Weak outlook for jobs, GDP in 2009

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The report said the recession will include four quarters of declining real GDP.

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NEW YORK (CNNMoney.com) -- The nation is expected to lose 2 million jobs in 2009 and undergo economic contraction through the first half of the year, according to a widely watched report released Thursday.

The quarterly forecast issued by UCLA's Anderson School of Management was peppered with words like "ugly," "nasty" and "abnormalities."

In the report, senior economist David Shulman said the recession will include four quarters of declining real gross domestic product, and unemployment will rise to 8.5% by late 2009 from the 6.7% reported last month.

The report began with a blunt statement from Shulman: "The news from the economy is bad. The recession that we had previously hoped to avoid is now with us in full gale force."

The nation's GDP will decline at a 4.1% annual rate in the current quarter, and it will continue to sink in 2009 by a rate of 3.4% in the first quarter and 0.8% in the second, the report said. GDP declined at a 0.5% rate in the third quarter of this year.

Shulman predicted "tepid" post-recession growth at about a 3% rate, saying "the global economy is in its first synchronized recession since the 1990s."

The report also predicted the U.S. deficit will exceed $1 trillion in fiscal 2009, and it noted massive abnormalities in data from the past few months that make it difficult to forecast.

Shulman pointed to the housing market collapse as a trigger for increased defaulted mortgages, which threatened the liquidity and solvency of the economy as it became "dependent upon the easy flow of mortgage credit."

The domino effect led to the culprit of the downturn: severe asset price deflation, which first reared its head as a liquidity crisis in the short-term money market in August 2007, causing a financial panic.

The report said stock prices are on track to either their biggest decline in history or their worst performance since either 1931 or 1937. Real stock prices never fully recovered from the bull market of the late 1990s, Shulman said, resulting in the "carnage" in the stock market today.

The report noted that homes and cars, the industries most tied to wealth and credit of consumer assets, are suffering. It predicted housing starts will drop below a 700,000 unit annual rate, the lowest in the postwar history. It also noted car sales are at a 25-year low.

The report also focused on California, the nation's most populous state, predicting a very weak first three quarters of 2009. with the possible beginning of a recovery later in the year. Home prices in California have dropped 25% from their peak at the beginning of the third quarter of 2006, the report said.

Foreclosures will continue and residential construction will decline through the second quarter of 2009, improving toward the end of the year, the report said.

Manufacturing will continue shedding jobs through the second quarter of 2010, the report said, because of productivity improvements and weakness in leisure and hospitality.

Unemployment in California is going to be "ugly," the report said. "We expect it to grow to a high of 8.7% next year and to remain at that level the following year."