UCLA Forecast: US Economy In ‘Depression-Like Crisis’ Until 2023

In its March quarterly forecast, the UCLA Anderson Forecast revised its outlook for the U.S. economy downward because of the expected impact of COVID-19, which was then still being referred to as an epidemic.

Two weeks later, as the economy began shutting down because of the pandemic, the Forecast released the first revision in its 68-year history to assert that the U.S. economy was already in recession.

Now, in its second quarterly forecast of 2020, the Forecast team states that the global health crisis has "morphed into a Depression-like crisis" and that it does not expect the national economy to return to its 2019 fourth-quarter peak until 2023.

The National Forecast

"To call this crisis a recession is a misnomer. We are forecasting a 42% annual rate of decline in real GDP for the current quarter, followed by a 'Nike swoosh' recovery that won't return the level of output to the prior fourth quarter of 2019 peak until early 2023," writes UCLA Anderson Forecast senior economist David Shulman in an essay titled "The Post-COVID Economy."

"On a fourth-quarter-to-fourth-quarter basis, real GDP will decline by 8.6% in 2020 and then increase by 5.3% and 4.9% in 2021 and 2022, respectively," he writes.

Shulman goes on to write that U.S. employment will not recover until "well past 2022" and that the unemployment rate, forecast to be about 10% in the fourth quarter of 2020, will still exceed 6% in the fourth quarter two years later. "For too many workers, the recession will linger on well past the official end date," Shulman writes.

Shulman's essay notes that the Federal Reserve acted with unusual alacrity by moving immediately to a near-zero interest rate policy and committing itself to supporting the corporate bond market, among other actions, and that the $1.8 trillion CARES Act moved quickly through Congress. He suggests that more relief will be needed this summer, and although a recovery is eventually forecast, it is expected to be moderate.

"Simply put, despite the Paycheck Protection Program, too many small businesses will fail and millions of jobs in restaurants and personal service firms will disappear in the short run. We believe that even with the availability of a vaccine, it will take time for consumers to return to normal," Shulman writes. He also states that the housing sector will be a lone bright spot in the recovery.

The forecast notes that while the economy seems to have hit bottom, it will be a while before GDP and employment levels reach fourth-quarter 2019 levels, as the huge debt buildup in both the public and private sectors dampen output. Looking beyond the forecast horizon of 2022, the pandemic has accelerated economic trends that were already moving toward increased digitization of business functions and online commerce.

"It has increased already-rising tensions with China and brought the E.U. closer together," Shulman writes. "A major response to the pandemic has been the success of work-from-home, which looks like it will lead to long-term changes in work and urban environments as workers avail themselves of more work/life options. In a nutshell, economic and housing activity will shift from large cites to mid-sized cities and away from the urban centers to the suburbs."

The California Report

In formulating a forecast for California, UCLA Anderson Forecast director Jerry Nickelsburg encountered unfamiliar territory, as the pandemic largely forced a reconsideration of the data sources whose patterns typically inform economic predictions. With historical precedent of more limited use, assumptions needed to be stronger. To this end, Nickelsburg's essay, titled "The Uncertain State: What We Know and What We Don't Know about the California Economy," notes that "the strong assumption is the abatement of the pandemic this summer and, to the extent it returns in 2021 and 2022, it does not generate another shutdown or a dramatic decrease in consumption as happened in 2020.… But we must keep in mind that the pandemic assumption is just that: an assumption."

Nickelsburg points out that two sectors that have borne the brunt of the job loss — leisure and hospitality, and retail — represent fully 50% of all the job losses. "While the mandated closure of restaurants, event spaces and touristic sites were the catalyst [for job losses in leisure and hospitality], the expiration of the closure ordinances will not act as a switch to bring all of those unemployed back," he writes. "The COVID-19 pandemic has created a sense of caution on the part of the general public, both within California and among tourists who might come to the state. Simply put, a significant part of the potential customers for these businesses will want to feel safe before venturing out to them."

The expectation for recovery in California is that it will very much mirror the U.S. recovery.

"It will be slower in the leisure and hospitality and retail sectors due to the disproportionate reliance on international tourism, and slower in transportation and warehousing due to the expected continuation of the trade war with China," Nickelsburg writes, "but faster in business, scientific and technical services and in the information sector, due to the demand for new technologies for the new way we are working and socializing."

The unemployment rate for the second quarter of this year is expected to be 14.6%, and it is expected to decline for the balance of 2021. For the entire years 2020, 2021 and 2022, the average unemployment rate is forecast to be 10.5%, 8.2% and 6.8%, respectively. In spite of the recession, the continued demand for a limited housing stock coupled with low interest rates should lead to a relatively rapid return of homebuilding. The forecast's expectation is for 94,000 net new units in 2020, a 17.3% decline from 2019.

This level of home building means that the prospect for the private sector's building out of the housing affordability problem over the next three years is nil.

Why Are Some Recoveries Rapid and Others Slow?

As a companion research article to the forecast, UCLA Anderson Professor Ed Leamer asks, "Why Are Some Recoveries Rapid and Others Slow?" In this article, he examines the qualities of past recoveries that have determined the duration of expansions and the time taken for the economy to return to pre-recession conditions.

In examining the historical data, Leamer shows the past three recoveries to have been slower than earlier recoveries. One reason, he writes, is the role of the manufacturing sector. Leamer writes that sectors that were growing when a recession began tended to return more quickly after the trough of the recession. But as manufacturing was a shrinking sector prior to the last three recessions, employment in this sector returned more slowly, if at all.

After an analysis of various economic sectors today, and their potential to drive the recovery from the current recession, Leamer notes that the pandemic might have the effect of permanently displacing some workers, and that what otherwise might have been a "mild and brief" recession could in fact be more severe as COVID-19 influences the human behaviors that might have driven a recovery.

"A drag on the recovery will come from information, wholesale, retail, government, and leisure and hospitality," Leamer writes. "They form the caboose. It's hard to identify the engine that will power the recovery forward."

Mobility Data and the U.S. Census Small Business Pulse Survey: What They Say about the Economic Consequences of the Pandemic

In the second of three companion essays, UCLA Anderson Forecast economist William Yu looks at two data sets, Google mobility data and the Small Business Pulse Survey of the U.S. Census Bureau. Yu's report presents evidence that there is a correlation between the mobility data and the economy, and a correlation between the mobility data and the state of small business.

Yu's analysis has three major takeaways. The first is an assessment of the data itself, as Yu points out that Google mobility data is informative regarding what's happening in the economy in a timely manner. He also notes that this data, along with the Small Business Pulse Survey, only became available to the public since the onset of the pandemic. Yu's second conclusion is that mobility to retail and recreation destinations correlates to local job growth for the whole economy and to total hours worked for local small business.

Finally, he notes, the recovery is on the way as the country gradually reopens its economy. Some sectors and some regions have a faster pace of recovery than others. For a fraction of businesses, a full recovery may never be possible.

Recent Developments in Housing Markets: The Coronavirus and the Tenant Protection Act of 2019

In the third companion essay, UCLA Anderson Forecast economist Leila Bengali examines two notable events relevant to California residential real estate markets. The first is the economic shutdown induced by the policy response to the coronavirus and the other is the Tenant Protection Act of 2019.

"Of the two changes in residential real estate markets so far this year, the effects of the coronavirus are getting far more attention; but the virus' effects and tenant protection laws are becoming interconnected as cities and states pass moratoria on evictions for non-payment of rent," Bengali writes.

She writes that if landlords become wary that governments will be more willing to enact eviction protections in the future, landlords may decide, or may be forced, to exit the rental market and either sell their buildings or convert them to non-rental property, further reducing the stock of rental housing. Also, consumer preferences may shift toward low-density, single-family housing, which would tend to lower rental prices as demand falls.

Looking across U.S. counties, her analysis finds that even as of March 2020, there appear to be negative, though small, effects of the virus on local residential real estate markets. With respect to tenant protection laws, while likely too early to see effects of the new state law that took effect January 1, 2020, an examination of similar laws in Los Angeles County suggests that such laws may reduce the quantity of rental housing, an unintended consequence.

The UCLA Anderson June Forecast Conference: Focus on Residential Real Estate

In addition to presentations of the U.S. and California forecasts and presentations of the additional essays described above, the June 2020 Forecast Conference, presented in partnership with the UCLA Ziman Center for Real Estate, features several discussions: the results of the Allen Matkins/UCLA Anderson Forecast CRE Survey, featuring Allen Matkins partner John Tipton; a look at what cities will be like after the pandemic with urbanist Richard Florida, director of the Martin Prosperity Institute at the University of Toronto's Rotman School of Management and Global Research Professor at New York University; a housing market analysis with Ivy Zelman and Associates' CEO Ivy Zelman; and a conversation with New York Times reporter Conor Dougherty on California home affordability. The conference takes place in an online webinar on Wednesday, June 24, 2020. Conference information may be found at https://ucla.in/2NbOTD2.

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, 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.