The U.S. economy will linger through a "soft patch" for the foreseeable future and a pullback in consumer spending could trigger a recession within the next two years, according to a widely watched forecast issued on Wednesday.
The UCLA Anderson Forecast predicted growth in gross domestic product this year would be 4.3 percent, unchanged from its prior outlook in June, but the report warned that the economic expansion is "rickety" because a six-year consumer spending spree may be coming to an end.
"I think consumers are maxed out right now," said economist Michael Bazdarich. "We think there is a small chance of recession over the next two years ... It could occur if consumers pull back. It's a not a sure thing they will pull back but they've been spending to the max."
Consumer spending may falter if the current soft patch presses on and prospects for faster growth dim, prompting consumers to pay down debt, which would create a "negative shock to GDP that could well trigger a recession," according to Bazdarich.
"There's not enough strength in the economy to withstand that," Bazdarich said.
The economy also is at risk because there is little room for housing to contribute to growth after 14 years of healthy building and because an overhang in investment in technology during the booming late 1990s remains, he said.
"Capital spending simply does not have the potential to repeat its expansion of the 1990s," and spending could be depressed when investment incentives enacted by the Bush administration and Congress expire in January, Bazdarich noted in the forecast report.
Additionally, investment in inventories is "incapable of sustaining the same share of GDP now that it did in previous expansions" because new technology and just-in-time management is allowing shops to get by with "ever-smaller levels of inventories relative to sales," Bazdarich noted.
"We think the downside risk for the economy is bigger than the upside risk," Bazdarich said.
However, by 2007 the over-investment in technology should be worked off, Bazdarich said. "At that point, a more robust capital spending cycle should emerge, at which point recession risks from elsewhere in the economy would be less damaging," he wrote in his report. "The key, though, is whether the economy can make it to 2007 'unscathed."'
The best-case scenario for the economy is it grows at a normal pace "with no resumption of the dynamic growth the Street is looking for," according to the report.
After 4.3 percent growth this year, the economy will grow at a 3.3 percent rate in 2005 and 2006 and will average 2.9 percent annual growth through 2010, according to the report. The U.S. unemployment rate will average 5.6 this year and should stay at that figure through 2010, according to the report.
"We're not going to get rapid growth here, just normal growth," Bazdarich said. "We will have decent job growth ... But that's not enough to lower the unemployment rate because the labor force is growing."
