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The Economic Forecast: A Q&A With Andrew Policano

Andrew Policano, dean of The Paul Merage School of Business at the University of California, Irvine, shares his thoughts on news--good and bad--in the economy.

The Irvine (Calif.) Chamber of Commerce and the Paul Merage School of Business at UCI will present the 2009 Business Outlook seminar at the Hilton Hotel Irvine/Orange County Airport on Thursday, Jan. 29. Andrew Policano, dean of the business school; Emile Haddad, CIO, Lennar Corp.; and Rick Keller, CEO, The Keller Group Investment Management Inc., are the featured speakers. Together, they will deliver the economic forecast for Orange County, Calif.

We had the opportunity to speak to Dean Policano prior to the seminar. He spoke about the local economy, the economic downturn and what the implications are for the entire country.

Entrepreneur: How would you characterize the local economy?
Andrew Policano:
Within Orange County, the business economy mirrors what's taking place at the national level. We're part of the global economic framework, so . . . what happens in the OC economy, doesn't stay in the OC economy.

In fact, we became more sluggish than the national economy a little bit earlier because the local economy was so heavily based in real estate, which is a primary driver of the current recession.

Is there any good news?
Well, the basis for the OC economy is quite strong. We have the largest medical device industry in the country. We have health care, professional [legal and consulting] services and education, and all of these sectors have driven some nice growth in the past and will again, in the long-term, be very strong.

What about at the national level?
I think there are some positives there, too, and one of them is that Ben Bernanke and the Federal Reserve have essentially flooded the economy with liquidity. It has really freed some of the problems in credit markets [that] have become frozen and dysfunctional.

Do you think the Fed's actions are adequate?
What [Bernanke's] always said is that he's ready to do more, if necessary. I'm a little bit concerned about the fact that the kind of liquidity that has been put into the system by the Fed has historically proven to be inflationary two to three years out.

I think what Bernanke has to do is play this very, very carefully and stay very closely tuned in to signals that credit markets are functioning or not functioning.

For example, he recognized he had to flood the commercial paper market [with liquidity] in December for it to work. Then there were signs it was working without him, so it was time to withdraw. That's the kind of thing he has to keep doing over and over again.

With the Fed tackling the problem with monetary policy, what do you think about the role of the new administration'?
We really need fiscal stimulus, so hopefully, that's what the Obama administration brings to the table--very, very quickly--in the form of flooding the market with liquidity through the banking system and TARP [Troubled Asset Relief Program], designed to isolate toxic assets and recapitalize banks.

Right now a big problem we're having is consumer confidence. When consumers lack confidence, they stop buying. Consumer [spending] is 70 percent or more of our economy, so when spending stops, we're in trouble.

One reason is decrease in wealth, but another reason is [uncertainty] about future employment and income. But when we have a new administration coming in, it brings hope and confidence to help bolster the psychological perceptions of the marketplace.

That, we're hoping, is a positive.

How long do you think it's going to take before the economy is back on track?
It's rather sobering. If the $750 billion - $850 billion stimulus package is passed, the most optimistic forecast is around the third quarter 2009. But more realistically, we're looking at fourth quarter 2009 and first quarter 2010.

And we have an unemployment rate of 7.2 percent. We expect the rate to rise throughout most of 2009 and then not pull back to where it is today until middle to late 2010.

It sounds like we're in for a tough slog, so what are some things businesses need to keep in mind while they go through all this?
I would say look at business cycles and take advantage of opportunities that exist right now. For companies that have long-term strategies and cash built up . . . this is a wonderful time to be looking at acquisitions. We should be seeing quite a bit of stronger businesses acquiring others with lower valuations.

The second thing is for companies to invest in human capital. They can take a close look at folks they already have and recognize them, and of course, there are a lot of very talented people who are available at this point in the cycle.

Growing market share, solidifying infrastructure and the foundation for the longer term--these are the kinds of opportunities that stable companies are taking advantage of now.

Is there anything you'd like to add?
Just that this will be a very slow and drawn-out recovery, but I'd emphasize the positives. We have very skilled folks at the helm right now in the Obama administration and . . . the Federal Reserve System. There are some really difficult issues to deal with, but we've learned a lot from looking at these kinds of periods over time.

The positive is that we're not going into a depression. We know how to handle this, and the main thing to remember is patience.

Jennifer Wang is a staff writer at Entrepreneur magazine in Southern California.
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