the recovery, and Watkins warns that there's a close to 50 percent chance of such a crisis occurring in 2012.

He says 2012 will see the first European country leave the eurozone, or single currency, which likely will spark a financial crisis in Europe akin to the one seen in the U.S. in September 2008. If that happens, Watkins believes it would precipitate a sharp recession in the U.S.

Another clear potential risk is an interruption in the oil supply from the Middle East.

"It is our opinion that, for the near term, the day a major supply source is interrupted is the day a recession starts," he says in the forecast.

A third risk to the U.S. economy is a recession in China, he says. Indications are that China also has suffered a collapse in its real estate bubble and that its banks are weak, contributing to a weaker Chinese economy than has been seen for some years, he says.

--- Published in the Ventura County Star on Dec. 15, 2011