Chapman sees U.S. in recession

As housing prices continue to tumble in most regions, forecasters from Chapman University said Tuesday that the U.S. economy had fallen into a recession that wouldn’t ease until next year.

Even worse, California’s recovery may not start for two years.

“At a local level, we are in a recession,” said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange. “For the state economy there is no clear label of a state recession. But we can look at job growth rates, and when they stay negative for two quarters, that’s a recession.”

Chapman economists believe overall U.S. spending will decline through most of 2008. Consumer spending will fall $100 billion, representing a full percentage-point decline in real growth of gross domestic product.

The Chapman report was part of a barrage of bad economic news Tuesday that helped push stock indexes slightly lower.

The Conference Board said its consumer confidence index dropped to 50.4 for June, the lowest in 16 years, from 58.1 the month before. Economists had expected a reading of 56.5.

And U.S. home prices kept up their free-fall in April, with Los Angeles and Orange counties posting some of the steepest declines, according to a major indicator released Tuesday.

The Standard & Poor’s/Case-Shiller index of home prices in 20 metropolitan areas fell 15.3% in April from the year-earlier period. The index is down 17.8% from its peak in the summer of 2006, bringing prices down to summer 2004 levels.

The Chapman forecast projected that housing prices in California would bottom out this quarter but would be slow to recover. Forecasters believe this prolonged price slump will further slow construction spending and tighten lending for commercial and residential building, adding more weight to an already sluggish economy.

The projection comes one week after UCLA forecasters said the U.S. and California economies hadn’t entered a recession despite falling home values, high oil prices and rising unemployment. Economists nationwide are debating the recession question, which is usually settled in hindsight after two consecutive quarters of negative economic growth.

“I don’t know what led to UCLA’s conclusion, but our econometric model shows a mild recession -- not a deep one, but a mild one,” said James Doti, president of Chapman University.

The UCLA forecast also stated that the pounding of the housing market hadn’t damaged the U.S. job market.

In California, the damage is evident, Adibi said, adding that the two biggest drags on the state economy are the mortgage and construction industries, which were the first to feel the housing market’s downfall. Because California disproportionately relies on these two industries for jobs compared with other states, any gains in education and health services or leisure and hospitality will do little to offset the losses, he said.

“Before it was just financial, but now in the Inland Empire they are losing jobs, they’re in recession,” Adibi said.

“Mortgage and construction are losing jobs, no question. From there it’s a trickle-down effect,” he said. “When you don’t build homes, appliance stores and furniture stores start softening. Housing is not an isolated sector.”

California will lose more than a net 30,000 jobs this year.

And if the job market is hurting, so are wages.

“No wonder consumer sentiment is so dark,” Adibi said. “They’re losing their homes, they have to pay more for gas and they have to pay more for food.”

The dearth of construction spending is especially painful for California’s economy because the building and mortgage industries logged such rapid growth in the early part of the decade. It also explains why California’s economy might take longer to bounce back than other states.

Standard & Poor’s said the sharpest declines in home prices were in areas that showed the biggest gains during the recent real estate boom.

The April price drop for the Los Angeles metro area, which includes Orange County, was 23.1% from a year earlier. San Diego and San Francisco both recorded price declines of 22%. Las Vegas, where home prices jumped 53% from 2004 to 2005, posted a decline of 26.8% from a year earlier, according to Standard & Poor’s.

The Case-Shiller index compares the latest sales of detached houses to previous sales and accounts for factors such as remodeling that might affect a home’s sale price over time. It excludes foreclosures. The base index number is 100, reflecting January 2000 prices. The 20-city April index number was 169.85; the Los Angeles-area April figure was 202.52.

Nationally, home values have fallen 16% over a two-year period, which has put extreme financial pressure on banks, Chapman President Doti said. The university’s forecasters concluded that national housing prices were nearing rock bottom and would begin stabilizing in mid-2009.

Since the housing crisis began, the Federal Reserve has fought to stimulate the economy by lowering interest rates. Now, however, the Chapman economists believe the Fed is caught in a tug of war between taking stimulative action and fighting inflation.

According to the forecast, once housing prices reach their lowest point the Fed will begin focusing its attention on inflation and finding ways to fight dollar depreciation.

“We’ve moved from stimulative mode to ‘wait-and-see’ mode,” Doti said. “The Fed has used all of its silver bullets. They will not drop the federal funds rate anymore.”

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conor.sanchez@latimes.com

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Times staff writer Peter Hong contributed to this report.