LOS ANGELES, (September 26, 2018) – As the national economy continues to grow in its 10th year of expansion, UCLA Anderson Forecast’s third quarterly report in 2018 questions whether the growth is sustainable. Currently operating at full employment and benefiting from the massive tax cut and spending increases, the economic stimulus coming from that combination will likely run out in 2020, with deficits that it created lingering for another decade.
In spite of concerns about the risk of a full-blown trade war with China, the forecast for the U.S. economy is one of growth, albeit slower. California remains one of the most prosperous states, with a strong market that is expected to continue to grow.
The National Forecast
Over the near term, the economy remains on a strong, broad-based 3% growth track, but it will slow to 2% in 2019 and to a near recession at 1% in 2020, says David Shulman, UCLA Anderson Forecast senior economist. The slowdown will be caused by the natural constraints of a fully-employed economy with a 3.5% unemployment rate next year and a waning of the administration’s stimulus policies. Moreover, with the inflation rate moving closer to 3% than 2%, the Federal Reserve will continue to pursue its interest rate normalization policies that will bring the Fed Funds rate above 3%.
Several measures are contributing to the economy’s current strength. Consumer spending has rebounded from 0.5% in the first quarter to 3.7% in the second quarter and it is on track to grow at a 2.5% pace in the second half. Equipment spending increased by 6.1% in 2017 and is expected to increase by 7.5% this year, its best performance since 2013, thanks in part to the rebound in oil and gas activity and the recently enacted corporate tax cuts. Defense spending is also surging. After years of decline, defense purchases are forecast to increase 3.7% this year and 4.7% in 2019. In 2020, the surge will end with only a modest increase of 0.7%.
Housing remains the one disappointing sector of the economy. Far from producing the average 1.5 million units a year, housing starts are forecast to peak at around 1.35 million units in 2019 and then roll over as higher mortgage rates exact their toll. Housing starts remain below the underlying demographic demand, with starts in multifamily units accounting for about one-third of the overall activity.
Looming over the forecast is the uncertainty of the current administration’s trade policies and the beginnings of a currency contagion that is enveloping a few of the developing economies (e.g., Turkish lira and Argentine peso). What is unknown is the effect that any trade policy will have on business investment.
“However, one thing remains clear. The trade deficit is going to explode,” writes Shulman. “What the administration doesn’t understand is that the trade deficit is largely a result of macroeconomic policies caused by the lack of domestic savings and the ever-growing budget deficit.”
The California Report
The current forecast projects a weakening of California’s economic growth in 2020 consistent with the slowing of the national economy, according to UCLA Anderson Forecast Director Jerry Nickelsburg. Nevertheless, California is expected to continue to grow faster than the U.S.
The risks that have been discussed during the past year are somewhat amplified this quarter. As predicted, the progress that has been made with renewing NAFTA and agreements reached with Mexico will have little effect on the U.S. and California economies. The same holds true with the negotiations being pursued with Canada. On the other hand, the risks associated with ever-increasing tariffs between China and the U.S. could have much greater consequences. If a significant slowdown in trade occurs, the logistics industry — one of the fastest growing sectors in California in the last year — will be adversely affected. In addition, the state’s budget, which has been expanding with increased tax revenues, would be at risk with any economic downturn. It is anticipated that in California the risks will not come to fruition during the next two years. However, Forecast economists are “keeping a keen eye on these risk factors that have the potential to derail the forecast,” notes Nickelsburg.
The forecast for 2018, 2019 and 2020 total employment growth is 1.7%, 1.8% and 0.8%, respectively. Payrolls are expected to grow at a 1.7%, 1.8% and 0.8% rate each respective year. Real personal income growth is forecast to be 2.5%, 3.6% and 2.9% in 2018, 2019 and 2020, respectively. California’s average unemployment rate is expected to have its normal differential to the U.S. rate at 4.2% in 2020. Home building will accelerate to about 140,000 units per year by the end of the 2020 forecast.
The Tech Industry in California and Los Angeles
California remains the center of high tech and innovation worldwide. Los Angeles has the largest tech workforce, with 446,000 jobs, followed by Silicon Valley’s 346,000 and San Francisco’s 268,000, as of July 2018.
According to UCLA Anderson Forecast Economist William Yu, tech jobs are forecast to grow during the next year in these California regions: Los Angeles: 2%; San Francisco: 2.2%; Silicon Valley: 2.5%; Orange County: 1%; San Diego: 2.5%; and East Bay: 2%. The exceptionally high growth seen in San Francisco and Silicon Valley during the past several years is expected to slow, owing partly to the rising cost of housing, and will converge to a normal growth range of 2%.
Silicon Beach and adjacent areas enjoyed a higher growth of tech jobs than the surrounding areas, particularly in the information sector. Employment in this sector requires greater technical skills and provides higher wages on average. In the past few years, startup investments have been increased in this region, fueling innovation and entrepreneurship.
Startup activities have also been accelerating throughout the state. San Francisco (including the East Bay) had the largest number of investments in 2017, with 909 deals funded, amounting to $22.2 billion. Silicon Valley reported 643 funding deals totaling $18.3 billion in 2017. Los Angeles came in third with 307 funding deals totaling $9 billion. San Diego reported $1.7 billion and Orange County tallied $2 billion in startup funding investments. It is worth noting that startup investments in Los Angeles have been accelerating in recent years, from $2.75 billion in 2011 to $9 billion for the first nine months in 2018.
Cathay Bank/UCLA Anderson Forecast China-U.S. Economic Relations Report, 2018 Third Quarter Update
Recent data show that there has not been a significant change in U.S.-China trade, at least in the first half of 2018. There have been shifts in buying in the past few months in anticipation of tariffs. However, after adjusting for seasonality, there is not a discernible trend in either international sea or air cargo shipments. The first wave of tariffs was imposed on July 6 and, therefore, could explain a shift in future trade volumes. If the tariffs were to be binding and reduce U.S.-China trade, there would be a reallocation of resources away from trading sectors in both countries. The escalation of trade tensions between the U.S. and China in the last few months has not yet engendered sizable dislocations in either economy.
All of the economists’ reports will be presented at the UCLA Anderson Forecast’s quarterly conference on Wednesday, September 26, 2018. The conference also features a panel discussion focusing on changes to expect in the fast-growing technology sector, with emphasis on how tech is changing the nature of work and the face of Los Angeles. Panelists will include: J.B. Blevins (’11), Adjunct Professor of Decisions, Operations, and Technology Management, UCLA Anderson School of Management; William Chun, Deputy Mayor, Economic Development, City of Los Angeles; Wes Nichols, Tech Entrepreneur and Board Partner, Up-Front Ventures; and Alex Maleki, Vice President of Business Development, Idealab.
The conference will be held in Korn Convocation Hall at UCLA Anderson School of Management. For more information about attending the conference, please visit anderson.ucla.edu/centers/ucla-anderson-forecast/september-2018-economic-outlook.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early 1990s downturn in California and the strength of the state’s rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast at uclaforecast.com.(