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Study: US economy, out of ICU, remains fragile
Updated: 2009-06-17 15:45

LOS ANGELES -- The American economy is out of intensive care but still very sick, economists said here in a report released on Tuesday.

David Shulman, senior economist at the Anderson Forecast, University of California in Los Angeles (UCLA), said in the report: "The free fall stage of the recession appears to be over and in fact we anticipate that the economy will record positive, albeit minimal, growth as early as the third quarter."

After declining by as estimated 2.9 percent in the current quarter, Shulman forecast that real GDP growth will be zero in the third quarter and 0.6 percent in the fourth quarter of 2009 and the first quarter of 2010.

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"Thereafter we forecast growth will be in the very modest 2-3 percent range," Shulman said.

However, he added, with the economy growing at such a tepid pace, the unemployment rate will continue to climb well into 2010 where it is expected to peak at 10.4 percent. "Job losses will likely continue for the remainder of the year," said Shulman.

According to Shulman, despite all of the controversy, the host of Federal Reserve and Treasury actions to provide liquidity and capital to a severely-wounded financial system appear to be working.

In the inter-bank market, the three month LIBOR rate has declined from 4.85 percent in early October to 0.65 percent in May.

Stocks too have bounced 40 percent off their March lows and the VIX Index (a measure of stock market volatility) has been reduced from 85 percent to 30 percent. An improved financial sector alone does not make a recovery, but it is a precondition for recovery, Shulman added.

Another good sign is that the long agonizing decline in housing market is in the process of ending. House prices, down 31 percent from the peak, have now returned to where they were in late 2002. "We are modeling in an end to the price decline late this year or early in 2010," he said.

He said recovery will be inhibited by the legacy of the financial excesses of 2003-2007 in forms of millions of foreclosed houses and even "underwater mortgages," a nationalized domestic automobile industry and a partially nationalized banking system.

Shulman warned that do not expect the recovery to look like those of 1991-1999 and 2003 when government spending is estimated to peak a postwar record of 24.2 percent of GDP in 2010, and a new regulatory regime with respect to finance, energy, environment and healthcare will hardly be a motivator for investment.

Jerry Nickelsburg, senior economist from the UCLA Anderson Forecast, said the signs of California economy are starting to be hopeful.

He said the recession is unfolding in California as expected, and the inertia of the recession is beginning to ease though it is not over yet.

But there is at least one dark cloud on the horizon, he said, California's state government has no choice but to contract at the worst time which deemed to be the worst post-World War II downturn yet.

The forcast for California economy is of a very weak first two quarters this year, with a little growth in the last six months of 2009 in the wake.