By ESMAEL ADIBI

The turmoil in the financial market along with a sharp drop in home sales, declining home prices, and slowdown in residential construction activity have increased the chance of recession at both national and local levels. But Los Angeles is more likely to suffer a recession than the country as a whole.

At the national level, a recession is generally defined as two or more consecutive quarterly declines in real GDP. The National Bureau of Economic Research, which is officially responsible for marking the beginning and end of business cycles, labels recession as a significant and broad-based decline in economic activity over a few-month period. Clearly, neither definition points to recession at the present time, and I believe the national economy will escape recession by both definitions over the remainder of this year and next. Why?

In response to the credit crunch, the Federal Reserve Board appropriately injected billions of dollars into the banking system. The Fed also cut interest rates by half a percentage point. The reduction in short-term interest rates should help those borrowers who will use adjustable mortgages for refinancing purposes or purchase of a new home.

Unfortunately, it will not solve the problem of those homeowners who will not be able to obtain an appraisal that will match or exceed their current mortgage or have to show proof of income to satisfy the tighter lending standards. Consequently, foreclosures and declines in home prices will last at least through 2008. As a result, the downward adjustment process in residential construction activity will continue well into 2008 and is expected to shave off about one percentage point from real GDP growth in 2007 and about a quarter of a percent in 2008.

However, this decline will be offset by growth in export activity, which is induced by relatively higher economic growth of our trading partners and significantly lower value of the U.S. dollar. Consumer spending, however, which accounts for over 70 percent of total U.S. spending, will increase by only 2.1 percent in 2007 followed by an increase of 2.6 percent in 2008.

Adding all the components of real GDP, our projection shows that the U.S. economy is poised to grow by 1 to 2 percent over the remainder of this year and early 2008, barely avoiding recession. With such weak growth, however, any unexpected shock could push the economy into recession.

Locally, the situation is different. There is no clear definition for recession at the local level. At the Anderson Center, we use two consecutive quarterly declines in total payroll employment growth as a signal for recession. Los Angeles County payroll job growth showed an increase of 1.7 percent in 2006, its best performance since 2000. The construction sector grew by 5.4 percent followed by a growth rate of 3.2 percent in the professional and business services sector. Transportation and warehousing, wholesale trade, and leisure and hospitality sectors all grew at about 2.5 percent last year. August employment statistics, the most recent available, showed a year-over-year increase of 0.9 percent in overall payroll employment growth in the county. The construction sector, with a loss of 1.9 percent in jobs, is the main drag on total employment growth.

Also, with some homeowners facing higher mortgage payments, many retailers are reducing their sales expectations and are shedding their employment base or not adding new employees. Year-over-year change in job growth in the retail sector is flat. In addition, employment in wholesale trade that also benefited from significant increases in imports is negatively affected by cutbacks in orders for imported goods.

Gains and losses

Of course, the professional and business services, the leisure and hospitality, and education and health services sectors are adding jobs at a relatively healthy pace. But with continued weakness in the construction, retail, and wholesale trade sectors, overall job growth will be lower than what is currently reported and could turn negative, leading to recession a very likely scenario.

The situation for Orange County is more dire. Orange County became the capital of the subprime mortgage industry and this sector has experienced sharp job losses since the beginning of this year. In fact, total payroll employment growth in Orange County for August showed a year-over-year growth rate of 0.2 percent. Hence, in addition to job losses in the construction and retail sectors, Orange County will suffer from the weakness in mortgage industry disproportionately harder than Los Angeles County.

So, recession or not? Clearly, at the local level, the probability of recession is relatively high while at the national level the likelihood is low.

These outcomes should not be surprising: Significant economic slowdown and possibility of recessions are the natural outcome of prolonged periods of growth and years of risk-taking behavior.

The adjustment process will be painful in the short-run but will ensure a long-run growth.

Esmael Adibi is director of the Anderson Center for Economic Research at Chapman University in Orange.