UCLA Forecast: Slow Growth But No Recession For U.S. Economy

Stopping just short of predicting a recession in the U.S. through its 2021 forecast horizon, the UCLA Anderson Forecast, in its third quarterly report of 2019, expects the national economy to slow to 0.4% in the second half of 2020, before rebounding to 2.1% in 2021.

Given the slow growth rate nationally and the weakness in the housing market, the Forecast expects California's unemployment rate to rise to an average of 5.1% in the fourth quarter of 2020. For the entire years of 2020 and 2021, the unemployment rate in the state is expected to average 4.6%.

The National Forecast

The latest UCLA Anderson Forecast for the nation opens by acknowledging a global economy in flux, taking into account the U.S. trade war with China, President Trump's criticism of Federal Reserve Chair Jerome Powell, near-recessionary conditions in Europe, Brexit, slowing economies in Brazil and Mexico, and all manner of rising geopolitical tensions. But despite the fluidity, the forecast does not suggest negative growth.

"Although we are not calling for a recession over the forecast horizon, as we have noted for over a year, it is very likely that economic growth will stall in the second half of 2020 as the effects of the 2017 tax cuts wane and as trade tensions exact their toll on corporate investments," writes senior economist David Shulman in an essay titled "The Year of Living Dangerously." The national forecast calls for real GDP growth of 2.1% and 1.2% in 2019 and 2020. "Indeed, in the second half of 2020, growth is expected to decline to 0.4% ― not quite a recession ― but pretty close," writes Shulman. In 2021, GDP is expected to return to 2.1% growth.

Shulman's essay cites six concerns: the trade war with China; the weakening of business investment in equipment and structures; the negatively sloped yield curve; the slowdown in employment growth; the inability of housing activity to launch; and the stagnant stock market. As for China, Shulman quotes a Federal Reserve study that noted that trade uncertainty lowered real GDP growth about 1% in 2019, while projecting a similar drop next year. "Make no mistake," Shulman writes, "American businesses and consumers will bear the brunt of the tariffs. And despite all of the administration's heightened rhetoric, the real trade deficit will continue to rise as it approaches $1 trillion this year."

On the plus side, Shulman notes that consumption ― which accounts for about two-thirds of GDP ― continues to roll along. Federal spending is advancing smartly in response to the recent budget deal and businesses continue to invest in intellectual property.

Shulman concludes his report by noting that the near 3% growth rate of more than a year ago is now a memory, with fourth quarter to fourth quarter real GDP growth for 2019 and 2020 now forecast to be 2.1% and 1.2% respectively. In addition, job growth will slow to under 70,000 per month ― well below the 200,000 jobs per month that we've become used to. The greatest risk to an already slowing economy are the tariff policies and their effect on exports and business investment.

The California Report

The UCLA Anderson Forecast's September 2019 report for California ponders why the state continues to outpace the nation in terms of job creation and economic growth. The answer, according to UCLA Anderson Forecast director Jerry Nickelsburg, is found in the growth areas of the state. "California is outperforming the U.S. for the same reason it has over the past decade; productivity gains through the employment of labor-augmenting technology," Nickelsburg writes.

Nickelsburg's report notes that eventually the slowing national and world economies will take their toll and that toll is likely to start getting paid in the latter part of next year, right around the time GDP falls below 1%.

But the news is not all negative.

"At present, and in spite of the trade tensions between the United States and China, the economic news is positive. The July county-wide unemployment rates from Marin to Santa Clara are below 2.8%, from Sonoma through the East Bay below 3.5% and, in Southern California, Orange and San Diego, are at or below the U.S. rate of 3.7%," writes Nickelsburg, while pointing out that L.A. and the inland regions are not doing quite as well.

The California forecast for total employment growth rates in 2019, 2020 and 2021 is 0.8%, 1.7% and 1.2%, respectively, as payroll jobs are expected to grow at a 1.6%, 1.1% and 0.9% rate across those years. "This reflects the stronger growth in payrolls over the last year, even while total employment growth was weaker," Nickelsburg writes.

Real personal income growth for the state is predicted to be 1.3%, 1.7% and 1.9% over the three-year forecast period, as the continued growth in real personal income in 2020 reflects the changing mix of employment in California and tight labor markets in high-wage occupations. Homebuilding will be lower by about 11,000 units per year by the end of 2021 than previously forecast, as a consequence of the current weak housing market and the anticipated slowdown late next year.

Special Report: Tech Jobs, Talents and the Local Economy

In the first of a pair of additional reports, UCLA Anderson Forecast economist William Yu discusses the impact of tech job growth on U.S metroplexes; the relationship between tech job growth, local economic growth and low-skill job growth; and the relationship between human capital and tech job density. Yu's analysis notes that the New York area employed the most tech workers as of 2018; Washington D.C. ranked second and Los Angeles third. However, it is San Francisco that saw the largest increase in such jobs from 2010 until 2018, adding 73,000 jobs in that time frame. San Jose has the highest density of tech jobs at 17.2%; Seattle ranks second with just under ten percent of the workforce in tech jobs.

Yu's report ends with a pair of conclusions: First, the tech industry and tech jobs drive local economies as the associated high wages propel overall job growth including low-skill job growth, though wage growth of low-skill jobs is not guaranteed. Second, high human capital metros and regions are more likely to become tech clusters, as a region with high human capital and tech jobs tends to attract and recruit talent from outside the region.

Special Report: Parcel Taxes in California

In a companion essay, UCLA Anderson Forecast economist Leila Bengali examines some of the consequences of property parcel taxes, which may vary from community to community, on California real estate. Bengali's report comments on such implications in an environment where home owners and potential home owners do not necessarily prioritize parcel taxes when making real estate decisions.

"The implications of California's parcel tax system with imperfectly attentive consumers are mixed. Existing residents' over sensitivity to parcel taxes may limit the number of options available both for themselves and for future residents, but future residents may not even be paying attention to the fact that they have choice," Bengali writes. She adds that "buyers' inattention may keep home prices higher than they otherwise would be, which is ultimately good for current residents and local governments."

The UCLA Anderson September Forecast Conference: Focus on Technology

In addition to presentations of the U.S. and California forecasts, the September 2019 Forecast Conference, presented in partnership with UCLA Anderson's Easton Center for Technology Management, features several panels and a keynote devoted to current trends and the implications of technology. The keynote will be delivered by Adam Miller ('94), founder and CEO of Cornerstone on Demand. The panel, moderated by Terry Kramer, director of the Easton Center, will feature a look at tech trends in Los Angeles from different perspectives. The conference takes place on September 25, 2019. Conference information may be found at bit.ly/2kQqKYf.

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.

About UCLA Anderson School of Management

UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA for Asia Pacific, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school's Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.