The overall economy appears to be growing at a steady pace, but there are potential threats that could affect the U.S. and California economic outlooks, according to the UCLA Anderson Forecast’s second quarterly report for 2018.
The risk of a trade war with one or more of the major U.S. trading partners, the uncertainties in Italian politics and their potential impact on the Euro-zone, the potential for withdrawal from NAFTA, and the now likely victory of Andres Manuel Lopez Obredor (AMLO) in the July Mexican presidential elections are among the elevated risks to the current forecast.
Noting that the era of ultra-low interest rates has passed and the economy is at full employment, UCLA Anderson Forecast Senior Economist David Shulman writes that real GDP growth is expected to reach 3% for the balance of the year when measured from the fourth quarter of 2017 to the fourth quarter in 2018, but it will dip to 2% growth in 2019 and 1% in 2020. This is because the current strong job growth, which averaged 200,000 jobs per month in 2017, is not sustainable in a full-employment economy. Job growth is expected to average 133,000 per month for the remainder of 2018 before declining to 85,000 per month and 60,000 per month in 2019 and 2020, respectively. The unemployment rate will drop from its current 3.8% to 3.4% in mid-2019, but return to 3.8% by the end of 2020. As Shulman has noted in other forecasts, “A fully employed economy has difficulty growing without substantial increases in productivity.”
At the same time, the trade deficit, in terms of real net exports, could increase from $622 billion in 2017 to $814 billion in 2020, a “result of the U.S. consuming more than it produces and needing to borrow to fund an increasing federal budget deficit. This is a direct consequence of a very low national savings rate,” Shulman states. “All the Trump Administration can do in this regard is move around the trade deficit among our import partners, not reduce it.”
Business investment, which may increase by seven percentage points in 2018 and 2019 before slowing in 2020, is expected to continue to be the driving force in the economy, thanks to the reduction in corporate tax rates, an allowance to write off 100% of equipment in the year it was purchased, and deregulatory policies of the administration in Washington, D.C.
The greatest current risks to the forecast of the U.S. economy stem from a potential trade war with China and the potential withdrawal from NAFTA. “A trade war implies higher tariffs and non-tariff barriers that work as a tax on the American people that would raise prices and restrict output. That is hardly the recipe for economic growth,” Shulman writes.
In a separate report, Shulman notes that housing activity “has been the great disappointment of the economic recovery and expansion that began in 2009.” Although housing starts have more than doubled since their lows of 2009–2011, they remain below the long-term average and nowhere near earlier boom periods. Housing starts across the U.S. are forecast to increase from 1.2 million units in 2017 to 1.34 million units and 1.40 million units in 2018 and 2019, respectively, far below the 59-year annual average of 1.435 units between 1959 and 2017.
Homeowners in high-demand areas and fast-growing cities “are sitting pretty and enjoying rapidly increasing house prices,” Shulman writes. “On the other hand, if you are a middle-class potential home buyer or a struggling renter in those areas, you are facing a very personal affordability crisis.”
California employment hit another record high in April 2018. As the economy has been expanding as expected, the current forecast has not changed much since last quarter’s forecast released in March 2018. Full employment has been less of a constraint on this growth with recent increases in the labor force.
It is anticipated that California’s average unemployment rate will remain higher than the U.S. rate and be at 4.3% in 2020, a consequence of a younger and more entrepreneurial workforce.
The forecast for total employment growth for the current and the next two years is 1.7%, 1.8% and 0.8%, respectively, with payrolls growing at about the same rate. Real personal income growth is forecast to be 2.5%, 3.6% and 2.9% in 2018, 2019 and 2020, respectively.
“Affordable housing in California continues to be the subject of considerable discussion,” writes UCLA Anderson Forecast Director Jerry Nickelsburg. His paper examines the complex relation between the state’s employment growth, the attractiveness of California and the building, zoning and environmental restrictions affecting housing supply. Although the forecast calls for a continued rise in housing prices, “the impact on economic growth is not as great as one might expect,” he notes.
